Shares of Spirit Airlines (NYSE: SAVE) traded down more than 10% on Thursday after the company provided disappointing second-quarter earnings guidance and was hit with an analyst downgrade.
Spirit, a no-frills discount airline, reported first-quarter earnings of $0.84 per share on revenue of $855.8 million, in line with analyst expectations. The results matched management's reduced guidance from earlier in the month.
A Spirit A-319 on approach. Image source: Spirit Airlines.
The outlook for the current quarter is what seems to have spooked investors. Spirit said it expects total revenue per available seat miles (TRASM) to be up 5% year over year, hit by strong storms that limited its operations over the busy Easter weekend. Spirit canceled 318 flights over the Easter weekend and incurred about $6 million in costs for passenger reaccommodation and crew disruptions.
It also faces challenges at its key Ft. Lauderdale, Florida, hub due to planned construction on the airport's north runway, which will limit flight throughput. Spirit is adding additional crew members and aircraft spares at Ft. Lauderdale during the construction to minimize the impact of the work, but that will add about 100 basis points to nonfuel costs per available seat mile in the second quarter.
Following the earnings report, the company was downgraded to neutral from buy by Bank of America Merrill Lynch analyst Andrew Didora on worries that industrywide pricing is weak and due to Spirit's cost pressures. Didora cut his price target to $61 from $71, saying that the upside for Spirit is limited until costs stabilize.
Spirit is still expecting capacity growth of 13% in the second quarter and 15% for the year, driven by continued aircraft deliveries and higher utilization. Spirit, like most discounters, relies on leisure travel for a bulk of its business, and will have to tread carefully in Ft. Lauderdale and throughout its network as the summer vacation season begins to make sure growth remains on track and the airline is able to continue to improve its reputation with customers.
Over the long term, there is a lot to like about Spirit Airlines. But investors should buckle up and prepare for turbulence over the next few quarters.
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