Spirit Airlines Inc
NYSE:SAVE
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Spirit Airlines Inc
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Welcome to the Fourth Quarter and Fiscal Year 2020 Conference Call. My name is James and I'll be your operator for today's call. All participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]
And I now like to turn the call over to DeAnne Gabel. DeAnne, you may begin.
Thank you, James and welcome everyone to Spirit Airlines fourth quarter earnings call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 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 on the call today are other members of our senior leadership team. Following our prepared remarks, there will be a question-and-answer session for sell-side analysts.
Today's discussion contains forward-looking statements that are based on the company's current expectations, are not a guarantee of future performance and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those reflected by the forward-looking statements are included in our reports on file with the SEC. We undertake no duty to update any forward-looking statements.
In comparing results today, we will be adjusting all periods to exclude the special items. Please refer to our fourth quarter 2020 earnings release, which is available on our website for the reconciliation of our non-GAAP measures.
With that, I turn the call over to Ted.
Thanks, DeAnne, and thanks to everyone for joining us today.
As we report the results of the final quarter of the most difficult year in Spirit's history, my thoughts turn first to the resiliency and grit of the Spirit team. My sincerest and humblest thanks to our team members for their contributions throughout the year. They met the challenges of 2020 with a winning attitude and pull together to ensure that Spirit is well positioned for the opportunities ahead.
Together, we have built a company with the pillars necessary for success. Our guests have noticed the improvements we have made and others are taking notice as well. I want to take this opportunity to congratulate the Spirit team on being named to Fortune's 2021 list of the World's Most Admired Companies.
Spirit was not just the only ULCC to be named on the list. We are also one of only three U.S. airlines and one of only eight airlines worldwide to be included, a very validating and earned recognition.
As we all know, the pandemic had an abrupt and devastating impact on our industry, and 2020 certainly turned out much differently than how it began. But from adversity comes strength, and that's definitely been true for Spirit. I'm very proud of how our team pivoted as needed and came up with solutions to new problems.
From the beginning, our top priority was and continues to be the wellbeing of our team members and guests. We quickly moved to adopt enhanced cleaning and sanitization protocols along with many other measures that met or exceeded the CDC guidelines and rules. We redefined how to make tactical changes to our schedule faster and closer to departure than ever before, which has been an asset especially given the choppiness of the recovery.
And we did so while delivering strong operational performance. For the full-year 2020, our completion factor was 97.9%, which based on preliminary results earned us a first place ranking among reporting carriers, and our on-time performance was 86.7%, earning us a third place ranking.
During 2020, we furthered our commitment to invest in the guests by leveraging technology driven solutions to enhance self-service options. And we also launched an entirely new mobile app experience that has earned a 4.8 star rating.
I could go on and on, but I'll summarize by saying I am very proud of our talented and dedicated team. With case counts declining, and the vaccine rollout underway, now is the time to turn our focus to preparing for the recovery. And thanks to the efforts of all the Spirit team members, we are very well positioned to do just that.
There are still many uncertainties about how the recovery will play out, but one thing we know is that our leading low-cost structure remains a key competitive advantage. And we intend to protect that asset to ensure our leadership position in the industry is maintained.
With that, I'll turn it over to Matt and Scott to discuss more details of our quarterly performance.
Thanks Ted.
The unprecedented events of the last 12 months have challenged all of us to rethink and re-engineer a number of our processes. And I joined Ted in thanking our team members for all their contributions for taking excellent care of our guests and for taking care of each other as we move through the pandemic.
Turning to our fourth quarter results, total operating revenue for the fourth quarter declined 48.6% year-over-year. Demand in October 2020 was relatively strong. Unfortunately, this momentum was dampened by the spike in case counts leading up to the Thanksgiving holiday. However, demand for travel during the peak Christmas holiday period gave us another welcome glimpse of the strong pent-up desire for air travel. Load factor for the full fourth quarter averaged 71.5%, but some of the peak travel days hit the mid-80s in load.
Total revenue per Passenger Flight segment decreased 14.5% year-over-year, primarily driven by a 25.6% decrease in average passenger revenue per segment, while non-ticket revenue per segment only decreased 4.5% to $55.42. For some added color, the small reduction in non-ticket rate is fully driven by effects of the pandemic on a couple of line items.
Our customers are savvy and they evaluate purchase decisions based on total price. And as illustrated by our strong non-ticket revenue per segment, they value the option to pay for the extras of their choosing. Our guests and others are recognizing the improvements we've made in our product, our operational reliability and overall level of service.
In fact, Spirit moved up one spot to fourth place in the 2020 edition of the middle seat scorecard, which is the Wall Street Journal's annual airline ranking of U.S. airlines by operational performance trailing only Delta Southwest and Alaska.
Additionally, just a few weeks ago, we launched our redesigned FREE SPIRIT loyalty program. We are very excited about the enhancements to the program and believe guests will enjoy the new benefits which in turn will drive increased revenue and returns for shareholders.
Moving ahead to the first quarter outlook. In addition to the usual seasonality change we see from December to January, the trends for January and February were negatively impacted by increased jurisdictional and regulatory restrictions as case counts, especially on the West Coast spiked. Additionally, the new testing requirements to enter the U.S. from international destinations, which went into effect on January 26, has also had a very recent and profound negative impact to our Latin American and Caribbean network, which currently represents 20% of our total flying.
To be clear, the inbound testing requirements do not impact U.S. territories. Therefore, the impact from testing affects approximately 15% of our total network as approximately 5% of our flying is to and from U.S. territories, which is not included and required testing regulations. Having said that, the booking curve remains unusually compressed across the network so forward, visibility remains somewhat limited.
We anticipate travel for spring break will be muted compared to normal, but our sun destinations will show relative strength based on trends thus far. We are encouraged by the early signs of traction in the latter half of March, and therefore we anticipate our exit rate for March will be much stronger than what trends indicate for early March. These trends are also supported by our recent survey data, which indicates sentiment has improved dramatically.
In fact, our survey data shows sentiment is at the highest level it's been since we began tracking the data last spring. And we are seeing evidence of this translating our search data which will later translate into bookings. Capacity for the first quarter 2021 is estimated to be down 17% compared to the first quarter of 2019 with January down 19%, February down about 22% and March down approximately 11% compared to the same month in 2019.
While disappointing we do believe the January and February trends are clearly transitory, based on survey results, rapidly declining case counts and anticipated vaccine penetration. We expect that by the end of the second quarter, the leisure demand profile will more broadly stabilize and that's how we are approaching our network and our capacity.
With that as our backdrop, we still expect to be back to 2019 capacity levels by midyear. But as always, we will be keenly watching the developments between now and then and adjust our plans as we see fit.
And now here is Scott.
Thanks Matt.
Also wanted to say thank you and congratulations to our Spirit team members. The recognition from Fortune magazine, The Wall Street Journal, and a host of other websites and publications is a reflection of the great airline we are running and the great experience we are delivering to our guests. I'm honored to be part of this team.
Now turning to the fourth quarter of 2020 financial performance, our adjusted net loss was $158 million, or a loss of $1.61 per share. Our EBITDA margin for the fourth quarter was negative 17.8% in line with our revised guidance given in early December. Adjusted operating expenses for the fourth quarter decreased 21.5% year-over-year to $659 million. This change was driven by a 25% reduction in capacity, as well as the 57.7% decrease in aircraft fuel expense due to decreases in both fuel rate and volume.
Despite the 25% decrease in flight volume compared to the fourth quarter of 2019 some volume related expenses increase year-over-year. For example, landing fees and other rents increased 6.8% year-over-year due to rate increases at various airports. And salaries, wages and benefits increased modestly, primarily due to an increase in crew members versus 2019.
On the balance sheet, we ended 2020 with $1.9 billion of unrestricted cash and short-term investments. This cash balance is almost twice as much as it was prior to the pandemic. During the fourth quarter, we took delivery of two A320neo aircraft, one of which was debt financed and the other financed through a sale leaseback transaction. We ended 2020 with 157 aircrafts in our fleet.
With most of our A319 fleet in long-term parking for the fourth quarter, we only operated roughly 130 aircraft during the period. We are however starting the program to bring the A319 back into service. As Ted mentioned, we took time to prepare the network and the operation for the recovery. In 2021, we will invest some time and money to get the airline ready to run full speed once we get to the point where demand is strong enough to do so.
We can take advantage of this lower utilization period and set the airline up for success in 2022 and beyond. One of the initial steps in bringing the parked aircraft back into service, there will be a fair amount of catch up maintenance expense to get them ready for service after being in long-term parking. We will also have expenses associated with additional training from new hires, as well as ongoing training for crews who have been on longer-term voluntary leaves.
We have been working with Airbus throughout the pandemic to move our aircraft positions around. As I discussed on prior calls, we were able to push some 2020 and 2021 deliveries out of the period. Since then, we have been able to move some positions around to fill in some holes we had no delivery stream in 2022. In total, we move six additional aircraft into the year, bringing our total aircraft to be delivered in 2022 to 17.
This does drive higher net pre-delivery deposits in 2021 and net pre-delivery deposits for the year are now estimated to be approximately $105 million. Together with our other CapEx of $60 million to $85 million, our estimated total spin for capital expenditures in 2021 is now $165 million to $190 million.
Operating expenses for the first quarter are estimated to be between $740 million and $750 million. Fuel price per gallon is anticipated to be $1.75 or 32% higher than it was in the fourth quarter. In addition to the first quarter typically being a seasonally weaker quarter than the fourth, our views on the first quarter of 2021 have been progressively worsening throughout the quarter.
Given the tightening of jurisdictional restrictions, international testing mandates, and increasing fuel costs, plus our shortened booking curves have a smaller. We have a smaller portion of revenue booked today than we would historically. Given this, we estimate our EBITDA margin for the first quarter will range between negative 45% to negative 55%. This takes into account our quarter to-date performance.
Our projection that demand will stay muted through the first half of March, and that the back half of March will be relatively strong. March could be as much as half of the quarter's revenue and any improvements in spring bookings would improve our EBITDA production. But with what we know today, this is where it sits.
We realized that most stakeholders aren't overly focused on many of our traditional unit metrics. And we agree until we get back to full utilization of our assets, unit metrics are not the most useful in evaluating the business. For now, our focus remains on maintaining sufficient liquidity and maximizing EBITDA margin. However, as we look out into the future, we know unit metrics will eventually matter again.
Our goal is to get back to pre COVID unit cost levels. But first, we need to be able to run a full airline. Prior to the pandemic, we were guiding to a 2020 CASM ex-fuel number of around [5.65 cents]. We anticipate being able to run 100% of our available capacity sometime around mid 2022. At that point, we would expect our non-fuel costs to be trending below success.
How far below six will really depend on a few decisions we make over the next couple of years around our fleet, where we fly our capacity growth and our financing decisions. But one thing is for sure we have all people recognize the value of having the lowest cost structure in the industry, and that won't change.
In closing, we don't believe the pandemic changes our opportunities for growth. In fact, it might even increase the available opportunity set for Spirit. We will continue to have the lowest cost in the industry and will be a beneficiary of a leisure and VFR demand resurgence when it happens. Our strong and improving brand, together with our low costs will position us to succeed as demand recovers.
With that, I'll hand it back to Ted.
Thanks, Scott.
The road to get to today has been filled with many new challenges and difficult decisions. I couldn't be prouder of our actions and progress over the past year. While not necessary, is also nice to have these achievements recognized publicly. We still have ways to go before leisure demand fully rebounds. However, as the vaccine is more widely available, case counts abate and travel restrictions ease.
We anticipate our guests will be ready to go visit friends and relatives and enjoy the many destinations we serve as we get closer to the summer months. It is with this in mind we turn our focus toward the recovery.
With that back to DeAnne.
Thank you, Ted.
And James, we are now ready to begin to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. We are ready to begin.
[Operator Instructions] Our first question comes from Mike Linenberg.
Two quick ones here. When we think about the composition of where your capacity is going to be deployed this quarter. I think, Matt, you said 20% was Latin America/Caribbean, but you did call out I guess five points for that, I guess is, you're referring to Puerto Rico and Virgin Islands. March quarter, how does that change? Is it more 90% domestic 10% Latin/Caribbean? If you can give us some color on that? Thanks.
Sure, Mike. Actually, the numbers I gave you there are what we're doing in the quarter now. So 20% of our flying is Latin America and Caribbean, approximately 5% is a touch more than that, but approximately 5% is in the U.S. territories, 15% would be International, and the rest would be domestic.
Okay, thanks for clarifying. And then how I'm just curious, notwithstanding the very short booking curve, several carriers are now looking to offer tickets out beyond kind of that traditional 330-day period. I know historically, you've done a bit - your window was maybe more like 180-200 days? Thoughts on, potentially opening up more inventory further out, does it make sense, does it not make sense, based on how you think about longer term, et cetera? Thank you for answering my questions.
So right now, we do not see the need to push the schedule that far out way out into the future, networks change, opportunities change. And historically, the booking curve hasn't really pushed anywhere near that far out for us in terms of impacting our overall results. So we're comfortable with the length of our schedule, and that does vary. Usually, we're out like you said 180 days, we'll go out to 240 days sometimes.
But having said that, just about the booking curve in general and thinking about bookings out into the future, we are, besides talking about the back half of March there, we are starting to see some traction starting to occur out in the early parts of summer as well. Just wanted to make sure I clarified that too, that the booking curve is compressed for the mass - for the majority of when we take volume. However, we are starting to see traction out in the summer.
And in some cases, we're actually starting to see volumes that are above last year's levels for out in the early parts of summer. So there are people looking to fly and there are people looking out there. I would just say, the stuff that we're getting in the summer right now, it's still small numbers, but it's very encouraging, and kind of goes along with the overall theme that there is pent-up demand out there, and people want to fly.
Next question from Brandon Oglenski.
Good morning, everyone, and thank you for taking my question. I guess Ted, can you talk to, the metrics that are driving you guys when you want to add capacity to the schedule? I mean, are you in any way constrained by the Airbus order book? I think that's a fair debate with investors, whether you want to have exposure to a legacy order book, or maybe not have that exposure as some of your competitors do? So can you talk to some of those constraints and what's driving the future here?
Sure, so close in - good morning Brandon, by the way close in we evaluate capacity based on EBITDA performance. So that's the way we're moving the capacity through the system. And we feel like we have the right tools now to help us refine that close in.
As we look at our opportunities down the road and you heard Matt mentioned that by the summer of this year, we anticipate being back to 2019 capacity levels, really the limit or overall let's say the medium term is more our ability to deliver crew. We have airplanes in - that have been in long-term storage that - as Scott mentioned, we're bringing those back into service. We'll have to train crew and hire crew to get ourselves ready, which means we won't be running that full airline, even with the fleet we have delivered today. And we'll deliver over the next little bit until the middle of next year.
So that's our limiter right now, beyond that, right before the pandemic hit, we ordered 100 airplanes with Airbus. And I think we said that that was still well under shooting the total opportunities that the company has, that we would refine around that and find necessary lift to round out the delivery schedule. And if anything, a silver lining to this pandemic as we believe that does open up doors for us to find airplanes when we need them.
And you heard Scott mentioned that we did find a few to be able to address some needs in 2022. And it's good to be in that position that we're actually going to need airplanes in addition to what we have over the next five to seven years. And it's nice to be in a position to be able to take advantage of that for once. So I think those are the ways we're thinking about short, medium and longer term.
Appreciate that, and I guess the commentary on 2022 Scott, getting back to below six and CASM fuel ex, that's really based on that utilization and the ability to get crew back in the system, is that right?
Yes, I think that's part of it, Brandon. We said, I've been pretty clear that running a full airline is important to you know an airline like Spirit. We didn't have the structural changes that other airlines are going through, our fleet was already simple. We didn't have the age workforce before. So we're going to make sure that we run an efficient airline, I mean doing that is running at full capacity of the airline.
And that's going to be important as we think about getting back to pre-COVID unit costs. Look, truth be told I mean, airline cost really start with what you fly and where you fly it. So, as we as we continue to think about our fleets, our network, and how we schedule it, over the next few years, that's really going to drive how far below six we get. So those decisions are really still to be made, but that's how the math is going to work.
Our next question is from Duane Pfennigwerth.
How much of the cost progression from the fourth quarter to the first quarter is a function of PSP optics?
Duane, this is Scott. So really when you think about the move between Q4 and Q1, the PSP really didn't have a lot of impacts. We were already starting to bring crews back in order to anticipate the running of, more capacity in the back half of the year. So the PSP component didn't really move the cost numbers.
A lot of the move between Q4 and Q1 is related to capacity and fuel. I mean, that drove more than half of the change in the expenses. But we were already moving the airline forward.
Okay, that's helpful. And then just maybe one for Matt, can you give us a sense for how your thought process is evolving regarding how dynamic or tactical you're going to be from a planning perspective? Obviously looking backwards, this has been an unprecedented year for you and for the industry and for all the people involved? But going forward, is the message that you're going to be more patient with bumps in the road on demand, like what you're seeing with international and less tactical or not?
Thanks, Duane. I would answer the question, sort of a couple of answers to your questions. So I'm trying to keep it as concise as possible. We are definitely reacting to and understanding what's going on from the booking curve perspective as best as we can. It is compressed, so we do have to take into account when we think about making changes.
What we have done, though moving forward, is we've been able to isolate a lot of our flying where we think there are issues that are happening or may happen. We've been able to redesign our schedules to make sure that we're isolating the flying for the crews and for the aircraft on a lot of what could be against demand risk involved flying. So, if we get closer into that flying and we don't see the results that we like from a booking perspective, we have and ability without disrupting the network to make some changes close in.
So in that regard, I think I would tell you that we have improved and we'll continue to have an ability to make close and tactical changes as we see fit. Having said all of that, once you get really close in on top of the flying itself, then you start to have different kinds of analyses on what costs do you save by not flying some things.
So when we're a few weeks out from travel, some of the costs can't really be saved by not flying. So all of that is part of the decision process to think both tactically and then further out strategically and how we set up the network.
Our next question from Hunter Keay.
Did the NOLs that you're building right now have any impact on the math on taking 33 airplanes if you're not going to need the tax shelter from accelerated depreciation that you would normally get if you're running the business sort of focused on sort of cash management?
Yes Hunter, it really doesn't, I mean we're looking at the assets really from a 25-year view. The other long-term assets, our view of returning back to profitability will happen in the near-term And so we're really taking a longer-term view around the opportunity set, not sort of thinking about the near-term NOI or cash tax component of the business.
Okay. Thanks, Scott. And then couple of questions on the JetBlue-American tie-up in New York. First, do you expect to get any of the divested slots at JFK and at DCA and then why you guys so opposed to it? It's not a JV, they can't coordinate on pricing, can't pull revenues. What is the big deal, and why are you guys been so vehemently opposed to it in the filings?
Hi, Hunter. It's Ted. Thanks for the question. I wish I could elaborate. But we do as you referenced have an open complaint here with the DOT so I think I'd be remiss in offering any further commentary on that.
Our next question from Catherine O'Brien.
So I had a question on some of the staffing and utilization comments you've made. If your capacity is going to be back to 2019 levels by mid-2021, in the second half of 2020, you were seeing some salary and benefit inflation due to having more crew members in the second half of 2019? Why is it that crew is a limiting factor to getting back to full utilization 2021? Do you think a portion of your current leave is it trying to going around with co-productivity or was it just my calculus skewed? Thanks.
I'll start. This is Ted and Scott can jump in behind. So there is lag is basically the answer. So as we've discussed in - our workgroups have been very flexible and proactive with us over the course of this pandemic in using voluntarily programs to get our costs down as we navigate the downturn but bringing those people back online requires some training and that does have expense with it, as well as time.
And we have a fixed set of resources that we can use to get those people through training both in fixed plants, in simulators and in trainers themselves. And so it does have to move its way through the snake a little bit. And I think that's why that ends up being a little bit more of a limiter in addition to the hiring that we'll have to do to staff the additional airplanes that are being delivered as we speak. So Scott, do you want to?
Yes, I think the airplanes are big component of this. We're 20% bigger in the number of aircraft today than we were in 2019. So the deliveries are still coming. So what we're talking about is getting to the point where we can operate all of the entire fleet, not our 2019 fleet. So the measure keeps moving even though we pause the hiring.
So we now got a spool that back up again. So we got to catch up what we missed for probably what amounts to about a year's worth of hiring, we got to do that again over a condensed period. So that happens as we just said, it's a lag but the aircraft have kept coming in.
Got it. Very clear. Thanks for that. And then one for Matt, I guess how should we think about the moving pieces of revenue going forward? Based on your guidance seems that load or fair non-ticket, we expected to work in a bit into the first quarter? Can you just walk us through what you're seeing in higher revenue managing right now? Sounds like some of your peers planning to manage loads thing for you. Is there anything funky going on with non-ticket given the international demand flying? I know there's a couple of questions in one, so I appreciate it?
Sure. So there is not too much funky going on in the international network with non-ticket. Generally speaking, the issue with international network is going to be on the volume side more so than it is on the yield profile. That's not to say there is not some impact on the yield profile there is, but it's largely a volume issue, then I'm sure you can understand why with that.
In terms of the overall network, we have been and will always be a low fare carrier. And our cost structure helps to support that, we grow markets and we stimulate markets, none of that's changed within our business model. And none of that will change moving forward. So we are first and foremost going to be a volume carrier. That's who we are and what we do our cost structure supports that. And then as we see the ability to you'll manage, we will, and we do. So I don't think anything is really going to be changing right now, as you can imagine the whole industry is dealing a little bit with the supply versus demand imbalance.
And what's going on right now in my opinion is just its transitory. I think this is the third time since the pandemic started, that we've had a dip in demand relative to case counts and other things that are going on with headlines in the media. So we'll come out of this just like we have before, it'll be stronger than it was before. And I really think that the best news moving forward is that customers want to fly, we're seeing that across our survey data.
And one thing we're going to talk about a lot, we're not going to give perfectly clear detail on this, but we have still a cancellation rate that is relatively high, it's very high compared to normal circumstances. And it's still relatively high, even for being almost a year into the pandemic. What that means is that there is a lot of people that are buying tickets, they want to go somewhere, and then their plans change for a variety of reasons, most of them being impacted by something related to COVID-19 in their personal lives in some way, shape, or form, or where they want to fly to.
To me, that's another real positive sign that there is a lot of demand out there. And for whatever reason, people can go soon. And you can define soon in varying ways. But soon those issues will be alleviated. And then we'll see the pent-up demand actually be able to go when they want to go and where they want to go.
Our next question from Helane Becker.
Hi, everybody, and thank you for the time. So this is I think a pretty easy question, on the flight attendant contract that comes due in May, are you talking to the FAs? Are you postponing it? How are you going to address that?
Good morning, Helane, It's Ted. I think that we're in regular to be clear - we're in regular communication with our flight attendant leadership group, and have been for quite a while. And I would describe the relationship is very strong. And the timing of the contract, and that sort of thing it will mature here over the next six months or so, meaning what the next step is, and how we handle the open and when it's time to start negotiating at a quick pace.
So I wouldn't put up a fine point on the actual date, but it will come. Clearly, we're all distracted right now, working through the issues the airline has in front of it, but that time will come and we'll be ready to do it. And I know our partners, the FA will be ready as well.
And then my follow-up question is with respect to the third-party maintenance business you're doing at Miami for GlobalX. How are you thinking about that? Is that like a business that you want to get into? Is it just a convenience, that they're there, you're there, you can do this for them? I'm just trying to find something in the annual report last night the K, but I couldn't really find anything about it. So if you talk about it, maybe you can point to the page?
I think if that's your answer, it's so small. That it didn't bear mention. I think to your - the genesis of your question, I think it's more the latter issue, which it's convenient. We happen to be sizable here in South Florida. And we could offer a little bit of assistance. Whether or not that's a business we engage in is for a later date.
We have periodically helped and done a few maintenance items for other companies in the past as well, where we've had bases, very small stuff. The reason that this one is public is because GlobalX needs to talk about it as part of their certification process. But otherwise, it would be well under the radar.
Our next question is from Andrew Didora.
I guess my question is really for Scott. With where fuel has gone and some of the cost pressures that you talked about in your prepared remarks, I can model your 2021 OpEx getting back pretty, close to 2019 levels. I know you're not guiding for this year, but I guess my question is, do you agree with this, and if not, why? And you guys have been talking a lot about being one of the first factor to cash breakeven profitability and whatnot. Are there any guideposts you can provide with that cause backdrop there in terms of where revenues need to be to get back to both cash flow - cash breakeven and profitability? Thanks.
Andrew from a fuel perspective, I mean, even though we're forecasting a fairly sizable increase over 2020, it's still down versus 2019. So if we think about profitability for the airline and returning to that, it's the same math we've talked about before, which is really around EBITDA margin. And if you adjust for fuel then that makes the hurdle slightly lower than 2019.
So assuming we're around the 20% number for EBITDA margin, some kind of unit revenue at full capacity at 20% discount to 2019 puts you in the range of where you would be from a cash breakeven perspective, obviously, we've pulled expenses out. So the hurdle is a little bit lower than that. But that gives you a proxy for how we're thinking about when that might happen.
Returning to a full airline is critical to getting to EBITDA breakeven and eventually to profitability. So that's the first big step, we'll drive capacity, we'll drive load, and then we'll maximize TRASM sort of in that order and that's probably how it's going to play out.
Just a follow-up there, just kind of with this cost structure, just curious why is 1Q you're still forecasting and based on your EBITDA margin guide revenues down directionally, 50% still versus the first quarter of '19. And I know you're prepping the airline for the recovery, but with revenue still down 50% why aren't you taking more capacity out right now? Thank you.
Yes, I mean, I think ultimately, Ted mentioned earlier, we have a pretty tight model in how we think about the deployment of capacity. And given word TRASMs are, there is not a lot of incremental benefit for flying it, but there is incremental benefit. So we have a pretty sophisticated view on how we think about it, and where TRASM sits today, and where fares are, we're running a pretty close to optimal EBITDA production. So that implies that if we were to fly less, EBITDA would be worse.
So I think - look I mean, it's tough, you understand the math, because you're not sitting over here, but it's what we talk about every day, the single biggest thing we can do to maximize EBITDA in this period is to fly the right amount of capacity. And so that's our number one focus.
Our next question from Jamie Baker.
Jamie Baker with JPMorgan. Similar question to what I asked JetBlue, I'm trying to understand how pricing and revenue management is going to respond to demand recovery. Because even in just a modest recovery scenario, you're going to be experienced a pace of bookings build, that's likely well in excess of what your automated systems have experienced in the past, you can save some time and tell me if you think this is irrelevant. But as with any automated process, I'm wondering what the response will be to inputs that haven't been witnessed or experienced before?
Jamie, this is Matt, thanks for the question. So I've been here about a little over four years now, 4.5 years, and since we've been here, we've gone through I think, three different kinds of demand environments before we got to the pandemic, so it's been every year we think about our processes, we think about our data, we think about our ability to respond. And you see that, and how we also not just move the network around, but how we think about revenue management of the ticket, as well as non-ticket.
So I would answer your question by saying I agree with you for a lot of airlines, they're going to have systems that may be a little bit slow to respond to changes in demand recovery, we're not going to be one of those airlines. We spend a lot of time thinking about how we compete. And with a point-to-point network and how we've seen competitive reaction over the years, we've become experts in understanding how our competitors think about us, how they think about their own pricing in our markets and how they think about their yield management, and in some cases, lack of yield management in our markets.
So we're used to that. In fact, I think that we have the muscles already built to be the best at responding to this when demand recovers because we've been there for a number of years already. So we're ready for this. And we can move very quickly based on how demand moves either up or down for that matter, Jamie.
That's very helpful. I appreciate that. And just a follow-up, in terms of getting below $0.06 in 2022, just to clarify if you're talking on an annual basis, not just dipping below $0.06 at some point, but more importantly, to the extent that you do fly the requisite capacity, and don't achieve that outcome. What do you think the reasons might be? I mean, what are the cost buckets where - or is it really a no brainer if you produce that capacity, it's almost mathematically guaranteed to be below six. I'm just trying to assess your confidence?
Now, it's fair question, Jamie, I think the way we're talking about it is we're going to get to full capacity most likely around that mid-mark in 2022. And we'll get to some point after that, we'll get to a run rate CASM that's sub six, you know, like we said, how far below six depends on a number of variables. And I think the variables that benefit us on the downside will likely be the ones that may have some risks on the other side, including some of the inflationary components that we've talked about. We've talked about airports being in significant mover as of late, hopefully, that reverses as the industry gets to a more efficient throughput in the airports. So hopefully, that migrates the other way.
But there are going to be things that we do some of the decisions we make around the fleet, around how we schedule the airline, that will dictate some of that. But there is obviously labor pressures that we're all going to face. We're going to have to mitigate this. So I think it's for us, we didn't have a lot of the structural changes during this period. So it's the same issues that we've had in the past will be the same issues that we have going forward. We just have to be efficient and thoughtful about how we run the airline.
Our next question from Joe Caiado.
Matt, quick question about your near field international business that isn't to U.S. territories, Caribbean markets, et cetera. What is the traffic flow between VFR and fare leisure? I'm just curious if there are differences in the duration of those near field international VFR trips versus leisure trips, and maybe a different sensitivity to the new testing requirement for your traffic base that's flying more to visit family as opposed to a three- or four-day beach vacation? Or is it just too early to tell?
No, it's not too early to tell Joe, the more pure leisure play and none of our destinations are really pure leisure plays. But the ones that are highly reliant on leisure vacation traffic has definitely been impacted more than the VFR traffic.
And without getting into specific details, I can tell you that the search volume definitely reflects that but it's not as disparate as the results are showing. People want to fly and they want to travel to these destinations. They're just right now on the sidelines, because quite frankly, if you're not in the industry, it's a little hard to understand. And it's a little hard to have the confidence that you need to understand that you can get tests and a lot of these leisure destinations.
But it's a change and it's something that not everyone fully grasped yet. That could change a little bit over time. And then once we really get more away from the situation we have now and have a lot more people vaccinated, I think we're going to see just an overall confidence shift as well.
Quick one, Scott, you made clear you think are well funded right now, plentiful liquidity. Does that still hold true if next week the administration were to start requiring COVID tests for domestic travel? And Ted, are you involved in those discussions with the white house? And how would you handicap that overall probability at this point? Thanks for the time.
So thinking about liquidity at a high level not specifically around testing, look, I mean, we feel pretty good where we are. So the quick answer is we're not planning on anything additional. I think what would drive that is the same things that drive our thoughts around, the balance sheet and leverage and capacity growth and all those things. It's really around demand unit revenue production, it's therefore profitability. Those things will be at the forefront of how we're thinking about planning the airlines, once we reach our profitability levels again, and look we're not going to be naive about the idea that, longer term, unit revenue depression, with our growth rates, isn't a great outcome.
So we're going to be flexible and ready to adapt the airline in that world. But our view today is that, we're going to be a beneficiary of the outcome and we're going to be ready to grow the airline again, and there's going to be profitability for us to be had. But we're going to be flexible and thoughtful about, protecting our six year event.
And I guess, as it relates to domestic testing and the issue, while I have - I personally have not had direct communications with the White House. We are a member of a lobby for organization that represents the four ULCCs and they have been in communication with the Secretary of Transportation, and they are aware of our concerns. We do not support the idea. We think it doesn't address the issue.
And I think everyone has, and you've heard not just from me, but from our peers, that it would be logistically extremely difficult to do and expensive. And I don't know that that given all of the protocols that airlines have put in place and the confirmation from independent authorities that travel on board airplanes is not a transmission event. That's why we don't believe it addresses the issue. So that point has been made strongly and we're hopeful that that will carry the day.
Our next question is from Joseph DeNardi.
Matt, you talked about I think mid 80 load factors during peak periods in fourth quarter if I heard you correctly. Can you talk about that the pricing you saw during those periods like are you seeing strong demand at the same price point pre-COVID or is this strong demand, but with much more promotional fares?
On - let me answer the question on average Joe, it's on average, we're going to see lower yields, even on the strongest of days and strongest of flights. Having said that, it's not necessarily about the high end of the booking curve, it has more to do with getting a base on board. And one of the things so, the base on board has been paying less to get on board. One of the issues that we've had and I don't think based on the environment that I'm seeing and experiencing.
I don't think we're unique in this either, but the booking curve being compressed does make us a hedge a little bit on how we how to put revenue on the airplane. So are we selling a little bit too inexpensive on peak periods. I would tell you we are, relative to where we would like to be. But our feeling is that we need to do that in order to make sure we get a good base on board so that we then get more confidence and understanding how the traffic will actually flow through the network. I hope that makes sense there, Joe?
Yes, it does thank you. And then Scott, you're going to love this question. Can you give us EBITDA margin guidance by month for first quarter? So what was January and what's the assumption for February and March. And then does CASM ex did better or worse in 2Q versus 1Q? Given how you're talking about supply and kind of prepping the business to run at full speed again. How should we think about the impact of those costs on 2Q assuming you get close to kind of pre-COVID capacity by the end of the quarter? Thank you.
Yes, hey Joe thanks for that. Yes, I can't give you EBITDA margin by month, but sort of talk a little bit about the inputs here, right. We know January and February are seasonally lower than March. And we're going to be a little smaller in January and February than we were in March. So those are going to be sort of directional components that will help you get there but I can't give you the number.
But and so to your to your second point around Q2, I think the view is today, we're going to be bigger in Q2, probably some sizable amount, probably around 30% bigger in Q2. And I would expect us, right now we're sort of looking at expenses growing at probably around two-thirds of that number. We're going to invest some things in the business to get ready for, full capacity in 2022.
So they're going to be a little bit higher on the expense side from that perspective. But we're going to start to see efficiencies in the business as we as we grow capacity.
Okay, is the two-thirds ex fuel or including fuel?
That's going to be total op expenses including fuel.
And our next question from Darryl Genovesi.
Scott, if I heard you correctly, you said you can get back to sub $0.06 on non-fuel unit costs when you're back at full utilization. And I think that will happen in mid-2022. I just want to make sure I understand the framework combine with what you said on the fleet, it sounds like the 2022 capacity view there, some capacity view that you're using to frame that cross guide it's like 30% higher versus 2019. Is that right?
Well, we haven't talked about capacity for 2022 yet. I mean, you could use, sort of fleet growth as a proxy for that. We have our fleet numbers out there. We have - we've grown the airline, 16 aircraft last year, will grow at 16 this year, and 17 in 2022. So you can sort of do the proxy for capacity. But we haven't given a number yet.
Yes, this is DeAnne. The comment about the 30% was regarding second quarter of 2021, we think will be 30% larger than in capacity than we were in first quarter of 2021.
No, thanks DeAnne, yes, I saw that. I'm basically doing what Scott just suggested. I'm looking at the fleet what you said about the deliveries, what you said on I think five A319 retirements you have coming up. And I was kind of getting to like a 30ish percent type of capacity boost implied by the comment that you're going to get back to operating a fleet utilization, essentially was what you imply?
So I just want to make sure as I was doing the math right. And if that's right, given that nominal demand is still some 50%, lower from 2019 today, I guess the question really is, should CASM ex below $0.06 really be your guiding late here? It just seems like you're taking a lot of risk on RASM to get to that target?
I might jump in here, this is Ted. Nominal demand below 50% may or may not be true at our level. And in fact, we don't believe it's true. The leisure component is 100% or approaching a 100% demand today. And we expect it will be the vast majority of the demand over the perhaps the earlier parts of the recovery. And so again, we've said this over the last couple of calls, the pandemic doesn't necessarily disrupt our story.
We still think there's going to be leisure demand and we're going to capture our portion of that. And so for those reasons, we did not - make permanent changes to our delivery schedule. We did not make permanent changes to our business plan. Now with that said tactically, we have been smart about deploying capacity and making sure that we don't penalize EBITDA.
And so, if this appears - if our current assumption, there all appears to be wrong, we would make changes to address that. But for now, that is the assumption and I think it's founded a lot on good history and theory.
Our next question from Savi Syth.
Scott, maybe if I could clarify on the kind of sequential chain, or just the understanding of could you quantify just how much that maintenance of spend might be that's elevated. And I'm guessing its 2Q more so than 1Q. And also just training, I'm just trying to understand that how much is elevated to kind of catch up to kind of this aircraft that are coming in and trying to understand just when? Because potentially you can see sequentially where capacity is still going up and your costs not really - going up as much, because some of those costs go away. So I'm trying to get an understanding, and I was wondering if you could help quantify that?
Yes, that's right Savi. I mean so for you, when we talk about capacity increase into Q2, that's going to drive, probably half of the costs increase. The other portion will probably be driven by, catch up expenses. We had aircraft parked, we're going have to get through, maintenance events, that'll probably take us, a good portion of 12 to 15 months to do. So we expect these catch-up expenses to last really through the year.
And we'll probably spend call it $30 million of catch-up expenses through that period. And that's going to be, other heavy maintenance components, on both the air frame and the engines, it will be training for crew, it will be new hires. So all of those things will happen, and you can't snap your fingers and have the airline ready to go. So it will take us 12 to 15 months to do it. And it will cost some money to do that.
And that's super helpful. And then just on the purchasing right now, and I know you've talked about cancellations, I'm just kind of curious just how much of the ATL is credits. And what percentage of your new sales are in kind of cash versus credits - these kinds of credit that - from cancellations?
Savi, this is Scott. So ATL balance is roughly $400 million, we're probably in the $250 million range. So probably 60 plus percent of the ATL is sitting in credit shells and from a redemption perspective, we're in the range of probably 10% to 15% of our bookings are coming in the form of credit shells, at least at this point. And I don't know if that will change over time, but that's probably a good proxy.
And our next question from Dan McKenzie.
I wonder if you can just elaborate a little bit on the new credit card deal and how it might drive a change in behavior. So what percent of the historical passenger base is maybe likely to travel more, possibly pay more to rack up more miles? And what could the credit card economics look like say three years from now, could this program ultimately maybe 10% of your revenue, say in three to five years?
Hi, Dan, it's Matt. I will try not going to answer your question exactly with the detail that you would like as some of that - are things that we're not really - ready and willing to share totally on that. But I can tell you that our expectation is that the new loyalty program and the credit card deal is going to also create more repeat traffic for us as well. We're already pretty good at getting repeat traffic onto the plane based on our model and how reliable we are and how reliable and consistent the product is out there. So that in and of itself has creates very high repeat rates.
In terms of how many people we think are going to travel more that's all theory. And that's all things that we have on paper. But for us internally, but I will tell you that what we've done to design the program gives incentive for passengers to engage with the model. So we want people to get rewarded for adding more ancillaries onto their itinerary, and onto their trip.
And that in and of itself we believe is going to create a higher repeat rate and a higher brand efficiency in terms of customer acquisition in the future, and all of those pieces holistically that lead to marketing expense, as that translates that into revenue on the aircraft. All of that should get better with a stronger loyalty program and the credit card will be a key component in helping us drive that through.
And with that, we are out of time for the day, but thank you all for joining us again today and we will talk to you soon.
Thank you.
Thanks.
Thank you ladies and gentleman. This concludes today's conference. Thank you for your participation. You may now disconnect.