Spirit Aviation - Q4 2022
February 7, 2023
Transcript
Operator (participant)
Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Fourth Quarter 2022 Earnings Conference Call. Today's conference is being recorded, and 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 the star key followed by one on your telephone keypad. If you would like to withdraw your question, simply press star one once again. Thank you, and I will now turn the conference over to DeAnne Gabel, Senior Director of Investor Relations. You may begin.
DeAnne Gabel (Senior Director of Investor Relations)
Thank you, Abby, and welcome everyone to Spirit Airlines' fourth quarter 2022 earnings call. This call is being recorded and simultaneously webcast. A replay of this call will be archived 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 in the room are other members of our senior leadership team. 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 as discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements, and 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. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our fourth quarter of 2022 earnings release, a copy of which is available on our website. With that, I'll now turn the call over to Ted Christie, Spirit's Chief Executive Officer.
Ted Christie (President and CEO)
Thanks, DeAnne. Thanks to everyone for joining us on the call today. A special thanks to everyone on the Spirit team. Together, we overcame many challenges throughout the year. Thanks to our team members' dedication, we made excellent progress on the steps necessary to return Spirit to sustained profitability. Demand was robust during 2022. Our team did a great job maximizing revenue production, including achieving another record for non-ticket revenue per segment. Operationally, the team delivered solid results with an overall mid-pack performance for both DOT on-time performance and completion factor, despite our network being impacted by multiple weather events and infrastructure bottlenecks. We are positioned well to build upon our 2022 successes. I'll share more about our 2023 goals before we get to Q&A. Before discussing our fourth quarter results, just a quick update about the pending merger with JetBlue.
We announced in December 2022 that Spirit and JetBlue had certified substantial compliance with the DOJ's second request and are now waiting to see whether the DOJ files suit to block the deal or allows us to proceed. We anticipate hearing from the DOJ in the next 30 days or so, and that's really all we have to say on that topic for now. Turning now to our fourth quarter 2022 performance. Operationally, the quarter started off with the tail end of Hurricane Ian impacting our operations, followed by Tropical Storm Nicole, and then by severe winter weather across the U.S. during the peak holidays. As a result of these weather events, we canceled over 1.5 percentage points of our anticipated fourth quarter capacity.
The good news is that our team did a great job mitigating the downline impact from these events and took excellent care of our guests. I am grateful for their efforts, and I'm honored to be part of the team. The revenue environment in the fourth quarter remained strong, and total RASM for the quarter was up 17 as compared to the fourth quarter of 2019 on 22.7% more capacity. This was even stronger than we had anticipated. In fact, adjusting for capacity increases, our unit revenue performance was amongst the best in the industry compared to 2019. Costs also came in better than expected, and as a result, our adjusted operating income for the fourth quarter was $57.6 million, resulting in an adjusted operating margin of 4.1%.
While our fourth quarter results were better than expected, we continue to face headwinds in returning to normalized margins and full utilization. As you may have seen in our release yesterday, we have once again trimmed our capacity expectations for 2023. Over the last six months, the GTF NEO engine has experienced diminished service availability, an issue that has been steadily increasing over this period. This is not just a Spirit issue. Pratt & Whitney continues to struggle to support its worldwide fleet of NEO aircraft as MRO capacity remains constrained, and turnaround times for engines in the shop have been nearly 3x longer than the historical averages for CEO engines. To put this in perspective, within a two-week period, we went from having two A320neo aircraft parked without operable engines to having seven A320neo aircraft sidelined due to these issues.
When operating, the NEO engine performance and fuel efficiency is great, but the engine's time on wing performance has once again declined. We are working with Pratt & Whitney on finding a solution that will increase time on wing performance, but it is frustrating that this has become an issue again. In addition, we have been notified by Airbus that a number of our expected 2023 deliveries will be delayed until 2024, which may cascade some aircraft into 2025, all reducing the number of aircraft delivered from Airbus and our lessor partners by seven shells in 2023. In the fourth quarter of 2022, we made the decision to accelerate the retirement of our A319 fleet, which Scott will share more details about. We have had some good news. Florida operational constraints have been gradually improving.
We will remain methodical and deliberate in building back Florida and relaxing the crew buffers that we've been forced to add until we have more confidence in the infrastructure that supports the airline industry. With that, I'll hand it over to Matt and Scott to share additional details about our fourth quarter performance, as well as some color around our first quarter outlook before I close with some thoughts on full year 2023. Matt, over to you.
Matt Klein (EVP and COO)
Thanks, Ted. I also want to thank our Spirit family members for their contributions. Our Spirit family members are our greatest assets, and thanks to their dedication and professionalism, Spirit is able to deliver the best value in the sky. For the fourth quarter, 2022, we will once again compare our results to 2019, but going forward into 2023, we will return to year-over-year comparisons. Turning now to our fourth quarter revenue performance. Total revenue was $1.39 billion, up 43.5% compared to the fourth quarter of 2019, the largest top-line growth of the major U.S. carriers that have reported results thus far. Total RASM for the quarter was $0.1081, up 17% versus 2019, while we simultaneously increased our capacity nearly 23%.
Demand was strong throughout the quarter, especially over the peak Christmas and New Year's Day holiday period, which helped mitigate the revenue impact from weather-related flight cancellations during that time. Load factor was down 3.8 percentage points versus the fourth quarter of 2019. As we explained last quarter, this is primarily because we are flying more on off-peak days and have less variability in the number of flights day to day at any given airport. We believe this better supports our operational reliability and is more likely to maximize earnings in this environment. On a per segment basis, total revenue per passenger increased to $136, a 23% increase compared to the fourth quarter of 2019. Passenger revenue per segment increased 22% to $64, and non-ticket revenue per segment increased 23% to over $71.
This was more than a $4 sequential increase in non-ticket revenue per passenger segment from the third quarter of 2022, driven by strong take rates for ancillary services, combined with the ongoing benefits of our revenue management initiatives. Looking ahead to first quarter, 2023, January started off very strong due to the shift in peak holiday return traffic. However, demand over the Doctor Martin Luther King Jr. holiday weekend was a bit soft compared to historical periods. This softness was not surprising, given that many schools had just gone back into session. President's Day holiday weekend is shaping up very nicely, and we are expecting to see continued strong demand trends over the spring break period.
Our self-imposed constraints on Florida volume continue to carry a unit revenue penalty, but again, we are being purposely conservative when it comes to removing some buffers and restrictions that limit our level of operations there. We acknowledge that this strategy may have a slight downward pressure on load factor and unit revenue, but we are comfortable it is the right earnings decision in current circumstances. Taking all of this into account, we estimate total RASM for the first quarter of 2023 will be up 23%-24.5% compared to the first quarter of 2022 on a capacity increase of 13.2%. As Ted commented, we have reduced our 2023 capacity plan. We now expect 2023 capacity to be up 19%-22% compared to the full year 2022.
With that, I'll now turn it over to Scott.
Scott Haralson (EVP and CFO)
Thanks, Matt. I'll start with a brief overview of our fourth quarter financial performance and then spend some time explaining how we're thinking about the outlook for 2023. Our fourth quarter non-fuel operating cost came in better than expected, primarily due to lower airport rents and landing fees driven by favorable signatory adjustments. We had anticipated that as volume in airports stabilized, we would see a reversal of this pandemic-related increases in airport rents and landing fees due to share shifts. This anticipated reversal came largely in the form of billing true-ups or adjustments as opposed to reduced future rates. Fuel costs were up more than 100% compared to the fourth quarter of 2019 on about 20% more volume due to a 69% increase in the average fuel price per gallon.
Fuel prices have remained stubbornly high, driven in large part by historically high refining margins. The current curve does suggest jet fuel prices will move lower as we progress through the year. For the fourth quarter, we saw good improvement in adjusted operating income quarter-to-quarter. Operating margin was still well below what we believe our normalized operating margins will be once we reach full utilization. Total non-operating expense came in higher than previously estimated due to the periodic valuation of the derivative liability associated with the 2026 convertible notes being valued $4 million higher than it was on September 30th, 2022.
During the fourth quarter, we completed a private add-on offering of $600 million to the company's 8% senior secured notes due 2025, bringing the aggregate principal amount of these senior secured notes outstanding to $1.1 billion. During the quarter, we also increased our commitment under our senior secured revolving credit facility by $60 million, bringing the total amount available under the facility to $300 million, none of which is drawn today. Liquidity at the end of 2022 was $1.8 billion, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of undrawn capacity under the revolving credit facility. We took delivery of 10 A320neo aircraft during the quarter, ending the period with 194 aircraft in the fleet.
As announced last month, we signed an agreement to sell 29 of our unencumbered A319ceo aircraft. We expect to remove 14 of these aircraft from our operating fleet in 2023, with the remainder expected to be removed in 2024. We took an impairment charge in the fourth quarter of $334 million, the expected proceeds of the transaction over the next two years will be between $150 million and $200 million. Over the last year or so, we have been assessing our long-term plans for this A319ceo fleet, our oldest, least efficient vintage of our A320 family aircraft. In the fourth quarter, we made the decision to accelerate the retirement of these aircraft.
In our previous 2023 capacity guide, we had included some reduction in A319 flying, so the impact of the 14 scheduled A319 removals in 2023 has a smaller impact than would otherwise be expected. We continue to view 2023 as a transition year. The objective of returning to full utilization is still primary. We have made the necessary internal investments to reach this objective. However, for all the reasons Ted listed, we are forced to be more conservative with our schedule planning than we otherwise would be. Given the modest build-up for the first half of 2023, we'll likely underutilize the fleet by about 10%. That should improve to around 5% in Q3 and back to what we consider normal utilization levels in Q4.
Matt mentioned the capacity plan for 2023 being up 19%-22% versus 2022. This is about a 450-550 basis point reduction versus our previous plan. We estimate about 40% of this reduction is related to the diminished NEO-engine performance, coupled with no or limited spare engine availability. We estimate about 30% is related to the Airbus delivery day delays and about 20% driven by the accelerated retirement of our A319 aircraft. The remaining reduction is related to the continued buffers we have in place to support the operation due to continued industry infrastructure constraints. For 2023, we estimate total capital expenditures will be about $360 million.
For some highlights here, approximately $150 million of this is related to the building of our new headquarters facility in Dania Beach, which we will occupy in the first quarter of 2024. $75 million is related to net predelivery deposits. About $30 million is related to the purchase of spare engines. Last month, our pilots ratified an amended collective bargaining agreement that provides significant pay increases and other enhanced benefits. We estimate the new rates and benefits drive an additional $180 million of wages, salaries, and benefits expense for the full year of 2023 or about $40 million-$45 million a quarter with an additional one-time expense in the first quarter of about $10 million related to the revaluation of banked sick and vacation time.
In total, we estimate the new contract adds about 4.5% increase to our 2023 CASM-ex. For the first quarter of 2023, we estimate our operating margin will range between -2%--4%. This assumes total operating expenses of $1.39 billion-$1.4 billion and a fuel price per gallon assumption of $3.20. For the full year 2023, given expected utilization levels and the new pilot contract, we now expect our CASM-ex will be in the high sixes. We also do expect to be profitable in all but the first quarter and profitable for the full year. Before I close, I want to thank the entire Spirit team.
2022 was a challenging year on many fronts, but our team persevered and continued to set us up well for 2023. With that, I'll turn it back over to Ted for closing remarks.
Ted Christie (President and CEO)
Okay, Scott, thanks for that brief overview. Now that 2022 is wrapped, we are excited to turn our attention to leveraging our strengths to make marked financial improvement in 2023. We are in a strong liquidity position to have minimal non-aircraft CapEx. We expect to produce solid EBITDA for full year 2023. In addition, we have the option to finance our new headquarters campus in Dania Beach should we decide to do so. We are steadily building back to full utilization, and despite some unexpected setbacks with engine availability issues, we are on track to reach normalized utilization by the end of the year. Our progress will be measured and intentional, so we don't overstress the surrounding infrastructure. As we move through the year, if we gain confidence in the surrounding infrastructure, we have the assets to move the needle on utilization a bit faster.
While our new pilot contract does add unit cost and margin pressure, we do expect the new contract to have a favorable impact on our attrition rates. We take our first A321neo in the first quarter and a total of 10 in 2023, which over time will gradually increase our average gauge and naturally drive productivity. Adding A321neos and retiring the A319ceos will also improve fuel CASM. We estimate that on average, an A321neo will produce 113 ASMs per gallon, while the retiring three nineteens on average produce 73 ASMs per gallon. We won't get into the full benefit of these changes in 2023, as we are only retiring a portion of the three nineteen fleet in 2023 and are taking only a handful of A321neos this year. Fuel efficiency should steadily improve as we move through 2023.
With utilization levels returning and fleet-related benefits on unit costs and fuel burn, we expect CASM and CASM-ex will be lower in 2024 than it will be in 2023. Demand for our product has remained strong. Our team continues to explore new ancillary opportunities, and we anticipate we will set another non-ticket revenue per segment record in 2023. With that, back to DeAnne.
DeAnne Gabel (Senior Director of Investor Relations)
Thank you. We are now ready to take questions from the analysts. We ask you limit yourself to one question with one related follow-up. Abby, we are ready to begin.
Operator (participant)
Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. We will take our first question from Mike Linenberg with Deutsche Bank. Your line is open.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Oh, hey, good morning, everyone. Hey, I guess a quick one and a quick follow-up here. I guess to Matt, as you think about, you know, retiring these A319s, does it preclude you and I, and I get, I appreciate, you know, the fuel efficiency, Ted, that you spelled out, you know, comparing the A319s versus the A320neos. Does it preclude you from, you know, flying certain markets, whether they're experimental or maybe smaller or medium-sized markets or with the bigger shells, are you know, sort of pigeonholed into flying some of the biggest routes? Like, what's the loss there from your ability to develop new markets with, you know, no longer having the A319s? Did you ever consider maybe an A319neo?
Matt Klein (EVP and COO)
Hey, Mike, good morning.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Hey.
Matt Klein (EVP and COO)
Yeah, in terms of where we deploy the aircraft, having the 319 CEOs retire does not stop our ability to grow or expand in any given route, even experimentally, if we choose to do that.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Mm-hmm.
Matt Klein (EVP and COO)
Really, what's become easier and better to do over time with larger aircraft is you can go in sort of day of week to certain places and test things out that way and then continue to grow off of that. That's not really brand new for us. We have done that in the past, and we would continue to do that. If we thought there were opportunities out there that maybe can't support daily right out of the gate, we would go in with day a week and then develop out from there, making sure that we're still right in that decision.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Okay. Okay. That's helpful.
Scott Haralson (EVP and CFO)
Hey, hey, Hey, Mike. Mike, I'll add another pile on to Matt's comment. You know, as we've been playing the fleet over, you know, the last sort of five-10 years, you know, we knew that the A320neo and its range capabilities would replace a good bit of the need for the 19 CEO, given that that was our long-haul fleet. As we've gotten bigger and bigger in our A320neos, you know, we knew that would be a long-haul replacement for us, and the operating costs are pretty similar. That was always going to be the case. I think that's, you know, that's where Matt and the network guys utilizing the NEO where it should be placed.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Okay. Just sort of a related, as we think about the 19%-22% growth in 2023, how much of that is actually gauge related versus maybe new markets, or are you just, you know, filling in the frequency to drive to that higher utilization to get back to normalcy by year-end?
Matt Klein (EVP and COO)
Yeah. Mike, most of the growth there is going to be coming as we look, as we look to continue to add frequencies in places where we're already strong. The makeup of that growth is gonna be less so from new routes, and more likely going to be really continuing to a trend that we've had for the last few years, which is where we're strong, we're gonna continue to accentuate those strengths, and we will continue to test out new places for us moving forward. Gauge does continue to slightly increase, as I think Ted said in his remarks. We will see a little bit of gauge increase throughout the year.
Then in terms of a lot of when the deliveries are coming, they are coming throughout the year, or there are a bunch, using that technical term, a bunch are coming near the end of the year. A lot of deliveries come in the fourth quarter, and you'll see a lot of that deployed into 2024 more so than 2023. That's a bit of the change in the capacity profile as well.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Okay.
Scott Haralson (EVP and CFO)
I'd say this is Ted, the last add on to that is obviously utilization is increasing throughout the year. So that's adding, you know, to the 19-22. I would agree with Matt. I think the gauge is the smallest component of it. I think it's more the aircraft deliveries and the utilization improvement that's driving the capacity move.
Mike Linenberg (Managing Director and Senior Company Research Analyst)
Okay, great. Great. Thanks, everyone.
Operator (participant)
We will take our next question from Jamie Baker with J.P. Morgan. Your line is open.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Hey, good morning, everybody. Quick one on pilots. As I recall, the contract had richer increases for first officers than for captains, which, you know, kinda seems sensible given the industry challenges, you know, right now. I know it's very early, but have you seen any changes yet in the cadence of applications? Does the tempered 2023 growth rate have any specific assumptions in this regard? You know, like, you know, an uptick in applicants, or is the tempered growth solely a function of the aircraft issues that you spoke about?
Ted Christie (President and CEO)
Good morning, Jamie.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Morning
Ted Christie (President and CEO)
To the first question, it is too early to call it one way or the other. I mean, our pilots ratified this contract less than a month ago. I think initial signs are positive, however, both as it relates to attrition and our continued throughput on new hires. We feel like that will produce the kind of results we'd see. To the second question, the more muted growth rate has.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Mm-hmm
Ted Christie (President and CEO)
Almost entirely everything to do with the fleet moves that Scott mentioned.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Okay
Ted Christie (President and CEO)
Both the NEO issue, the Airbus delivery delays. Admittedly, the A319 retirement was different than our planned assumption, but that was gonna happen eventually. I think it's more that. I think we have adequate staffing and throughput to staff a bigger airline, which is why I said in my comments that if we start to feel more comfortable that, you know, ATC problems are getting resolved quicker, that we're not seeing as much as many issues with catering trucks and fueling trucks and stuff like that, we could probably tick the growth up a little bit more, but we'll wait to see that first.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Got it. Second question, just because it's generated some headlines, and I'm getting questions here, the estimate or your comment that you expect to hear from the DOJ in the next 30 days, is that a well-informed estimate on your part or something that specifically, Justice has guided you to?
Ted Christie (President and CEO)
No, it's a guess on my part. You know, just based on where we've seen the process go, so I wouldn't. You know, I said.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Okay
Ted Christie (President and CEO)
Or so. I said or so 'cause I mean, it could be, you know, longer than that. You know, we're into the process right now and, you know, have been working with the DOJ on making sure we satisfy the requests and that sort of thing. As we've laid out or I guess JetBlue has been more specific in laying out the process, I think it's consistent with their view on where things will go and still in line with what the timing estimates were that were given early on.
Jamie Baker (Managing Director and Senior Airlines Analyst)
Okay, that's really helpful. Look forward to seeing you next month at our conference. Take care.
Ted Christie (President and CEO)
Thanks. Thanks.
Operator (participant)
We will take our next question from Duane Pfennigwerth with Evercore ISI. Your line is open.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Hey, good morning.
Ted Christie (President and CEO)
Hey, Duane. You okay?
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Yeah, I'm good. Thanks for the time. You talked about time on wing, lower time on wing. That was a phrase you used, you know, at least two or 3x on the call. Can you speak a little bit more specifically, what was the expectation in your planning, in terms of cycles or years, and what is it that you're realizing, and who bears the higher cost there?
Ted Christie (President and CEO)
I'll do my best to summarize. I don't have the specific data at hand. When we purchased this engine and went through the RFP process to determine what the power plant was gonna be on the NEO, we made assumptions about, you know, time on wing between major shop visits and reliability, generally speaking, for unscheduled removals that were consistent assumptions with what we've experienced with our CEO power. With the V2500, what has been experienced with the other engine manufacturers, kind of legacy power, that sort of thing. It's fair to say that the teething issues have gone longer and deeper than any operator anticipated. I think that's fair for the two manufacturers as well.
Rather than it being six or seven or eight years between removals and shop visits, we're seeing a considerable higher uptick in frequency. Just last year, I think, believe we removed 30+ engines. We've been operating this aircraft for about six years, of which the vast majority of them have delivered over the last two.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Got it.
Ted Christie (President and CEO)
We're still working through it, and, obviously, there is warranty on the engines that's part of our purchase agreement, and, that is, you know, we're satisfied with the cover there, and in constant discussions with Pratt on the best way to kind of like mitigate these problems, and come up with a better solution. They've been a willing partner. It's just, I know it's frustrating for both of us that we're still here right now.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
It sounds more like an aircraft availability issue than a cost issue.
Ted Christie (President and CEO)
That's right. Right now, it is largely that. You know, I mentioned that in a two-week period what happened to us. Right now, we didn't anticipate having that many aircraft without engines available, either spare engines or returns from the shop. We had to take utilization down as a result because those.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Got it.
Ted Christie (President and CEO)
Are impactful to fleet utilization.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Got it. Just on the Airbus delivery delays, can you speak to any penalties or credits related to that?
Scott Haralson (EVP and CFO)
Hey, Duane, this is Scott. No, there are no penalties at this point. These are sort of excused delays with the supply chain issues that are happening around the world. Airbus is not immune. At this point, no financial components associated.
Duane Pfennigwerth (Senior Managing Director and Senior Equity Research Analyst)
Okay. Thank you. Look forward to speaking more soon.
Ted Christie (President and CEO)
Thanks.
Operator (participant)
As a reminder, it is star one if you would like to ask a question, and we will take our next question from Dan McKenzie with Seaport Global. Your line is open.
Dan McKenzie (Senior Analyst)
Hey. Good morning, guys. Thanks. You know, going back to the Spirit and the headwinds to normalize margins and, you know, the more conservative approach to schedules this year, with respect to the downward pressure on revenue that you referenced, how much downward pressure is reversed as you get back to normalized network planning and utilization? I guess, you know, what's the best way for investors to get comfortable, you know, with the, with continued revenue execution?
Matt Klein (EVP and COO)
Hey, Dan, it's Matt. I'll take that. There's a couple of components that flow into that. One is we continue to have on purpose, we're still a little smaller flying to Florida than we would otherwise be. Another thing, and this is the same trend that we saw in our schedule last quarter as well, which is just flying more off-peak days of week as well. The reason why we're doing that is largely to make sure we can maintain a reliable operation at our airports and for all of our crew and team members out there.
Those two components combined add up to about 1.5 points in the first quarter is our expectation that we're taking when we talk about unit revenue penalty. Last quarter, it was more than that. As we move through the spring towards the summer, we should start to see some of that relax naturally as we would fly more off-peak days of the week normally as we head towards the peak. The question will be is, as we operate through the spring and the summer, then we'll know how things are going towards the fall. It's a little early for us to talk about the fall post-summer to think about these kinds of impacts to unit revenue in the network. We're confident that we're building up.
Ted mentioned our operation, last year was mid-pack in both on-time performance and completion factor. We're good with that. As long as we can continue to maintain that, we'll be able to keep loosening up these restrictions as the year progresses.
Dan McKenzie (Senior Analyst)
I see. Second question here, the normalized operations in the fourth quarter later this year, does that assume the Pratt & Whitney issues are resolved by then? I guess just more broadly, if you could address SAVE's cost structure today and to what extent the cost structure is a margin headwind in the next cycle. With that, if it is, if it's not, can pre-tax margins get back to where they've been historically? Or at least how should investors think about what a normalized margin should look like for Spirit?
Ted Christie (President and CEO)
Hey Dan, as to the first half, this is Ted, we do make an assumption that we're going to be collectively with Pratt resolving the availability issue on the NEO throughout the remainder of this year, such that by the time we hit the fourth quarter, we're able to support full utilization, which would include aircraft that are currently unable to be operated. There is an assumption in there, which obviously could change if we don't get the mitigation efforts and the improvement that we're hoping for. But, you know, we'll keep you posted on that throughout the year. Maybe, Scott, you wanna comment on CASM and margins?
Scott Haralson (EVP and CFO)
Yeah. Quickly on unit cost and maybe go forward views on unit cost of margin. You know, obviously the three components that we've talked about a lot, and every airline has, which is, you know, aircraft or sorry, airport cost and labor cost, which make the majority of our move. The biggest is obviously labor. Labor accounts for probably north of 60% of our unit cost increase versus 2019. The other is how we're sort of thinking about aircraft financing, which could be temporary or, you know, at least in this window has been primarily sale-leaseback financing and operating leases, which is a, probably a 10-15 point headwind on unit cost by itself.
It's aircraft rent, it's labor, it's airport costs, which has been the big mover for us. Going forward, it's about getting efficiency in the other parts of the business, getting back to full utilization or very close to it. There are gonna be other operating parameters that are gonna be, you know, difficult for the industry. You know, we've talked about it, every airline has talked about the parameters operating today are different than what they were pre-COVID. It's gonna take a little more infrastructure to do that than it did in 2019. We've put those investments in place. We expect full utilization to be a product that we'll get to by the end of the year and into 2024.
I think the fundamental component about our margin production is still sort of mid-teens margins. We think that, you know, as the supply-demand impact is back to an equilibrium, fuel goes back to where it's sort of been as an average, we expect us to produce mid-teens margins. I think that's where we're thinking about the growth of the airline and all the components with it. Hope that helps.
Dan McKenzie (Senior Analyst)
Yeah. Thanks for the time you guys. Appreciate it.
Operator (participant)
We will take our next question from Helane Becker with Cowen. Your line is open.
Helane Becker (Managing Director and Senior Research Analyst)
Thanks very much, operator. Hi, everybody. Thank you. My first question is with respect to your ancillaries. How are you thinking about, I guess, increasing them? I mean, Maybe that's not the right question. Maybe it's more like, where do you think they can go? They seem pretty high now, but how high do you think they can go?
Matt Klein (EVP and COO)
Hey, hey, Helane. It's Matt.
Helane Becker (Managing Director and Senior Research Analyst)
Hi, Matt.
Matt Klein (EVP and COO)
Good morning. We, in terms of ancillaries, we're not gonna plant a flag today and give a target as to where we think it can go, specifically. I can tell you, as Ted mentioned, we expect to have another record this year. We continue to expect it to march upwards. We do continue to improve, in terms of the way that we merchandise products and making sure that everything continues to improve from a guest experience perspective in terms of getting through the purchase process. That's not just on our website, but on our app as well. We also have what we believe to be, if not the largest, one of the largest reaches to third parties in terms of selling our ancillary products now as well.
That's been beneficial from a distribution perspective. Even if guests aren't purchasing ancillaries on their first contact with us, we do know that the more often that they see the products, if they're not frequent Spirit travelers...
It leads to better take rates down the line for them as well before they get to the airport or before they board the aircraft. It's about merchandising distribution and also just continuing our ongoing improvements in revenue management strategy and the technologies that we're building to put in place to help us manage the products similar to the traditional revenue management of just the ticket in general. We continue to make strides with revenue management of the ancillaries as well.
Helane Becker (Managing Director and Senior Research Analyst)
Okay. That's hugely helpful. Just for my follow-up question, it's really just a clarification. On the ASMs, I think you said... I'm not sure who, you or Scott said that they were mostly second half, right? Weighted, you're seeing capacity increases in the second half of the year. Are you assuming that the engine relief will be there by the summer months, or how should we think about that?
Ted Christie (President and CEO)
Helane, this is Ted. Yeah, we do have a backend skewed delivery schedule with Airbus, which I think is what you're referring to, which, you know, affects ASM production but doesn't affect utilization because, you know, the airplanes aren't there. What's more impactful to utilization is the aircraft that have already been delivered and are not being operated because they're sitting on ground. Those are the engine issues. We do expect that by the fourth quarter that we'll have a resolution to it. We're working with Pratt on ways to mitigate the impacts throughout the course of the year. Obviously if we're right, then we should land exactly where we expect.
If we're wrong, there will be potential utilization penalty in the fourth quarter. Right now that's our base case.
Helane Becker (Managing Director and Senior Research Analyst)
Okay. All right. That's hugely helpful. Thanks everybody.
Operator (participant)
Thanks, Helane. We will take our next question from Savi Sith with Raymond James. Your line is open.
Savi Sith (Managing Director and Senior Equity Research Analyst)
Hey, good morning. It's a couple of follow-up questions actually. On the capacity growth, wondering if you could kind of talk about stage versus departure. It seems like your stage length has come down quite a bit and just curious what's driving that and if we should see this as a new level or how you can expect that to progress in 2023?
Matt Klein (EVP and COO)
Hey, Savi. It's Matt. So in terms of stage, our stage is coming in slightly from where it had been. Really, without getting into all of the technical reasons behind that, just know that some of the delays that we've seen, as Ted and Scott has mentioned with not just deliveries, but some of the on-wing time on wing engine issues with the NEO has caused us to make some very, I would call it close in network changes that we weren't anticipating. Without getting into all the specifics around it, what's ended up happening is we've ended up pulling some of the longer haul, which is making the stage look shorter than really, we had initially intended it to be. We're taking all this into account.
We now have a better view on what's going on with the engine issues and the fleet plan overall, which has been moving a little bit over the last, say six, eight weeks or so. Now that we have a better handle on that, we'll be able to think about the network more fully as we move through this year. All of that wrapped up to say we're aware of the stage number and where it's at, and we anticipate it will lengthen out from here. You'll see that as we move through the year with the way that we think about the network. That'll just get published as the schedules come out.
Savi Sith (Managing Director and Senior Equity Research Analyst)
That's helpful. If I might ask, just on the peak versus off-peak demand trends, like, it seemed like in the fourth quarter the off-peaks maybe were a bit stronger than you've seen in the past. You know, is that right? Are you seeing that trend continuing? Just as you kind of look at February, March, you know, how does the off-peak and peak trends compare to what you saw in the fourth quarter?
Matt Klein (EVP and COO)
The off-peak in the fourth quarter was probably a little bit stronger than we're seeing here in the first quarter, but I'm not, I'm not chalking that up to anything really other than some holiday shift things that were dramatic. The Christmas and New Year's period shifted by an entire week, which is not insignificant, and it just changes the way that everyone kind of thinks about off-peak travel after you come out of a peak. I'm definitely the off-peaks are a little bit weaker right now than they were in the fourth quarter, but it's not, it's not unexpected based on the holiday shifts, is the way I would say it. The peaks that we're seeing as we move through the first quarter are strong.
Every time we float out a little bit more inventory, if we see any kind of opportunity to drive some lower yield demand, we are seeing that inventory get snapped up right away. Demand is strong. We anticipate this will not just push through spring break, but really head through the shoulder period in Q2 and really move into the summer well. We're not seeing any indications of any kind of fall off of demand. This little bit of off-peak happening right now is really a blip and not anything that I'm concerned about.
Savi Sith (Managing Director and Senior Equity Research Analyst)
That's helpful. Thank you.
Matt Klein (EVP and COO)
You're welcome.
Operator (participant)
We will take our next question from Stephen Trent with Citi. Your line is open.
Stephen Trent (Managing Director and Senior Research Analyst)
Hi. Good morning, everybody, and thanks for taking my question. Several of mine have been answered, but I did wanna follow up, you know, on the improvements you guys mentioned, with extra crew, and you mentioned you got some infrastructure help. Those Fort Lauderdale runway stuff is, you know, out of the way. When I think about, you know, how well you guys handled the December storm, could you kinda give us any color regarding what other strategies you may have employed, you know, such as maybe investments in flight op software or something along those lines?
Ted Christie (President and CEO)
Sure, Stephen. You know, over the course of last year, we did discuss a number of the initiatives that the company had launched since 2021 to improve reliability across the network. Obviously, some of those are notably our crew-related reliability items. We opened 3 new crew bases last year, which is a pretty significant move for us and has had the expected effect. We're more targeted with the buffers we use around the network, both crew-related buffers as well as aircraft time-related buffers. Matt mentioned that the network is more stable throughout the course of the week and throughout the course of the month. That is a reliability enhancer also. Most of our flying today comes from or lands in a crew base, which is a change in the network.
Then we have deployed a number of initiatives around crew services that help our crew scheduling team react to and deal with interruption when it happens, and our crews have noticed. You know, they're able to get their issues resolved much faster and that helps our crew scheduling team repair the network faster. Those are all kind of like the lessons learned. We're not done, by the way. There's still quite a bit of work to be done to finalize, you know, where we wanna land. I would tell you that, you know, it was not a seamless operating fourth quarter. We had, you know, delayed hurricane activity, the Winter Storm Elliott. It was messy.
We saw that across the industry, but I am proud of the way our network responded and our group responded. I think that it just gets further enhanced from here.
Stephen Trent (Managing Director and Senior Research Analyst)
Super appreciate that. As my follow-up, just very quickly, when I think about your southbound international flying, and over the last three to four years, you know, Mexico's practically hasn't slowed down at all and never shut down with the pandemic, are you seeing any sort of shifts in terms of maybe one market growth moderating as it hits harder comps and other places starting to open up, or is it, you know, still about the same as it's, you know, been the last several quarters? Thank you.
Matt Klein (EVP and COO)
Yeah, Stephen, it's Matt. Yeah, our Latin America and Caribbean network continues to build well, continues to see strength. We have had like any part of the network, there's always a route here or there that needs to be adjusted or re-timed. Generally speaking, I would tell you that some of the issues that we saw in the early part of last year when it had to do with some of the international VFR routes, they've all recovered well. We had a strong holiday period and, you know, we're anticipating and expect to see a strong spring and spring break here as well as we head towards the summer.
I don't know specifically that I wanna talk about headwinds that we may see on year-over-year comps. Right now we're really focused on just the absolute and maximizing what we see out there. When we talk about ancillary products and services, the take rates and the rates that we're seeing are, continue to do well and perform there. Nothing that I would say is slowing down at this point.
Stephen Trent (Managing Director and Senior Research Analyst)
Okay. Very helpful, Matt, and thanks for taking the time.
Matt Klein (EVP and COO)
You're welcome.
Operator (participant)
We will take our next question from Scott Group with Wolfe Research. Your line is open.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good morning. Your comment about being profitable for the year, can you just talk about the fuel and RASM assumptions you're assuming to get there?
Scott Haralson (EVP and CFO)
Hey, Scott. This is Scott. I'll start on the fuel side. Obviously, we pull the fuel curve, you know, generally about a week or so in advance of the call. At that point, you know, fuel was sitting at around, you know. It was, you know, obviously higher in January, but the first quarter will be around $3.20, and it will, you know, decline through the year. Probably for the full year will be around $3 and based on the fuel curve. That's the basic assumption. I don't know, Matt, you wanna talk about unit revenue for the year, but, you know, not really giving a guide full year.
Matt Klein (EVP and COO)
Yeah, we're not gonna talk about a guide, Scott, for full year, unit revenue. I should probably just leave it at that.
Scott Group (Managing Director and Senior Analyst)
Okay. Just I think you had a comment that, you think CASM will be lower in 2024. You know, if you take a step back, right, capacity is up 40% versus 2019, CASM's up 25% or so. Like, what changes in 2024 to sort of get the model working better again the way you'd expect where there should be some sort of unit cost operating leverage?
Scott Haralson (EVP and CFO)
Yeah. Hey, Scott. This is Scott again. I think the biggest lever is utilization. You know, we're gonna be increasing that through the year, and we'll exit at about normal utilization levels, obviously depending on where, you know, the engine reliability issue sits. You know, that's the expectation. If we do that for the full year, that alone mathematically will give us, you know, a push down. We're obviously managing the P&L, so we feel pretty optimistic about where sort of 2024 and beyond full run rate CASM-ex will sit.
Scott Group (Managing Director and Senior Analyst)
Okay. All right. Thank you.
Operator (participant)
We have no further questions at this time. I will now turn the call back to DeAnne Gabel for closing remarks.
DeAnne Gabel (Senior Director of Investor Relations)
No, Abby, I think we're done. Thank you so much everyone for joining us today. We'll catch you all next time.
Operator (participant)
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.