Does Spirit Airlines Have Enough Cash On Hand To Tide Over A Severe Downturn?

by Trefis Team
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Spirit Airlines stock (NYSE: SAVE) has rallied by more than 60% in recent weeks majorly from the growing number of passengers at TSA checkpoints. However, the overall passenger demand is still down by more than 85% compared to the figure a year ago. As part of the Covid-19 response, Spirit Airlines has planned a 90% capacity reduction for June with a gradual increase in July. Trefis explores the impact of various demand recovery scenarios on Spirit Airlines’ revenues, margins, and cash flows in the interactive dashboard analysis, Can Spirit Airlines Survive The Covid-19 Recession?

Spirit Airlines ended FY2019 with a cash reserve of $1 billion and $2 billion in long-term debt. While the company has $222 million in principal payments due in 2020, we believe that it’s balance sheet is strong enough to weather the crisis. Even in the pessimistic scenario, where demand recovery happens in October and the daily cash burn rate of $4 million remains, we estimate that a combination of revolver credit, social security payment deferrals, and excise tax relief to support operating losses during the third quarter. However, if the demand does not recover until October, the daily cash burn rate would surge by another $2 million just from employee costs. While the company can raise $741 million of additional debt under the CARES Act, it would have to re-negotiate with all stakeholders and trim its capital expenditure plan to reduce cash outflow.

Scenario 1: Air Travel Demand Picks Up In July 2020

  • In 2019, Spirit Airlines generated $3.8 billion in total revenues with 41.7 billion available seat miles (capacity), 84.4% occupancy rate, and $0.11 of passenger yield (ticket price).
  • Considering the air travel demand picks up by July, we estimate Spirit Airlines’ revenues to decline by 40% to $2.2 billion for the full year, including the negative impact of lower ticket prices and a gradual increase in occupancy rate.
  • Maintenance costs, aircraft rent, and certain other operating expenses are necessary for base operations and the quarterly cash outgo towards these expense heads is likely to be $200 million – which roughly translates into a $2 million daily cash burn rate.
  • Interestingly, the company expects to incur $770 million in capital expenditure in 2020, which adds another $2 million to the daily cash burn rate.
  • Despite a substantial reduction in fuel expenditure due to a 90% reduction in capacity and the CARES Act grant to cover employee costs, Spirit’s net margins are expected to slide into negative territory (ignoring impairments).
  • However, the $1 billion cash in hand would be sufficient to support the $200 million of operating cash outflow, $770 million of capital expenditure, and some portion of long-term debt obligations.

 

 

Scenario 2: Recovery Around September/October 2020

  • While such a scenario is expected to have a structural impact on the overall airline industry, the company would require the full $335 million of CARES act grant to cover employee costs.
  • We estimate the revenues to slide by more than 60% to $1.5 billion and net margins to deteriorate further.
  • However, the $1 billion of cash reserve, $165 million of revolving credit, and $24 million in tax benefits are expected to be sufficient in addressing the $440 million operating cash outflow and certain capital expenses.
  • As this situation will have a considerable impact on margins due to high employee expenses, we expect the company to further reduce its cash burn rate by re-negotiating with contractors, employees, and associated stakeholders.

While Spirit Airlines has a strong cash position to cover losses and capital expenses until October, Does American Airlines Have Enough Liquidity To Survive Covid-19 Demand Shock?

 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

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