Spirit Airlines (NYSE: NYSE:SAVE) has disclosed preliminary financial estimates for the first quarter of 2024 and has announced a significant agreement with International Aero Engines, LLC (IAE), which is expected to impact the airline's liquidity for the year. The agreement, which addresses compensation for aircraft grounded due to engine availability issues, is poised to provide Spirit with monthly credits through the end of 2024.
The compensation arrangement follows operational challenges related to the Pratt & Whitney PW100G-JM geared turbofan (GTF) engines, which have led to aircraft being unavailable for service. The estimated financial impact of this agreement on Spirit's liquidity is projected to be between $150 million and $200 million for the full year 2024. The airline plans to negotiate further arrangements with Pratt & Whitney for any aircraft that remain out of service after December 31, 2024.
Initially, Spirit anticipated recognizing approximately $38 million in credits for these out-of-service aircraft within the first quarter's adjusted operating margin. However, after reevaluating the relevant accounting guidance, the company will now account for these credits as vendor consideration, which will be reflected as a reduction in the purchase price of goods and services from IAE.
Consequently, this will delay the recognition of a significant portion of the credits in the company's consolidated statement of operations, as they will first be recognized as a reduction to the cost basis of capitalized maintenance and spare engines.
Due to this change in accounting, Spirit expects to recognize roughly $1.6 million of credits related to the aircraft on the ground in the first quarter of 2024, resulting in a variance of approximately 300 basis points in operating margin for the quarter.
Despite this, the company's total operating expenses for the quarter are estimated to align with prior guidance, thanks to operational efficiencies that have reduced labor and other expenses. Additionally, airport rents and landing fees are expected to be lower than forecasted due to adjustments and network changes.
Spirit's adjusted operating margin for the first quarter is projected to be negative, ranging from negative 14.5 percent to negative 13.5 percent. Without the change in accounting for the credits, the operating margin would have been estimated at negative 11.5 percent to negative 10.5 percent.
Capital expenditures for the quarter are estimated at approximately $30 million, largely for the construction of Spirit's new headquarters in Dania Beach, Florida, and the purchase of spare parts, including four spare engines.
The airline ended the first quarter with $1.2 billion in unrestricted cash and cash equivalents, along with short-term investment securities, and an additional $300 million of liquidity available through its revolving credit facility. By the end of 2024, Spirit anticipates its liquidity to be around $1.4 billion.
This financial update is based on Spirit Airlines' current estimates provided in this SEC filing.
InvestingPro Insights
In light of Spirit Airlines' recent financial estimates and the significant agreement with International Aero Engines, LLC, insights from InvestingPro provide a deeper understanding of the company's current financial standing. With a market capitalization of $457.62 million, Spirit Airlines is navigating through turbulent financial waters. The company's Price / Book multiple, as of the last twelve months ending Q4 2023, stands at 0.46, which suggests that the stock is trading at a low valuation relative to the company's book value. This could be an indicator of a potential undervaluation, especially for value investors looking for opportunities.
However, not all signals are positive. Spirit Airlines is grappling with a significant debt burden and may face challenges in making interest payments, as indicated by two InvestingPro Tips. Moreover, the company's stock has experienced a substantial decline, trading near its 52-week low and reflecting a price that is only 23.97% of its peak over the last year. This could attract investors interested in potentially undervalued stocks or those betting on a turnaround.
For those considering an investment in Spirit Airlines, it is worth noting that there are 13 additional InvestingPro Tips available, which can provide further guidance on the stock's prospects. Interested investors can access these tips and more detailed analytics by visiting InvestingPro. Moreover, by using the coupon code PRONEWS24, investors can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, potentially unlocking valuable insights to inform their investment decisions.
As the company moves forward with its strategic plans and negotiations, these InvestingPro metrics and tips will be crucial for shareholders and potential investors to monitor Spirit's ability to manage its financial obligations and capitalize on its assets.
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