Spirit Aviation - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Thank you for standing by. My name is Adam. I'll be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Q2 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Vivian Tavares, Manager of Investor Relations. Please go ahead.
Vivian Tavares (Manager of Investor Relations)
Thank you, Adam, and welcome everyone to Spirit Airlines second quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. As soon as it is available, we will archive a replay of this call on our website for a minimum of 60 days. Presenting on today's call are Ted Christie, Spirit's Chief Executive Officer, Matt Klein, our Chief Commercial Officer, and Scott Haralson, our Chief Financial Officer. Also joining us are other members of our senior leadership team. Following our prepared remarks, there will be a question-and-answer session for analysts. Today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance.
There could be significant risks and uncertainties that cause actual results to differ materially from those contained in our forward-looking statements, including, but not limited to, various risks and uncertainties related to the acquisition of Spirit by JetBlue and other risk factors discussed in our reports on file with the SEC. Investors should not place undue reliance on these forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our second quarter 2023 earnings release, a copy of which is available on our website under the Investor Relations section at ir.spirit.com. I will now turn the call over to Ted Christie, Spirit's President and CEO.
Ted Christie (CEO)
Thanks, Viv, thanks to everyone for joining us on the call today. I want to start by saying thank you to our entire Spirit team and our business partners for their commitment and dedication in caring for our guests and minimizing the negative impact from the rash of thunderstorms that have plagued us here in the Fort Lauderdale area and across much of our network in recent months. While our reported DOT operating metrics for the quarter were negatively impacted by all the weather events and a plethora of air traffic control initiatives, our controllable completion factor for the quarter was very good, coming in at 99.7%. Turning to our second quarter 2023 financial performance, operating margin was 3.3%, about 2 points below our initial guide. Total RASM for the quarter was strong and well above pre-COVID historical averages.
However, demand for the peak summer travel period has not built as we expected, resulting in lower fare levels. We are comparing to a period of exceptionally strong domestic and near field international demand in 2022, while at the same time seeing a dramatic demand shift away from these regions towards long-haul international. Inclement weather and ATC disruptions in the peak part of June also contributed to the lower T-RASM. These demand and pricing trends and difficult weather continued throughout July and are expected to continue into the fall. However, once the international summer travel season ends and kids go back to school, we expect demand will shift back towards domestic. This should mean a more normal pricing and demand environment for the peak holiday travel periods in the fourth quarter.
Before Matt and Scott share further details about our second quarter performance and forward outlook, I want to update you on our issues with the GTF engine that powers our neo fleet. Last week, RTX shared that Pratt & Whitney had recently discovered a quality control issue during the manufacture of a disk on neo engines produced primarily between Q4 2015 and Q3 2021. Out of an abundance of caution, Pratt has identified an initial 200 engines for accelerated inspection, and we were told that we had up to 13 engines in this group. The current plan is to begin pulling these engines from service after Labor Day, which will result in 7 neo aircraft being removed from scheduled service. This is above and beyond the current set of aircraft on ground, or AOGs, as we refer to them, which as of today, sits at 7 aircraft.
For planning purposes, we are assuming these 7 additional aircraft will be out of service post-Labor Day through the end of the year. Matt will discuss this impact in more detail, but the close-in nature of this schedule reduction does have a significant impact on revenue for September. It is worth noting that Spirit is the largest operator of GTF-powered neos in the United States, with the highest number of engines produced during the 2015 to 2021 period. Exposure to this issue is very unique and material for us and is having an impact on our margin. We should know by mid to late September how many of the additional 1,000 engines Pratt has identified for inspection are ones we operate.
Timing for the engine inspections on the next 1,000 is not yet known, but we believe it likely the inspections will need to be performed before the end of September 2024. Pratt has indicated that some of the 1,000 engines may already be scheduled for removal in 2024, so the net incremental impact may be smaller. However, we will learn more in September. We are still managing through a significant number of unscheduled neo engine removals due to an assortment of issues previously disclosed and discussed. Throughout the second quarter, we had 6 and currently have 7 aircraft out of service and have assumed the same for the fourth quarter.
That said, our maintenance planning team is gaining confidence that by the end of the year, we should see this count reduce, at least temporarily, to about 4 aircraft. While unscheduled removal should ease as we enter 2024, unfortunately, next year we have a large spike in the number of scheduled neo-engine checks as a result of a short time life-limited part, which means that we will have the equivalent of at least 10 aircraft out of service during most of 2024. This, of course, doesn't include any additional aircraft we will have to ground as a result of the latest engine issue. This new issue is yet another frustrating and disappointing development. RTX has promised to make the airlines affected by this new neo-engine issue whole, and for now, we intend to take them at their word and use that assumption in our planning.
The details and timings of those reimbursements are unknown as of yet. We'll keep you posted as we get further updates. Matt, over to you.
Matt Klein (EVP and Chief Commercial Officer)
Thanks, Ted, and a special thanks to all our team members. We carried a record number of guests, and everyone involved continues to do a great job managing the high volumes while navigating the numerous weather and ATC challenges. I'll start with a brief overview of our second quarter revenue performance and provide some color on the demand environment for the third quarter. Total revenue for the second quarter was $1.43 billion, up 4.8% year-over-year. Total RASM was $0.103, a decrease of 10.7% on a capacity increase of 17%. Load factor was 82.9%, down 3.1 points year-over-year. Compared to Q2, 2019, total RASM was up 9.6% on a capacity increase of nearly 30%. A strong result, but short of our expectations.
On a per-segment basis, passenger revenue per segment decreased 20% year-over-year to $57.86. Non-ticket trends remained strong and on a per-segment basis, increased 2.9% or about $2 year-over-year to a second quarter record of over $70. Based on trends we were seeing earlier in the year, coupled with the knowledge of what performed exceedingly well in the summer of 2022, we made the intentional move to increase the number of longer-stage flights heading into the peak summer travel period. In the second quarter, in aggregate, these routes performed in line with pre-COVID historical averages. However, we were anticipating they would outperform those averages and have results similar to what we had experienced in the recent past.
In addition, demand did not build into the peak summer period as we had anticipated, leading to lower fares across the network. When we look at our second quarter revenue guide compared to flown results, approximately 25% of the revenue miss was associated with elevated cancellations in the quarter, and the balance of the revenue variance was split between longer-haul domestic performance, as I just described above, along with a general regional demand impact. Ted mentioned earlier that we had to make a significant change to our September schedule due to issues regarding the GTF engines from Pratt & Whitney. We received the update on the last day before we put our September schedule to bed. This update required us to remove seven available aircraft from the fleet on less than 24 hours notice.
Under normal circumstances, we would select a flying that is expected to have the lowest contribution to the network. However, in this situation, we had to remove flying that our already built lines of flying could offer up relatively easily, since we didn't have time to build out an entirely new schedule. This results in an operating schedule that isn't exactly as commercially effective as we would otherwise set out for sale. We did remove nearly 5% of planned September capacity due to this specific engine removal issue, and we expect this new AOG issue will penalize revenue production in Q3 by approximately 1.5%, which is on top of the lost revenue for the original neo AOG issue, which we estimate reduces revenue by nearly 6%.
We do expect to smooth out our schedule in October, but the impact to top-line revenue will continue until these issues are resolved. Turning now to third quarter guidance, we expect the demand trends in the domestic U.S., Latin America, and the Caribbean to continue to be weaker than normal throughout the third quarter as a result of the carry forward of demand shifting to long-haul international and very difficult operations throughout the peak due to weather and ATC. Taking this into account, as well as adjusting for the additional out-of-service aircraft, we estimate total revenue for the third quarter 2023 will range between $1.3 billion and $1.32 billion, down 3.2% to down 1.7%, with capacity increasing 13.7% year-over-year.
This equates to unit revenue being down 13.6%-14.9% year-over-year in the third quarter. With that, I will now turn it over to Scott.
Scott Haralson (CFO)
Thanks, Matt. After briefly discussing our Q2 results and Q3 guidance, I will share a few details about our recent fleet changes. Our second quarter operating costs were $1.39 billion. Non-fuel operating expenses came in at the better end of our expectations at $994.5 million. Fuel expense was in line with our guide. Fuel gallons were modestly lower, but average fuel price was higher than estimated. Compared to when we gave our guide in late April, crude oil prices improved, but crack spreads widened across the board, driving a fuel price per gallon for the second quarter of $2.62, slightly higher than an estimated guide of $2.60 per gallon.
On a year-over-year basis, lower fuel expense, driven by a 39.1% decrease in average fuel prices, offset increases driven by more flight volume, additional aircraft rent, and inflationary wage pressures.
Total non-operating expense came in better than we estimated, primarily due to a non-cash benefit related to the mark-to-market valuation of the derivative liability associated with the 2026 convertible notes. As a reminder, when we give our non-op guidance, it excludes any potential change in the mark-to-market adjustment. Liquidity at the end of the second quarter was $1.5 billion, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of capacity under our revolving credit facility. During the second quarter, we retired 3 A319neos, took delivery of 5 A320neos, and delivery of our first A321neo aircraft, ending the quarter with 198 aircraft in the fleet. We currently estimate that total capital expenditures for the full year of 2023 will be about $255 million.
Looking ahead to the third and fourth quarters, the development of the new NEO disk issue, together with our other remaining NEO engine availability issues, drive lower overall capacity production that harms our efficiency. On a positive note, our pilot attrition has reduced, and assuming this lower level of attrition continues for the remainder of the year, we would have been at full fleet utilization by Q4. The recent Pratt & Whitney news results in an even less aircraft in our fleet being available for operations, This means we will likely be overstaffed and carry more pilots than required for Q4 and into early 2024. With pilot attrition no longer being a drag on our utilization by the fourth quarter, we can now isolate the AOG issues and look at the core airline.
The core airline, that is, excluding AOGs, should be back to full utilization by Q4 and is expected to be closer to run rate margin and CASMx production. The drag on margin caused by the AOG aircraft should be viewed as neutralized due to RTX's make-whole commitment. Now let me discuss some of the recent changes to the Airbus order book. Early this year, we were given delayed aircraft delivery dates for 2023 and part of 2024, piling up deliveries in 2024. In addition, it has been widely expected that these delays would continue beyond 2024. We also had some decisions regarding a few of our A319neo orders and option aircraft that needed to be made. Airbus has also been clear to us about their own production limitations and backlog of orders that will likely push new order deliveries into 2030 and beyond.
Also, in the near term, we need a general slowdown of, of growth to de-risk the business and give ourselves a chance to digest the previous few years of growth. Given all of these things, and the fact that our original orders only extended into 2027, we started discussing a broader reevaluation of our future aircraft deliveries. At the end of the day, we agreed to make the following changes without changing the total number of commitments. One, we reduced 2024 deliveries by 11 and smoothed the remaining deliveries between 2025 and 2029. Together with our direct lease commitments and the retiring of our A319, these changes slow our growth in the near term and provide us a consistent level of deliveries for the back half of the decade.
Number two, we upgauged all of our A319neo orders to A321neos to be delivered between 2025 and 2029. Three, we moved the timing of our option aircraft decision by 1 year and smoothed the timing of those options. A lot of moving parts here, all of which we believe are positive to both Spirit and Airbus, and we appreciate Airbus partnering with us together to make a meaningful agreement, giving us a stable and predictable order book with the aircraft mix we view as most beneficial to Spirit. At the time we made these decisions, we estimated these fleet changes would produce a 2024 growth rate in the high teens. However, that was before learning about the latest neo engine issue.
It'll be a few more months before we fully understand what the impact may be on our 2024 capacity plans. Looking ahead to the third quarter, we estimate our operating margin will range between -5.5% to -7.5%. We estimate fuel costs per gallon will average $2.80, with total operating expenses ranging between $1.39 billion and $1.40 billion. Our third quarter guidance metrics are included in our investor update, published today, a copy of which can be found on our website at ir.spirit.com. Before I hand it back to Ted, I do want to recognize our operators.
The past few months have been a difficult weather and ATC environment, and our crews, our airport staff, the operations control center staff, and the other operation support personnel have been the ultimate professionals, and I wanted to give them a quick shout-out. Now I'll turn it back over to Ted for closing remarks.
Ted Christie (CEO)
Thanks, Scott. Although we made progress on improving our operating margin in the second quarter of 2023, we are clearly still underperforming our potential and face a challenging Q3. We acknowledge that some of this is due to decisions we made coming out of the pandemic. In hindsight, slower growth would have been more ideal during and coming out of the pandemic. This was largely impossible for us due to the pace of our contracted deliveries. That, coupled with high pilot attrition issues, have been contributing factors in our struggle to return to full fleet utilization. It is possible that we are being overly conservative with how tight we are willing to run the network, with the intention of supporting operational reliability, but at the cost of penalizing utilization. Labor, weather, and infrastructure issues have been volatile and unpredictable.
We are optimistic that some of our learnings over the past few years will help productivity in the back part of 2023 and full year 2024. Pilot attrition rates in June, July, and indications for August are trending better than we expected, which is great. It also means that for Q3, we could have flown more hours on the peak days than we scheduled and has resulted in a missed opportunity. Nonetheless, assuming our pilot attrition rates stay where they are or improve further, our growth is no longer constrained by pilots, which bodes well for our core fleet, achieving full utilization in peak Q4. In fact, if we weren't burdened with aircraft being pulled from service due to GTF issues, we believe we could achieve full utilization on our entire fleet by year-end.
We believe we missed out on some passenger volume in June and July, holding out for higher yields that did not materialize, and we have revised our approach for the fall. Not surprisingly, accurately predicting the new normal demand levels post-pandemic has been challenging. We are making tactical changes to our network post the Labor Day holiday, including more variation between peak and non-peak day of week flying, which in this demand environment, we believe is the revenue and margin-maximizing answer. The fleet decisions we have made, including the early retirement of the A319s, revising the pace of our aircraft deliveries beginning in 2024 through 2029, and upgauging more deliveries to the A321 variant, should all drive fuel and other cost efficiency benefits in 2024 and beyond and allow us to deliver growth more in line with expected demand growth.
In conclusion, the dynamics of the airline business are a constant. One thing that I have learned over my two-plus decade career is that things in the airline industry can change quickly and often. Sometimes the answer is to pivot, and sometimes the better answer is to stay the course. The current setup is simply not favorable to a domestic-focused airline, especially while still operating with some lack of efficiency and productivity. I believe these things will change in our favor, and we are taking steps now to be positioned to capitalize on them. Frustrations aside, our team is doing a great job adjusting as necessary, and I strongly believe our expected three-Q performance is an anomaly.
Most important for us, as we trend towards a normalized utilization rate, we expect our cost structure to return to industry-leading levels and provide us margin tailwinds and a considerable advantage against the rest of the industry. Now back to Vivian to begin the Q&A session.
Vivian Tavares (Manager of Investor Relations)
Thank you, Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. Adam, we are ready to begin.
Operator (participant)
At this time, I'd like to remind everyone, in order to ask a question, press Star, then the number one on your telephone keypad. Your first question comes from the line of Conor Cunningham with Melius Research. Your line is open.
Conor Cunningham (Equity Research Analyst)
Ted, just this, this comment of shifting day of week, it's been a big theme this, this far. Just ignoring the potential fare impacts, but just when you think about operational stress on the system, when you add more-
Ted Christie (CEO)
Hey, Connor, you're... Sorry, Connor, you're cutting in and out, but I think you asked about day of week, variation and the operational effect of that. Is that right?
Conor Cunningham (Equity Research Analyst)
Yes, yes. Sorry about that.
Ted Christie (CEO)
Okay. No problem. You're right. I mean, one of the things that we implemented as a result of our learnings from 2021 here was that we started to smooth the airline out a little bit more because it is easier for, particularly airport ops, to understand and schedule the airline. That is only one of the many things that we've implemented as part of our operational enhancement package, and I alluded to that in my comments, that we have quite a few things that we've done to make our operation run, and I think it's been having a nice effect. As part of the learnings from that, we're looking at the things that are most effective and some of the things that we did that weren't having as much of an impact.
We believe that while we're not going to stress the airline too much going from peak to off-peak, there is some opportunity for us to drive some of that, which will help unit revenue, and we think it helps the margin at the end of the day, particularly in the off-peak period.
Conor Cunningham (Equity Research Analyst)
Okay. Then on the GTF issue, you mentioned, you know, that Pratt's talking about making whole. I know you expect that to play out. I mean, I think Alliance talked about maintenance credits. Just any thoughts there would be helpful. Thank you.
Ted Christie (CEO)
No problem. Yeah, it's still early. This all developed quite quickly on us. As we, as we said, we had to make quick changes to September, which is, you know, not favorable at all. One thing I will say about Pratt, we're a long-standing customer. This is a storied institution in the United States, one of the biggest industrials in the history of the United States, and we've had a long-standing partnership with them, and they've always stood by their customers, and they've always honored their commitments. We expect that to be true. They've, they've intended to make us whole on this issue, and that is our expectations. Coming to the details of what that will look like and how it will take form, it's still too early to tell.
Operator (participant)
Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is open.
Duane Pfennigwerth (Senior Managing Director)
Hey, good morning. Thanks. Ted, your comment about holding out for yield was kind of interesting. You know, I think there was a line in the press release about an, an acute reduction in demand. Can you, can you talk about when you, you know, when you first saw that kind of acute reduction in demand? Is it sort of the other side of the coin of maybe holding out for yield? I assume it was kind of a late in the quarter issue. Any color on the markets where that was kind of felt most acutely, you know, maybe Caribbean, et cetera?
Ted Christie (CEO)
Sure, Duane, thanks. I'll give just a brief intro, but I'm gonna let Matt color in around the edges. I think some of the points you made, and we use the words intentionally, drive home what, what was we saw was very acute. We feel like it's, it's isolated and noticeable, and ties nicely with what we've, what we've witnessed and now heard people talk about a rapid and distinct shift away from domestic and near field international, which was very strong last year, to long-haul international, which is obviously considerably outperforming this year. Our strategy around, around handling yield, clearly was patterned off of what we were seeing over the last, you know, 12-plus months, and that, that did not play out well towards the end of June.
Matt, what would you add about geography and, and that sort of thing?
Matt Klein (EVP and Chief Commercial Officer)
Sure, Duane. I can. One perfect example, I think, as you talked about Caribbean there for a second, is Cancun would be an example of some of the abruptness that occurred during the quarter for us, is April. Within the same quarter, April, we saw incredible demand strength, pricing, pricing power, and sold-out flights basically every day. Then less than 2 months later, we saw in June, which is still a very strong time for Cancun, reverse, with unit revenues in some cases down very high double-digit % change year-over-year. That's all happening within the same quarter, and that's how abruptly things kind of moved. We have a couple other examples like that, but that's probably the biggest example.
Having said that, our capacity is up a little bit in Cancun, so some of that could be explainable, but not to the level that we actually saw. The industry has added some extra capacity there, too, so it's always about supply and demand. But in this case, the demand just fell off. As we talk about yield and think about June, but then also into the end of June and then into the third quarter, we took a position that we had been seeing for the last 15, 16, 17 months of the demand will be there, it will come in, and the yields will be impressive. That just stopped relatively quickly.
It's not that it went completely away, it's just that it stopped at the same pace that we had seen. Really, we held out a little bit too long, expecting to see those yields come in. Once you make an adjustment to that, then you are sacrificing yield for volume, then you need to see the volumes come in. We are anticipating and starting to see the volumes come in. They're just at lower yields than we'd like to normally see for third quarter.
We have described this as an acute situation, and we are expecting to see demand trends here in the domestic U.S., but also in near field, international, as well as U.S. territories, bounce back and look, and look more normal as we get out of the summer into the fall, and then especially, at the peak periods in the, in the fourth quarter.
Duane Pfennigwerth (Senior Managing Director)
Any, any themes on the originating city aspect to that demand change, where did you see sort of variation depending upon what region of the country you're originating from?
Matt Klein (EVP and Chief Commercial Officer)
No, not, not really, Duane. It, it feels, it feels like it's spread. I mean, you know, being, being heavily East Coast-oriented, has an effect, on, on, some of the demand, where that demand decides to go, because as you would expect, transatlantic Europe is, is not too far away from the East Coast, relatively speaking. There was an impact with that. In general, we saw, we saw impacts, but East Coast really, really took it, probably the most.
Duane Pfennigwerth (Senior Managing Director)
That's, that's great. I really appreciate that color. Then just on, just on the engine issue, and this may be impossible at, at this point in time, but, you know, of this kind of negative 6, negative 7% margin outlook for the third quarter, how many margin points do you think these specific engine issues are costing you? To the extent that there's, you know, reimbursement sometime down the road, how would you size that headwind, you know, as of today?
Ted Christie (CEO)
Sure. We think the easiest way to think about the margin impact of this issue is really driven by, you know, our utilization and productivity. Given where we are right now with fleet utilization, which takes into account all the aircraft on ground that we have today, we're probably missing 7+ margin points as a result of that, broadly speaking. Some of that can be attributed to some of our own restrictions, which we alluded to before, about how we're running the airline, but the vast majority of it is because we have AOGs.
So, you know, we're, we're gonna be obviously in discussions about, you know, what the impact it's having on us. It is, unfortunately for us, in the United States, we're really the standout here. So, you know, it will be, you know, an important discussion that we have with the folks at Pratt & RTX. As I said earlier, we've, we've got a very strong partnership with them. They've always stood by us, and they've always honored their commitments. We have no reason to expect that would change here.
Duane Pfennigwerth (Senior Managing Director)
Thank you.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Scott Group (Research Analyst)
Hey, thanks. Morning, guys. I, I know there's a lot of talk about this shift international and days of week, you know, if I take a step back, is it just possible that we've now finally surpassed pre-pandemic domestic capacity? At the same time, corporate demand is somewhat diminished from where it was, legacies are forced to just be a little bit more focused on leisure. There's just too much supply relative to demand for some of the smaller carriers, we just sort of reached that inflection point. Is it possible that's what's just happening right now?
Ted Christie (CEO)
Good morning, Scott. Look, you know, I mean, the nuances of establishing what impacts demand are difficult to arrive at, as you would, as you would expect. Given what we experienced in the latter part of Q2 and what we're, what we're seeing here in Q3, we wouldn't describe it that way. We would describe it as, you know, clearly a shift in demand geographically. So, you know, we think that that move probably costs us, you know, 400 basis points on the margin this quarter. We don't expect that that will repeat next summer or in, in the fourth quarter, more, more closely in. So, you know, I, I wouldn't-- I wouldn't say...
Nothing that we're seeing right now says that we have a, an, you know, a noticeable supply-demand imbalance. In fact, you know, if you look at what's been happening over the course of the, the recovery from the pandemic, unit revenues across the board are up. And admittedly, we're considerably larger, but the industry is only modestly larger, and it would tell you that there's, you know, there's plenty of demand out there. I don't, I don't know that we see data yet. I mean, your supposition would say, is it possible? I suppose anything's possible, right?
But it's entirely possible that right now there's an artificial lid on demand, because corporate travel hasn't returned and because, you know, people are fatigued with the operations that we've all been dealing with over the last, you know, year and a half. You know, it becomes exhausting when you sit at an airport, and you're delayed six hours because of air traffic control initiatives and ground delay programs. There's just as much as there's always possibilities that there's changes happening in the demand profile, I think there's just as many that say it's possible that we're seeing some things that are artificially lidding demand.
Again, we're, we're more focused on what we saw in the second quarter and what we're expecting here in the third, and we think that that's what's driving the disconnect in our, our performance.
Scott Group (Research Analyst)
Okay, that makes sense. You know, just given the merger, and I guess the uncertainty of the merger, how, how do you plan for capacity growth next year? What are your initial thoughts, and I guess, how much capacity growth do you need to have a shot of getting the CASM down next year?
Ted Christie (CEO)
Well, the good news is, Scott can jump in here after I'm done, is that the primary driver of getting the CASM where we want it to be is getting the productivity of the existing assets to where we want it to be. That's not necessarily I mean, obviously, that drives growth because utilization will, will in fact, drive growth. As, as Scott said, we feel that we would be at that in the fourth quarter, excluding the AOGs, with Pratt. That'll help us get to our expected, more expected kind of CASM trajectory, and that should be a tailwind for us. Looking at 2024, it's a little cloudy right now because, you know, we, we originally thought we had a pretty good bead on what was happening with the fleet.
We made the necessary adjustments, which I think were smart, and then, of course, we just received information two weeks ago that kind of changes that. What would you add to that?
Scott Haralson (CFO)
No, I think that's right. Scott, I think it's about utilization first and foremost for us. I mean, we've been running uphill, you know, for the last few years trying to catch up to the amount of aircraft we've been delivering. With the changes in the Airbus delivery stream that we negotiated, I think put us in a pretty good spot to try to navigate all of the different variables that are moving, and let us feel comfortable that we're able to generate margins that will tell us that we should be growing again. I mean, we got to earn that right to grow, you know, the airline.
We got to return utilization, return margin, and cash production, and then we can start to lean forward. I think, you know, we want to make sure we can digest the capacity we've taken over the last few years, get utilization to where it is, and kind of get our skis underneath us, and then we'll move forward.
Scott Group (Research Analyst)
Okay. Thank you, guys.
Operator (participant)
Your next question comes from the line of Jamie Baker with JPMorgan Chase. Your line is open.
Jamie Baker (Managing Director and Senior Analyst)
Hey, good morning, everybody. Thanks for the color on pilot attrition. Just wondering if you have any, you know, year-over-year numbers that you could share. Is the new contract having the desired effect of increasing applications, or is it merely slowing attrition? Either way, it's obviously, you know, positive.
Ted Christie (CEO)
Yeah, it is positive. You know, the attrition numbers are stabilizing in ranges that versus where we were at, you know, we were at peaks. You'll recall on our Q1 earnings call in April, we alerted that we were seeing, you know, some alarming attrition levels, and as a result, we pulled some capacity from the summer. Those ended up being the anomaly. We're now at levels that are much more akin to what we were experiencing in the early part of this year as a result of the deal, and give us confidence that as we move forward, you know, we've reached some stability. I think obviously, a new contract does create stickiness for existing pilots.
Our recruiting team is doing a fantastic job at navigating the environment, and we're, we're having great success at attracting new pilots as well. Full classes every time, and, and the engagement there is really strong. You know, as a, as, as a one anecdote, you know, like I said, we've, we've noticed that there have been pilots leaving us and a number of other lower-cost airlines going to the majors. We've, we've now experienced numbers of what we're calling boomerang pilots, where they've left us, gone to another airline, and are coming back.
I think it has to do with a mix of obviously the, the contract itself, the quality of life that we offer, and, and the, and the combination of those work-life balance, benefits, pay, and the word of mouth is spreading. You know, I'm encouraged by all of that. We can't rest on our laurels. We've established new programs that, that give our pilots much more touch time and concierge-type feel.
It's working. For now, that gives us some confidence that it will no longer be the limiter. It really comes down now to fleet, and that's how we solve-- that's how we work to solve this problem with Pratt.
Matt Klein (EVP and Chief Commercial Officer)
Got it. Well, and that leads into my... Thank you, and that leads into my second question, and this is, you know, probably one of the most theoretical, questions that I've asked you over the years. If you could choose between the GTF issues completely disappearing tomorrow, gone, or having corporate demand immediately recover for the big three, and not just to 2019, but back to where it should have been in 2023, which of those would you choose? You can't have both. You can have one or the other.
Ted Christie (CEO)
I can't have both, huh? Okay, well, I think, my answer would be to have the, the, the Pratt issue resolved.
Matt Klein (EVP and Chief Commercial Officer)
Okay.
Ted Christie (CEO)
We, you know, it, it's, it's localized to us. It, it makes us stand out. We don't like it, neither do they, by the way. It's, it's crimping what drives this business, which is productivity and low costs. You're right that having another demand funnel open up would be good for the broader industry, and, and I, I couldn't argue that that wouldn't, wouldn't help the whole industry a little bit. When thinking first specifically about us, I would feel better about having our house in order and our fleet where we want it.
Matt Klein (EVP and Chief Commercial Officer)
Okay, very helpful. Thank you, everybody.
Ted Christie (CEO)
Yep.
Operator (participant)
Your next question comes from the line of Stephen Trent with Citi. Your line is open.
Stephen Trent (Managing Director and Research Analyst)
Good morning, everybody, thanks for taking my questions. Just quickly, I was wondering, I was intrigued by what you said about Cancun. On your Mexico flow, have you actually seen over the last year or so, any tailwinds in terms of cross-border demand, considering that the FAA has not restored Mexico's Category 1 Aviation Safety Rating, and Allegiant and Viva Aerobus are not linked up yet, et cetera? I'm just wondering if, if that's created any opportunities for you. Thank you.
Matt Klein (EVP and Chief Commercial Officer)
Hey, Stephen, it's Matt. We have, we have added a little bit more in Mexico overall. We haven't really seen a lot of the cross-border sale benefit that you're discussing or I guess asked about. Almost all of our Mexico demand is point of origin United States. Believe me, while I tell you that I wish we saw more coming out of Mexico, it's, it's the vast, vast, vast majority for us is point of origin U.S.
Stephen Trent (Managing Director and Research Analyst)
Great. Appreciate that, Matt. Just very quickly, when you look at the challenges, I mean, not just you guys, everybody with air traffic control and the other issues out there with storms, you know, any high-level view with respect to longer term strategy of maybe doing more with crew bases in certain regions versus today? Thank you.
Ted Christie (CEO)
Sure, Stephen. You're, you're right. I mean, the, the whole industry has been very vocal about the challenges we face, I know, you know, weather is a driver of that. It's-- it certainly appears to be noticeable that there has been a shift in the weather patterns. We don't believe that the weather patterns really fully account for the changes in what we're experiencing from a level of disruption, delay, and cancellation. Let me give you, like, an interesting data point. Pre-pandemic, in the second quarter of 2019, Spirit canceled about 700 flights for weather.
If you'll recall, which you may not, but in the very early part of the second quarter of 2019, we had a very difficult Easter period because of a storm pattern that moved through Florida. It was very noticeable, and turns out it was the first indication of some of the challenges that the Jax Center control center was having. We're about 30% bigger today than we were in 2019, so we should have expected to see around 900 to 1,000 cancellations in the second quarter of this year. Instead, we canceled 1,700 flights. Weather alone doesn't describe what's happening.
What's happening is that the staffing shortages at the variety of different control centers throughout the U.S., which has been widely publicized, are limiting their ability to navigate the airlines around the challenges, and it's putting us into a real bind.
Matt Klein (EVP and Chief Commercial Officer)
What we're trying to do, and what we've done over the course of the, of the last couple of years, is we've done exactly what you suggested. We've put significantly more investment into things that previously were just easier to run. Adding crew bases has turned out to be one of the bigger wins for us, in fact. Since 2019, I think we've added maybe four or five crew bases. It's been a noticeable shift, and that's helped the scheduling team create a little bit more ease of recovery. That's just one example of a variety of different things that we've done to insert buffer, to create recoverability. We've reduced the average line days for our crews.
You know, they used to go out on average around 4 days, and now they go on average around 2 days, and that makes it easier to recover there. All of this is intended to make the, the operation easier to recover and more reliable, but it doesn't come for free. We, like the other airlines, are doing our best to lobby with the Department of Transportation and the FAA to put the necessary infrastructure in place in the air traffic control system so we can start to run more efficiently, which will drive lower costs and lower fares, which is really the best answer for the country.
Stephen Trent (Managing Director and Research Analyst)
That's very helpful. We really appreciate the color on it, and thanks for the time.
Operator (participant)
Your next question comes from the line of Helane Becker with TD Cowen. Your line is open.
Tom Fitzgerald (VP and Equity Research Analyst)
Hi, this is Tom Fitzgerald. I'm for Helane. Thanks so much for the time. Just a question, it looks like you're growing a lot in the third quarter in Phoenix, Charlotte, and Los Angeles. I was curious if you had any color on those markets in particular. Just as a follow-up, just a quick modeling question. I know the base case assumption seems to be that the regional shift and the regional demand mix will shift back to something more normal in the fourth quarter. Pre-COVID, you know, 4Q revenue would usually decline a little bit sequentially versus the third. Last year was up.
Is it, just from a high level, would you expect it to be like last year, it'd be slightly up versus the third quarter or, or still, down a little bit? I'm just appreciate any, any color there. Thanks so much.
Matt Klein (EVP and Chief Commercial Officer)
Hey, Tom, it's Matt. Your first question regarding Phoenix, Charlotte, and Los Angeles. We, we have seen pretty good success in these cities, which is why, which is why you're seeing the growth there. We did pick up an extra gate in, in Charlotte, we've also picked up extra gates in Los Angeles, and we're utilizing them. That's what we do. You know, we've, we've seen growth. Our own growth in Los Angeles has, has been very effective for us. It's helped build out our presence out on the West Coast a little bit more. It makes us more relevant in general in Los Angeles, which then helps the overall Los Angeles revenue generation and brand awareness out there.
Phoenix is just another leisure destination in the country that it's time for us to start doing a little bit more work there. In terms of Q4 versus Q3, the answer would be generally yes, we'd expect to see trends that you mentioned kind of continue out there. We would expect to see that kind of growth in Q4.
Operator (participant)
Your next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is open.
Michael Linenberg (Managing Director and Senior Analyst)
Hey, good morning, everyone. Yeah, two questions here. I just-- I want to go back to, you know, maybe Scott and Jamie's question just about, you know, the big three and the fact that, you know, corporate's down and they've been allocating more assets into leisure markets. I'm really curious, though, like, how much of the capacity, or you know, markets that you're in, where you've seen low-- other low-fare carriers adding capacity and, and, and, and whether or not, you know, you sort of have a, a sense of, you know, sort of versus 2019, how much, in your markets, low-fare competition, or capacity is up?
Because it does seem like, you know, when you look at a lot of the different route changes that have made of late, it does seem like a lot of the low-fare carriers are all targeting the same markets, and in many cases, they are going after the same customer. How much of that is a factor or maybe it's not? Maybe it's not much of a factor. I'm just curious about your take on that. Thanks.
Matt Klein (EVP and Chief Commercial Officer)
Sure, Mike, it's Matt. I'll try to tackle that one. We have seen from pre-COVID really to now, our overlap has generally been the same across the industry, with a couple of exceptions. One is, as you just noted, our nonstop overlaps with Frontier have increased a bit. But, but with Southwest, we've gone down. Kind of a trade-off there amongst, I guess you'd say, low-fare carriers. Overall, generally speaking, we, of course, when we decide where to fly and how we pick routes and pick new cities, we're evaluating the overall landscape, and we're evaluating what's going on in general.
We do take into account who is already operating certain routes, because as we put together our forecasts, we, we have a lot of history and understanding how we think routes will perform. The competitive dynamics, while different city to city, generally can help us predict what we think outcomes will be. Having said all that, in normal environment, routes that we can target domestically, not to, not to sound a little bit arrogant about it, but a lot of times it doesn't matter who's already there. If our forecasts play out and we think that we're going to grow markets, which is what we do, it generally doesn't turn into a big issue.
The issue that we're seeing right now is with this move towards international long-haul traffic, some of the competition right now inside the U.S. is competing for what might be lower, lower demand profile than what we were all probably anticipating. At least we were anticipating a different demand profile this summer.
Ted Christie (CEO)
Generally, I think, to answer your question is, even though we do see competition and we are growing on top of other people, and just like they are on top of us from time to time, generally hasn't been an issue for us. This summer, we feel, is incredibly unique that we're seeing some of these impacts.
as we noted, we, we expect this to flip back as we get into the fall and the peak holiday periods, when just in general, customers just take shorter trips and they're looking to stay more stateside, and we expect that will then turn back into the normal demand patterns that, that we're used to all seeing.
Michael Linenberg (Managing Director and Senior Analyst)
Okay, great. Good answer. Then just, thanks for that. Then just second, more of a modeling question: You obviously, a lot of moving parts here with, you know, the GTF, or the GTF issue. How should we think about 4Q capacity, you know, your sort of revised capacity number for 2023? Then what does that mean for 2024, especially since you've cut back your deliveries for next year? Just rough numbers since I, I know it's early. Thank you.
Scott Haralson (CFO)
Yeah. Hey, hey, Mike, this is Scott. I'll, I'll take a stab. Matt can hop in, too. Looking at, at sort of the move between second, third, and fourth, you know, with the, with the reductions that we've had from the, from the GTF, the new GTF issues, you know, probably looking at a slight reduction in Q3, with the increase in utilization, we would expect Q4 to be a good bit higher than Q3. We haven't finalized the exact capacity schedule for Q4, but I would expect, you know, somewhat material move north in capacity. Thinking about 2024, I mean, obviously, the, the news is fresh on the, the additional GTF issues, it's hard to predict what 2024 will look like.
I did mention in the prepared remarks that with the moves we made with Airbus, we expected to be in the high teens, so the expectation is a lot of that growth will be muted by the engine issues. Hard to know if we're going to be, you know, in the single digits or flat or, you know, low teens. Hard to tell at this point, but my guess would be somewhere in the single digits for 2024.
Ted Christie (CEO)
One other point.
Michael Linenberg (Managing Director and Senior Analyst)
Terry?
Ted Christie (CEO)
One other point that I'll make, Mike, for the fourth quarter, and I, I said it in my prepared remarks. Pratt had indicated that we were gonna see up to 13 engines in this initial allotment, and given the, the tight timeframe and that, and that it was effective, the inspections would be effective in September, we pulled 7 aircraft out of service for the month. However, they're continuing to refine the universe of engines, and it's entirely possible that we may see some benefit associated with that, which means that our exposure in the initial allotment of 200 could go down.
If that's true, that would give us more opportunity in October, November, and December with productive airplanes. Given that what we've just talked about with pilots, we definitely have those available, ready to fly. We don't know yet. It's all kind of in the soup, and we're just gonna have to update you as, as we learn more over the course of the next month.
Michael Linenberg (Managing Director and Senior Analyst)
Okay, very good. Thanks, gentlemen.
Ted Christie (CEO)
Adam, do we have any other calls or questions?
Operator (participant)
Your next question comes from the line of Dan McKenzie with Seaport Global.
Dan McKenzie (Research Analyst)
Great.
Operator (participant)
Your line is open.
Dan McKenzie (Research Analyst)
Oh, hey, thanks. Good morning, guys. Picking up on that last point, you know, the, the uncertainty around 2024 is pretty understandable. Going back to the script and the need to slow down growth and de-risk the business, has, you know, your thoughts about growth beyond 2024, also, you know, they've also moderated. How should we think about growth longer term?
Ted Christie (CEO)
I can start, and Scott, you know, alluded to some of these changes in, in the script. We still see a sizable opportunity. That hasn't changed. I think what we're alluding to as far as the near term, is that we continue to grow pretty notably on a fleet basis throughout the course of the pandemic and haven't been able to use them. We just haven't been able to get the utilization where we wanted it to be. Taking a chance to digest those airplanes and get them up in the air and efficient, will help the unit cost story, which helps the margin story.
The, the work that Scott and the treasury team did with Airbus was, was a cooperative effort between ourselves and, and the manufacturer to smooth out deliveries, give us some more certainty into the latter part of this decade, where airplanes are gonna be very, very difficult to get your hands on, and, and allow us to use the lessor community to supplement that when and if we feel like it's necessary. You know, there's a lot of moving parts in our fleet, as, as is true for every airline. We're retiring Three Nineteens right now. We're gonna get pretty close over the next, you know, 5 or 6 years to the oldest Three Twentys, believe it or not, in our fleet, and starting to have to think about what happens with those and whether or not we keep those around.
There's, there's ups and downs that we'll deal with, but the opportunity itself still hasn't changed for us. It's just a, a question of pacing and that sort of thing.
Scott Haralson (CFO)
No, I think that's right. I think we've... We, we smoothed out the delivery stream. You know, prior to this adjustment, we were having some, some peaks and troughs that were pretty material. This allowed us to smooth it out, give us a predictable base, and, and allow us to, you know, as I mentioned earlier, to sort of earn our way into the growth profile again. We'll use, you know, the, the lessor community, like Ted said, give us some flexibility.... We have some ability to extend and, or retire early additional aircraft. This gives us a good base to maneuver with as we think about going forward. I think the long-term story is still the same.
We think there's opportunity for us to continue to grow, and so what was the best fleet mix and platform for us to do that? I think we set ourselves up well for that.
Dan McKenzie (Research Analyst)
Okay. I guess just in terms of an actual growth rate, you know, are we thinking that longer term target, that growth target is still, you know, call it low double digits? Or, you know, does it, mid-double digits, any sort of perspective around that?
Ted Christie (CEO)
Well, if you just, I think mathematically roll out the airplanes, it's less than that now. Certainly as you get, you know, bigger, into, into the future. That's why I say, you know, I think we're evaluating the pace of things. You know, we, we, Scott said it earlier, I think, I think it was a great point. You know, we have to earn our right to, to deliver the capacity. Getting back to full efficiency, and starting to deliver the margins we believe that we can, is our first step. This was a good idea to kind of, you know, for a lot of reasons, to smooth things out for ourselves and gives us a chance to, to kinda prove all of that.
You know, we have the right team here to execute to it, but we, we need to get the job done. I think that's what this, this kind of recent modification allows us to do.
Scott Haralson (CFO)
Yeah, I think, I think the point there, there too, is that the, the growth is not an isolated objective, right? We, we need the, the returns to be able to justify it. So while we think that will be the case, we, we do need to make sure that we're doing that before we deploy the capital. So I think that's just prudent management for us to, to sort of see the game film first.
Ted Christie (CEO)
And, you know, we, we, we haven't commented a lot on, you know, the pending transaction with JetBlue. You know, as you can see from the results that have happened across the industry really here, you know, the dominant oligarchs are outperforming the rest of the industry, and that's not an accident. When you control that much capacity, it's very difficult to compete, especially with the diversity of revenue sources, the strength of their loyalty programs, the strength of their credit card programs. We do our best to fight that every day with low costs and low fares, but you can just see from the numbers. We think the best answer for competition is to, to create a fifth alternative. Clearly, with that, that engine, there's going to be unique growth opportunities.
That's the case we intend to make. And I think that's, that's going to be the best answer. If it doesn't work and we're standalone, we still feel good about our prospects, but it's not to say that, you know, the recent experience hasn't shown that there are some challenges out there. And I think we're just doing what we would you would expect us to do as management, which is be a little bit prudent, make sure we're pursuing the growth in the right way.
Dan McKenzie (Research Analyst)
Yeah. Perfect. Second question here. You know, this idea of an artificial lid on demand, you know, that you share due to ATC issues, is the thought that that will persist until 2025, when the ATC is expected to be fully staffed? Or, you know, I guess, is it, is it, you know, just more temporary, just sort of tied to, you know, some, some issues today because it's so severely understaffed?
Ted Christie (CEO)
Well, you know, admittedly, I'm, I'm speaking purely on speculation and anecdote, but I've experienced it. You know, having flown a lot. I fly a lot, and it, it can be frustrating when you're stuck at an airport for three, four, five, six hours, because of, of, you know, ground delays and, you know, all the things happening. I think that may be making people make different buying decisions. So I don't know how long that persists. Clearly, during the summer, it's at its peak. We don't anticipate that, you know, during the fall or the winter, where actually it's a little bit easier to operate, we're gonna see, you know, that type of frustration. I think it's, it happens a lot during this, this period, which is when everyone's traveling and the weather's bad.
I think it's just an, you know, a theoretical impact that, I can tell you that, you know, first-person experience, I've witnessed, and it's very, You know, you can understand how people might say: You know what? I may not add that third trip to go see my family because I just can't afford to spend 9 hours back and forth waiting.
Dan McKenzie (Research Analyst)
Hmm. Yeah, makes sense. Thanks so much for the time, you guys.
Operator (participant)
Your final question comes from the line of Savi Syth with Raymond James. Your line is open.
Savi Syth (Managing Director and Equity Research Analyst)
Hey, good morning, everyone. Just a bit of a follow-up in, in terms of, as you're thinking of 2024, but more so from, you know, how much of that pre-GTF, like, when you were thinking of high teens, how much of that growth was gonna come from utilization? I'm, I'm just trying to think about as you're exiting this year and, and going into next year, you know, you, you might not need as many kind of training and hiring costs, and, and your utilization improves, so that should be a pretty good tailwind. I'm trying to just, you know, quantify that a little bit more.
Scott Haralson (CFO)
Yeah. Hey, Savi, this is Scott. Yeah, I think you're spot on with some of that. As we thought about the, the high teens, it's really made up of, of, of really 3 things. They're, and they're both probably, you know, in the 5-7 points worth of move. You know, we'll probably grow the fleet, about 5 points, you know, in 2024. You have utilization move year-over-year, which is probably 5-7 points worth of, of impact. We have average seats for everyone, and that's probably another 5+ points, and so that gets you in the high teens. Your, your point's right, you know, really 2, 2 of those, you know, are, are less impacted by pilots. I think, you know, we feel good about our pipeline.
We've talked about that before, no longer pilot constrained. Now this is just getting the airline humming again. I, I think we're, we're in a good spot. Unfortunately, we do have to deal with the, you know, the next batch of GTF issues, but we feel comfortable about the core part of the airline.
Savi Syth (Managing Director and Equity Research Analyst)
Okay. Regarding the GTF, and, like, if it, you know, if you do get settled with the make-whole, how does that flow through the PNL? Is that a special item, and it helps your cash, or how, how, how does that kind of flow through?
Scott Haralson (CFO)
Yeah, Savi, we're, we're early in the, the discussions around what that might look like. So difficult to say. It could take a few, few different forms, you know, over, over different lengths of time. We, we would have to figure out what the accounting would be based on the, the vehicle. You know, we'll, we'll, we'll let you know when that materializes.
Savi Syth (Managing Director and Equity Research Analyst)
Thank you.
Operator (participant)
I will now turn the call back over to Vivian Tavares for closing remarks.
Vivian Tavares (Manager of Investor Relations)
Thank you all for joining us and for your participation today. Please contact Investor or Media Relations if you have any further questions. We look forward to talking to you soon. Have a great day.
Operator (participant)
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
