Spirit Airlines (NASDAQ:SAVE) and JetBlue Airways (NASDAQ:JBLU) are two of the most promising growth companies in the U.S. airline industry. However, they have been frustrating stocks to own for the past couple of years, as JetBlue and Spirit have been slower to recover from the industry’s unit revenue downturn than many of their peers.
Investors started to become more optimistic about both companies’ prospects in late 2016. Yet JetBlue and Spirit experienced big unit revenue declines once again in Q1 2017.
Fortunately, both carriers seem to be on the cusp of a return to unit revenue growth. This should allow them to stabilize their earnings over the next couple of quarters before returning to strong earnings growth in late 2017 or 2018.
Spirit sees brighter skies ahead
Back in February, Spirit Airlines forecast that its revenue per available seat mile (RASM) would decline 2.5% year over year in Q1. That would have been better than the 3.6% RASM decline it reported in the prior quarter.
However, Spirit cut its Q1 unit revenue guidance last month, saying that it had underestimated the impact of Easter shifting back to April after falling in March last year. Ultimately, RASM declined 4.3% for the quarter.
The outlook for the rest of the year remains strong, though. In fact, in a recent investor update, Spirit’s management said that unit revenue was on track to rise in Q2, excluding the benefit from a later Easter.
Spirit estimates that the Easter shift negatively impacted unit revenue by 3.5 percentage points in the first quarter. Assuming that it will see a corresponding benefit in Q2, the company’s guidance implies that RASM will rise at mid-single-digit rate this quarter.
Even with this strong RASM growth, Spirit could face continued margin erosion during the second quarter. CFO Ted Christie has already warned investors that non-fuel unit costs will likely rise at a mid-single-digit rate in Q2, mainly due to the timing of various maintenance projects. Meanwhile, fuel costs are on pace to rise at least 20% relative to the $1.47/gallon Spirit paid for jet fuel in Q2 2016. Spirit would probably need RASM to rise 7% to 8% to hold its profit margin steady.
That said, Spirit Airlines could still return to earnings growth this quarter. Between its rapid capacity expansion and its return to unit revenue growth, Spirit’s revenue is likely to rise by nearly 25% in Q2, offsetting its margin decline.
Looking further ahead, Spirit expects non-fuel unit costs to decrease in the third and fourth quarters. Fuel cost comparisons will get easier as the year progresses. The company’s efforts to maximize revenue will have had more time to work, as well. As a result, Spirit Airlines’ earnings growth is likely to accelerate in the second half of the year.