Spirit Airlines Inc
NYSE:SAVE
Earnings Call Analysis
Q4-2023 Analysis
Spirit Airlines Inc
As we embark on the journey through 2024, the anticipation of a more normalized demand pattern for domestic travel is driven by the strategic network focus and favorable changes in industry capacity. One of the key contributors is a network realignment that capitalizes on strongholds like Fort Lauderdale, while trimming underperforming routes. This recalibration, paired with observed robust holiday demand and early indicators for spring, strengthens the confidence in warmer domestic travel prospects for the summer. However, while the changes have set the stage for a positive turn in Total Revenue per Available Seat Mile (TRASM), which is expected to sequentially improve from Q4 2023 to Q1 2024, the company is still on a path to recovery, needing to navigate a competitive and somewhat turbulent industry landscape.
Despite a rise in operating costs, the company outperformed its initial expense forecasts due to heightened operational reliability and expense control initiatives. The advancements realized in the fourth quarter with an operating margin improvement illustrate a persistent push towards profitability. An additional boost is expected from improving fuel efficiency and optimizing labor expenses. Going forward, the plan involves maintaining a rigorous focus on cost management, including addressing aircraft on ground (AOG) situations, navigating inflationary pressures, and renegotiating contracts, like those with Pratt & Whitney, to offset some of the current financial strain.
The company acknowledges an overstaffing situation, attributable in part to an unexpected downturn in expected aircraft availability. Workforce adjustments are underway to right-size the employee base across various departments to align with the operational scale. These changes, although challenging, are part of a broader strategy to rectify the cost structure, setting the groundwork for sustainable business operations.
The executive team expresses cautious optimism about returning to cash flow positivity and profitability. This optimism is fueled by favorable shifts in domestic demand and success in managing business costs. The inclusive strategy includes a conceivably low-to-mid single-digit capacity growth, which presents a promising opportunity for unit revenue enhancement without necessitating an extraordinary rebound in the broader domestic market. Several markers, such as steady demand for bookings and an already noticeable improvement in Q1 TRASM, underpin the expectation that the trajectory toward financial stability is attainable with refined focus and execution.
In the near term, the company projects Q1 2024 revenues to fall between $1.25 billion and $1.28 billion, a testament to the renewed vigor in non-ticket revenue and network strategy shifts. The aim for the full year 2024 is to effectively manage the AOG impact, optimize cost structures, and ultimately advance the unit economics, with the intent to mitigate margin pressures and regain cash flow momentum.
You don't have any saved screeners yet
Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to DeAnne Gabel, Senior Director, Investor Relations. DeAnne, please go ahead.
Thank you, Greg, and welcome, everyone, to Spirit Airlines Fourth Quarter 2023 Earnings Conference Call. This call is being recorded and simultaneously webcast. As soon as it is available, we will archive a replay of this call on our website for a minimum of 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 are other members of our senior leadership team. Following our prepared remarks, there will be a question-and-answer session for analysts. Today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those contained in our forward-looking statements, including but not limited to, various risks and uncertainties related to the acquisition of Spirit by JetBlue and other risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements, and investors should not place undue reliance on these forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our fourth quarter 2023 earnings release, a copy of which is available on our website under the Investor Relations section at ir.spirit.com. And now I will turn the call over to Ted Christie.
Thanks, DeAnne, and thanks to everyone for joining us on the call today. As we look back on 2023, while our financial results for the full year were unsatisfactory, I am proud of what our team accomplished, and we are well on our way to make the necessary strategic shifts that will enable Spirit to compete effectively in the current demand environment. First of all, I thank all our Spirit team members for their dedication and commitment in caring for our guests and each other while overcoming the operational and financial challenges we faced in 2023. And a special thank you to all who carried the extra burden of preparing for the court case and working on merger integration planning while attending to their regular full-time duties. The professionalism and enthusiasm of the Spirit team is unmatched, and I'm honored to work alongside such remarkable people as we deploy our plan to return to sustained profitability. Regarding the merger, when JetBlue first made the offer to us in 2022 and we subsequently signed a merger agreement, which had overwhelming support from our stockholders, our Board of Directors anticipated it would be a long litigious road to obtaining regulatory approval. To compensate for that, we negotiated meaningful protections for the company and our constituents against an adverse regulatory outcome. Nonetheless, we believed and we continue to believe a merger between JetBlue and Spirit is a compelling combination not only for our business but also for the American consumers. As such, we strongly disagree with the court's ruling to grant an injunction against the merger. Together with JetBlue, we filed a notice of appeal and our request for an expedited review has been granted. We will not be commenting further or attending questions about the merger on today's call. Moving on to a recap of 2023. At the beginning of the year, we made the decision to allocate resources and go full throttle on hiring the necessary number of pilots and building the infrastructure to support getting back to full fleet utilization by year-end '23. We also recognized that we needed to derisk the business and give ourselves the means to digest the high growth rate we had coming out of the pandemic. However, due to contractual obligations, the first practical opportunity to slow our pace of forward deliveries was in 2024. Therefore, in the summer of 2023, we negotiated a deferral of 11 aircraft originally slated for delivery in 2024 and smoothes out the remaining deliveries between 2025 and 2029 to slow the pace of our growth over the next few years. At the time, together with achieving full fleet utilization, we believe this would be enough to set us up for a return to profitability in 2024. Things, of course, changed as the year progressed. We did not foresee the number of parked NEO aircraft in 2024 and beyond due to GTF NEO engine availability, further complicating and delaying our ability to achieve full fleet utilization. In addition, shifts in the balance of supply and demand for domestic air travel in leisure markets during last summer and fall had a very profound negative impact on revenue trends for the second half of 2023. In October, we stated we were prepared to make the necessary strategic shifts to enable Spirit to compete effectively, and we began to do just that and are executing on a plan that we believe will provide us a platform for margin health. We are making changes to network construction, peak versus off-peak flying and geographic and market concentration, and we'll assess the success of various components and make some inevitable adjustments. We are not prepared to share all the details of our plan with you today as we await some clarity on our appeal. However, Matt and Scott will share some of the actions in progress that are already having the desired impact. Before I hand it over to them to provide details on our fourth quarter financial performance and first quarter 2024 outlook, I want to comment on the recent speculation about Spirit's ability to make it as a stand-alone carrier should the merger not close. This misguided narrative has been advanced by an assortment of pundits. However, back in the real world, we are focused on facts. Liquidity is always king, and we have enhanced our levels to give us the necessary flexibility to successfully close with JetBlue or to pursue our stand-alone plans. Above all else, margin repair is the key and we have been making network adjustments and cost decisions to recover our margin production. First, Matt, over to you.
Thanks, Ted. I want to start by commending our team for delivering excellent operating results throughout the fourth quarter. And during the busy peak holiday period, we achieved a near-perfect completion factor. Running a great operation is a key focus at all times. However, high load factors like we had over the peak holiday period and winter weather disruptions add extra complexities in running a reliable operations, and our team did a fantastic job managing both. Moving on to our fourth quarter revenue performance. Total revenue for the fourth quarter was $1.32 billion, a decrease of 5% year-over-year, which was better than the high end of our initial guide. Total RASM was $0.0894, a decrease of 17.3% on a capacity increase of about 15%. Load factor was 80.1%, down around 1 point year-over-year. On a per segment basis, passenger revenue per segment decreased 25% year-over-year to $48.24. Our non-ticket results weren't quite as strong as they were in the fourth quarter last year, declining 6.6% year-over-year to $66.60, but I would call the non-ticket trend from an exit rate perspective strong as we head into Q1. I'll add some more color on this non-ticket topic further down in my prepared remarks. It is not apparent by looking only at the quarterly averages but leisure demand in the peak holiday period was very strong. However, with the return of corporate business traffic still lagging that of leisure, it feels like there is still a bit too much capacity chasing leisure demand to gain yield traction and drive historical load factors during the off-peak periods. In the immediate term, primarily January through the first half of February, we felt the best way to address this continuing issue was to reduce flights on off-peak days to a greater degree than we typically do. We also made other network changes, including suspending a few of our recently launched markets and slowing our overall pace of introducing new markets to our network. We are also continuing to make other adjustments to the network that better align our capacity towards markets where the supply-demand trends are more in balance. We started to get more aggressive in this process in Q4, and we will continue to refine the network throughout the balance of the first half of the year. For the first quarter, we estimate our capacity will be up approximately 1.5% year-over-year, which is about 5.5 percentage points lower than we projected back in October. About half of this variance is related to the reduction of scheduled flights on off-peak days that I just spoke about. The other half is a combination of having to pull NEO aircraft from service to position them for engine removals due to the powdered metal disc inspections, and some impact still remains related to ongoing ATC issues. ATC issues are improving. They just have not improved to the degree we thought they would. Therefore, to help support operational reliability, we have not yet been able to reduce scheduled block times as much as we had originally anticipated. We'll get there but it's taking longer than any of us would like. For the remainder of the year, based on our current assumptions regarding engine removals, we anticipate year-over-year capacity for Q2 to be up low single digits, Q3 up high single digits, Q4 expected to be about flat, which leads to full year 2024 capacity ranging between flat to up mid-single digits versus full year 2023. The timing of engine removals and aircraft being pulled from service is fluid, so this is just our baseline estimate for now. Please note that our published schedules for the second quarter and beyond do not yet reflect the estimates I just provided. I'll now turn to how we're thinking about the demand environment and what we think the trajectory will be headed into the summer. There is a material amount of industry capacity coming online in some of the markets we serve. However, we have also seen some cuts in projected industry capacity growth rates for 2024, which should be constructive for yield production as we move through the year. Domestic demand over the peak holiday period and early trends we are seeing for spring break give us confidence that we will see more normalized demand trends for domestic travel this summer. In regard to non-ticket trends, throughout Q4, we saw core ancillary products improve in each month on a year-over-year basis. This trend is continuing into Q1 as well. Some network shifts as well as some adjustments to our revenue management strategies has non-ticket back on track. Additionally, some new merchandising techniques are going into production this month, which we anticipate will continue to push non-ticket higher as we exit the off-peak and end into spring break and Q2. As a reminder, we are lapping what was a very strong first quarter last year, so on a year-over-year basis, we are estimating first quarter 2024 TRASM will be down compared to the first quarter last year. However, our network and schedule changes, together with non-ticket revenue trends, should provide a nice tailwind to our sequential unit revenue performance from Q4 into Q1, and that sets us up well to continue this positive trend into Q2. We estimate the first quarter 2024 total revenue will range between $1.25 billion and $1.28 billion. And with that, I will now turn it over to Scott.
Thanks, Matt. 2023 was a year of many distractions and unpredicted events. Our team did a great job preparing for and reacting to all the issues we faced with professionalism and a positive attitude. For that, I want to give thanks to everyone on the Spirit team. Turning to our fourth quarter results. Our fourth quarter operating costs were $1.49 billion, an increase of 11.3% compared to the fourth quarter of 2022 on a capacity increase of 14.8%. Nonfuel operating expenses were $998, much better than our initial expectations, driven largely by lower airport rents, lower costs resulting from our reliable operational performance and various cost savings initiatives. Also, better fuel efficiency drove lower-than-expected fuel expense despite fuel price per gallon coming in higher. Together with the better-than-expected revenue results [indiscernible] operating margin for the fourth quarter of 2023 was negative 12.4%, about 2.5 points better than the high end of our initial guide. While I applaud our team for beating expectations, these are clearly unsustainable results overall, and we remain determined to return to profitability and have been adjusting our strategy accordingly. There is considerable economic power in the Spirit business model, but we do understand some of the limitations and issues with it as well. We believe we have some things in the works that will address these issues while maintaining the power of the model. We look forward to discussing these enhancements as the year unfolds. Total nonoperating expense came in about $5 million higher than our initial guidance, in part due to lower interest income, higher interest expense and mark-to-market valuation of the derivative liability associated with the 2026 convertible notes. We ended 2023 with $1.3 billion of liquidity, which includes unrestricted cash and cash equivalents, short-term investments and the $300 million of available capacity under our revolving credit facility. During the fourth quarter of 2023, we modified our credit facility, extending the final maturity to September 30, 2025. We recently completed sale leaseback transactions for aircraft we previously owned and operated. We completed 20 of these transactions in December and 5 more in early January. In total, these transactions resulted in net cash proceeds of approximately $420 million. We retired 1 A319 aircraft and took delivery of 2 new A320neos and 2 new A321neos during the fourth quarter, ending the year with 205 aircraft in our fleet. Before I move on to the first quarter outlook and plans for 2024, just a quick update on our GTF engine availability issues. In January, we averaged 13 grounded NEO aircraft and continue to estimate this number will climb steadily to an average of about 40 in December, averaging about 25 AOGs for the full year 2024. The situation remains very fluid so we'll keep you updated as things develop. While we are working closely with Pratt & Whitney to predictively manage the engine removals and finalize a compensation arrangement that will partially cover the cost of the AOGs, we won't be able to achieve what we would consider an optimized cost structure until we get past the engine availability issues. Net of expected reimbursements, we expect this current AOG issue to cost us a few margin points in 2024. Looking ahead to the first quarter and full year of '24, we continue to face cost pressures from carrying costs related to the NEO engine availability issues, inflationary pressures on wages, and we will also see increases in aircraft rent due to the higher mix of leased versus debt-financed aircraft. On the positive side, we continued to improve fuel efficiency, driven by the increase in the number of NEO aircraft in our fleet, particularly the 8 A321neos added in 2023. In 2024, we are scheduled to take 20 more A321neos, which will drive further fuel efficiency. We are also making progress in improving utilization of our non-AOG aircraft, which we define as total fleet minus any aircraft on the ground due to engine availability issues. And this is a better comparable metric to historical fleet utilization numbers. We expect the benefits from better fuel efficiency, improved utilization of our non-AOG fleet and the rightsizing of our labor cost to be the platform for our ongoing unit cost repair. Regarding liquidity, we believe our $1.3 billion of total liquidity at the end of 2023 should be more than adequate to sustain us until the business is back to generating cash. This is a milestone we think we will cross as we enter March of this year and then begin building cash in the second quarter and beyond. And while we have confidence in our ability to return to positive cash generation, we will continue to look at other opportunities to further shore up liquidity as we progress through the year. Also, while Spirit remains focused on consummating the merger with JetBlue and is looking forward to prosecuting the expedited appeal of the U.S. District Court's order, the company is aware of its 2025 and 2026 debt maturities and is assessing options to address those maturities when the time is appropriate. We anticipate capital expenditures, including net predelivery deposits for the full year 2024 to be about $235 million. For the first quarter of 2024, we estimate our operating margin will range between negative 15% to negative 12% with the fuel cost per gallon averaging $2.90. So now I'll turn it back to Ted for closing remarks.
Thanks, Scott. As we enter 2024, we are beginning to see the benefits from the tactical and strategic changes we implemented in 2023, including day of week schedule adjustments, eliminating a number of underperforming cities, refocusing our network on areas of obvious strength like Fort Lauderdale and directing more discretionary airplanes to markets with better supply-demand characteristics. In addition, current booking trends support our view that domestic environment is beginning to rebound. Together with the changes we have made, we estimate this will result in an unprecedented sequential improvement in TRASM from fourth quarter 2023 to first quarter 2024, which supports our view of a domestic recovery in 2024. After 20-plus years of working for lower-cost carriers, it has become ever more clear to me that we exist in an uneven playing field. To quote Judge William Young in his decision to enjoin the merger between Spirit and JetBlue, "The airline industry is an oligopoly that has become more concentrated due to a series of mergers in the first decades of the 21st century, with a small group of firms in control of the vast majority of the market." No truer words were stated in the entire opinion. Despite that explicit acknowledgment, the government continues to do nothing to address the anticompetitive structure of our industry. Instead, they have just engaged in an expensive and long litigation process to block the merger of the sixth and seventh largest airlines that, when combined, would still be half the size of the fourth. This case should never have been broad. It's beyond absurd for the government to claim a victory for the American consumer. In fact, it's ridiculous. As kind as I can be on the matter would be to confirm that the law of unintended consequences is in full effect. Either through direct government intervention or lack thereof, the end result has been to perpetuate a small group of haves that control the market at the expense of the have-nots and the American consumer. Nonetheless, you can rest assured that the Spirit team is 100% clear and focused on the adjustments we are currently employing and will continue to make throughout 2024 to drive us back to cash flow generation and profitability. Now back to DeAnne.
Thank you, Ted, Scott, and Matt. And I also want to apologize for the background noise you may have heard. I'm not sure where it was coming from but it does seem to have resolved itself. And with that, Greg, we are now ready to take questions from the analysts. [Operator Instructions]
[Operator Instructions] It looks like our first question is from the line of Christopher Stathoulopoulos with Susquehanna.
So Ted, with regards to network optimization, could you talk a little bit in perhaps some more detail around the changes with your crew scheduling placement and then also how you're thinking about your seat distribution by market? It sounds like perhaps something similar to what we heard from Frontier this week, but any additional color here as we think about the composition or distribution of your capacity as well as some of the tactical changes you made around scheduling in the crew as we look at 2024.
Sure. Well, let me make a couple of comments specifically on how we've designed how the airplane network interfaces with the crew, and I'll let Matt also opine on how he feels like seats and capacity are being deployed into markets. So over the last 2.5 years, we've made a number of structural improvements to the core network and how it enhances our reliability. And one of the biggest changes we made at the early part of -- the later part of 2021 and into early '22 was restructuring how many crews originate and come back to their base and what percentage of the flying origination comes back to its base and how long those crews are away from their base. Those changes were made back then. And if you follow our reliability since then, wow, on-time performance ebbs and flows depending on how our utilization is doing throughout the year, and of course, depending on air traffic control and weather. Completion factor has been excellent, and that's really what's key to us is to see that signal first, then we can start tweaking further in ways that we think can drive even better on-time performance. And if you look at the peak part of the holiday period at the end of last year, we were in the top 3. And for the month of January, we were in the top 3 and then the top 2 in completion factor. So I think as far as structural enhancements go, we're getting wiser and wiser about how we can enhance further reliability. If we think about how the networks are being deployed from a seat perspective, maybe, Matt, you want to give some perspective on that, too.
Yes, sure. So Chris, we -- when you look at first quarter this year versus sort of the last 12 months rolling into the quarter, we have added, on a year-over-year basis, 55 new routes and we suspended or exited 37 routes. And part of those suspensions includes 9 city exits or suspensions, where we think we'll be back into those cities. So those are some material moves for us. I think Ted mentioned in his prepared remarks the shift in the ASMs. Some of it has gone to Fort Lauderdale, where we continue to see very good strength. And we've also seen a good bit of growth for Spirit in the New York Metro area as well. Again, a great source of strength for us. And what we're seeing is some shift away from some other leisure destinations. Orlando is a little smaller for us, Vegas is also smaller for us. So really just surveying the landscape, which we do all the time. And those are the actions that we've been taking. And I think for now, we're really happy with what we're seeing as early returns on that. And we'll just continue to accentuate our strengths and look for opportunities where we think the supply-demand balance favors us a little bit more.
Okay. And as my follow-up, Matt or Scott, maybe if you could walk us through the cadence of how we should think about the GTF aircraft grounding. You did give your capacity guide by quarter here for 2024, so thank you. But as we start to or rework, if you will, our bottoms-up models for next year, any detail you could give us so far as the cadence of GTF groundings through 2024 and how we should think about 2025?
Chris, this is Scott. I'll start. For 2024, I think I mentioned a little bit in the prepared remarks, we will have an AOG number in the first quarter in the high teens. And that will steadily climb through the year and probably end up in the fourth quarter, averaging about 40 AOGs. And that would translate to an annual number for '24 of about 25 AOGs for the year. For 2025, it's going to be difficult to estimate today. I mean, in actuality, really looking out into the third and fourth quarter had some bit of volatility so looking into 2025 is going to be tough to estimate. There's a lot of things that we're doing and Pratt is doing to help manage the number. So we really only have a good bit of visibility into '24 at this point.
And I would just -- this is Matt. I would just add to that, to Scott's point, there is still some volatility in the number. And we'll just continue to adjust the fleet and the network, we'll move around some of that. We feel pretty good that we have a better number now than we had even a few months ago, so that's good. And Bob, we'll just continue to move as necessary.
And our next question comes from the line of Mike Linenberg with Deutsche Bank.
I apologize if I missed this, Scott, but when we think about the airplanes coming in for the year, I think, what is it, 26 or 27 new Airbuses. How are those being financed? And as each airplane comes in, should we think of that as a cash-accretive transaction as you bring in each airplane with all the puts and takes?
Yes. Mike, thanks for the question. Yes, the number of deliveries for 2024 will be 27 aircraft, and they're all fully financed with either the ones coming from Airbus are sell leaseback transactions, and we also have deliveries that are coming from lessors as direct operating leases. So those are all fully financed. And in fact, we're fully financed through the second quarter of 2025 minus 1 second quarter of 25 airplanes. So that's the delivery stream. And in regards to the financing, we typically will finance the cost of the airplane. So we're usually plus or minus the cost of the airplane. We don't typically over-finance. And also maybe it's a good time to point out maybe some clarification too on how that stuff works. Because we've had some questions from analysts around what do we do with gains and losses. So they've asked whether or not we include the gains or losses in our operating expense. And to be clear, we do not. We actually calculate the gains or loss in account for them as a nonoperating expense and they are excluded from our non-GAAP metrics. So we know some airlines do account for gains and losses, those credits to operating expense, but we don't do that.
Yes. I would say actually the airlines that do -- most of the airlines that with respect to sale leaseback gains actually follow what you do. Southwest excludes them as well when they take them. So no, I think that's sort of what it's been historically. My second question is just related on cash. You mentioned that you anticipate getting into positive operating cash in March and then beyond, June quarter and beyond. Clearly, there is a seasonal tailwind that will start kicking in. Probably if it's not now, it's within the next week or 2. And so we know that, that carries you through part of the year. But as we think through the full year, are you implicitly telling us that the operating performance or, I should say, the financial performance of the airline is expected to get a lot better in the back half of the year? And/or will that be supplemented by other things like whether it's deferred maintenance or other levers that you can pull to generate additional cash on the operating side?
Yes. Mike, I'll start, and I'm sure Ted and Matt want to jump in here, too. I'll just start at the high level sort of financial forecast for the business. And yes, we'll likely burn some operating cash in the beginnings of the first quarter, which we talked about January and February. But things will make a turn as we head into spring break. And second, third and fourth quarters, we do expect to generate some operating cash for the business in those quarters. We expect margin to be positive for those periods. And it's really premised on the domestic return, our ability to manage some of the costs in the business, which we are already seeing returns on. So that's really what the premise of the cash generation is, but I'll let Matt and Ted sort of talk about some of the market stuff.
Yes. I mean, I think I'd only add, Mike, that when we hit, and I think I made a comment, when we hit the late summer of last year, there was some notable shift in domestic demand and we're obviously heavily skewed domestic today. And that, coupled with Pratt & Whitney not moving in our direction by any mean and getting considerably worse, burdened the business with both kind of like a bad setup on the top line and a lot of burden on the -- in the cost structure. And that was not a good start. But we're starting to make the adjustments we need to make, moving as rapidly as we can. Looks like the market should stabilize just based on what we saw in the peak of the fourth quarter and what we're already seeing for spring break. And we'll make some, as Scott alluded to, some adjustments to rightsizing the business as well. And all of that combined, while not fully done and we still have a lot of work to do to get back to where we want to be, it's progress in the right direction that gives us some confidence that we can start moving the cash needle in the right way.
And our next question comes from Duane Pfennigwerth with Evercore ISI.
This is Jake on for Duane. In your prepared remarks, you mentioned rightsizing the labor cost. If that's coming from headcount, can you quantify how overstaffed you are and what particular groups? And then just relating to commentary on the last call, are you seeing the same as the rest of the industry regarding improving pilot staffing?
Thanks for the question. This is Ted, I'll start. Maybe Scott, you want to jump in. So as I stated, we moved full bore into hiring to hit what we thought was going to be a full utilization airline on a much bigger fleet as we were moving through the second half of 2023. And we -- that did not materialize. We're going to be, as Scott said, down, on average, 25 airplanes from where we thought we would be. By the time we hit the end of the year, it's 40. And so that's a lot of staffing and that's across the board. It's everything from our frontline people, our pilots, our flight attendants, the folks at the airports. Quite frankly, even the general and administrative workforce has some more direct-related expense associated with it when you get bigger. So we're working with all those various constituents to come up with solutions. We already have some progress on that. I hesitate to give you a number right now. But last year, we alluded to the fact that we're pursuing $100 million in structural cost enhancements and it's sort of tied to that, so at least gives you some guidance on the bucket. And then as to your question on pilot staffing, we saw the warm start to turn a little bit in the middle part of last year, and attrition really started to go down for us. And I've heard similar comments from other airlines as well. So it sounds like all the work that the industry is doing collectively to create more opportunities for pilots to get training, to move through the process, is bearing some fruit. And we're starting to see, once again, the principles of supply and demand working the way it's supposed to. Wages have gone up for pilots. There's more opportunity for prospective pilots to find options to get trained and to become a professional pilot, and that's beginning to bear fruit. So I think we are starting to get closer and closer in balance. Do you want to add anything more?
No, I think you hit on it, Ted. I think that's the point is when we think about hiring crew, it's well in advance of taking deliveries of airplanes. And so when the AOG issue started to materialize in the back half of last year, we had to react, and the number of resources that we had internally was already embedded into the business. So this is really all about rightsizing our cost and a lot of that is labor, as Ted mentioned, to the size of the business. And that will be muted in 2024 and 2025 and maybe even beyond that. So part of what we're going to do is figure out the right staffing levels in all components of the business to make sure they're fit for where we are.
Okay. And then just a follow-up. You talked about the timing of AOG, but do you have any insight or can you provide any detail for the time line of GTF engine compensation?
Yes. I mean, from a timing perspective, let me just give you a little history. We've been in discussions with Pratt & Whitney for the better part of a few months, figuring out how to best negotiate a structure to compensate us for the AOG aircraft. And while I think we are in the later innings, we don't have an agreement yet so it's difficult to say where we think that will hit and when. But we do have some amount of compensation embedded in our guidance, just to be clear. I just can't give you details on what that is. That is a commercial agreement with Pratt that we will not be able to disclose the details, but I will tell you that it's in the guidance.
And our next question comes from the line of Conor Cunningham with Melius Research.
Just as we talk about this margin recovery opportunity, some of the other domestic airlines have talked about that as well. But as you sit here today, do the plans that you're currently laying out gets you back to breakeven by year-end? It just seems very unit revenue-driven right now. I'm just trying to understand the building blocks of how we get there overall.
Thanks, Conor, it's Ted. Yes. So look, it has to be at least, if not a portion, a significant portion driven around the recovery that we're seeing. And I think that speaks a little bit to how bad it was in the latter part of summer and the fall of last year. That didn't feel right to anybody and it feels like it was a little bit of a demand shift and maybe some macro concern about where the economy was heading. And I think those 2 things are starting to stabilize. And if we weren't seeing some confidence in that in the way people were booking, in both the peaks and off-peaks right now, we would tell you, but they are -- it does appear to be moving in the right direction. So yes, it does imply that we start to continue to see that momentum, coupled with the efforts that we're making on the cost structure and the utilization that were not right in the second half of last year either. So it's definitely both items, but it does require the demand environment to behave the way we're starting to see it behave.
Conor, I'll make 1 other comment and Matt will probably want to chime in, too. But just mathematically, as we think about the year-over-year move, we talked about our growth rate being in the low single digits, kind of flat to up mid-single digits range. That alone will provide a tailwind to unit revenue, sort of this no-growth scenario versus our historical double-digit growth rate. So we think that the move in unit revenue for us and really the domestic landscape doesn't have to be fantastic for us to get to the unit revenue number that we're expecting for the year. I don't think we're being aggressive because we do have some puts and takes on the network changes and the sort of no-growth benefit to unit revenue. So I think the assumption around the domestic recovery, I think, is not aggressive for us at this point.
Yes. And Conor, this is Matt. I can add a little bit of color in terms of the trends that we've been seeing, especially as we move out of the fourth quarter and into January. We're definitely starting to see -- if you think about the sort of the year-over-year unit revenue production, it was very -- obviously not up to where we wanted it to be in Q4. What we're seeing now as we head into January, it's still January. But the year-over-year unit revenue change, what we saw in Q4 as we headed into January and into the first quarter, we're seeing significant unit revenue improvement on a year-over-year basis, still down in Q1 but significantly less down, if that makes sense, for what we expect in Q1 relative to what we saw in Q4. And domestic is leading that charge back, which is what we were expecting to see, and it's good to see it starting to come through that way. One of the piece, I think, that's worth noting geographically and everybody has some amount of geographic diversity, it just so happens right now. We talked in the past, I think it was like last summer into the fall, how Cancun really took a turn in the wrong way as we headed into the summer and exited the summer. We're still seeing some issues there. So Cancun and some of our Caribbean leisure routes, think of that as like Montego Bay, Punta Cana, we're still seeing material unit revenue declines there. So some of our numbers here are including, of course, including that part of the network, which might be worth at least a couple of margin points right there just from some geographic issues we're having. We expect that to come back but the timing is taking longer than what we would have liked. So that's still out there affecting our numbers, and domestic is definitely starting to lead this charge back for us.
Okay, that's very helpful. And then I know you talked about you feel comfortable with the liquidity situation, but can you just talk about where the unencumbered asset base sits today? I feel like you got a lot of equity in your order book. Just anything you have on your current fleet. And then maybe if you could just talk about the -- your current discussions with refinancing of the loyalty bond in 2025.
Yes, I'll mention the unencumbered assets and really the financeable base, I guess, is what you're getting to. So today, unencumbered assets, excluding the 319s, which are already contracted for sale, hard assets sit in the sort of $350 million range. We also have $425 million of PDPs with Airbus and a roughly $500 million of equity sitting in airplanes. And so that's sort of $1.2 billion of financeable assets sort of what we start with. LTVs are unknown at this point, but it also doesn't assess the value of the order book, which is a different concept but just sort of the financeable basis over $1 billion. And then the the other discussions around the loyalty bonds aren't at a point at which we can discuss today. We're in the early innings of thinking about how we address those, but we are aware, and that's about all I can say about those today.
And our next question comes from the line of Scott Group with Wolfe Research.
So just before I get to questions, just 1 thing I want to clarify. You made a comment that the GTF recovery is reflected in your guidance. What do you mean when you say that?
Yes. The comment was around the compensation agreement with Pratt & Whitney for the AOGs. While we don't have an agreement in place today, we do have an estimate for that compensation that will show up as a credit to nonoperating expenses. That is in our guidance, an assumption for that.
And so you're saying the Q1 guide reflects some assumption for the recovery?
That is what I'm saying, yes.
Okay. And just are you assuming that's spread over the course of the year? Are you taking like the full recovery assumption in Q1? Just want to understand like what the real starting point for Q1 costs are.
Sure, fair enough. Yes, the way the estimate will work in our guide is that we assume that we get compensated on a per AOG amount over the year. So the number of AOGs that happened in the first quarter will have a corresponding amount as a credit to that expense in the period. So that will -- it will be spread over the year, in other words.
Okay, that's helpful. And then just maybe along those lines, just how are you thinking about the trajectory of CASM over the course of the year?
Well, I think a lot of it will be in part to what Matt mentioned around capacity, but we're not going to give guidance for CASM for the year. There's a number of moving pieces around that at this point. But we do expect to be -- sort of year-over-year, we've talked about it being up probably mid-single digits year-over-year. And that's primarily due to capacity constraints and some of the lingering sort of rightsizing components that we'll address through the year.
Okay. And then just lastly, is there -- I know you said $230 million or so of CapEx. Is there a cash CapEx number to think about? And then have you guys publicly talked about any sort of minimum liquidity targets?
The $235 million of CapEx is cash so that's the cash number for CapEx. And we've been asked around minimum liquidity and I'll say a couple of things. One is that there is no specific operating minimum for us but we do have some contractual minimums. We've talked about the $400 million minimum in our royalty bond. Our revolver has a similar number. And people often ask about holdback of which we can't give details on. But just as a marker, our ATL balance is just under $400 million for the end of 2023. So the holdback is usually some factor of that, which we can't give specifics but those are sort of markers. But other than that, I can't give you a specific number.
And our next question comes from the line of Andrew Didora with Bank of America.
A lot of my questions have already been addressed. But Scott, just with regards to your -- the answer to the last question here, the $235 million of cash CapEx in 2024, that is before any financing, correct?
That is correct. That is not sort of the gross fleet CapEx number. That really includes our sort of aircraft-related CapEx, call it, net of PDPs and engines and those things, plus other CapEx, like we have some remaining spend left on the headquarters, some other ratable spend and part spend and other IT projects, so your normal run rate CapEx.
Yes. Got it, okay. And then just going back to the GTF issues. By the time you reach the end of 2024, how much of your fleet will already be kind of through the process and done? Just trying to get a sense for what's to come in 2025.
Well, this is a tough one. We're sort of looking at each other at the best way to answer it. It's an excellent question but unfortunately, we don't have clarity on that. The number that would trigger the right answer there would be some stability in what we call the wing-to-wing turn time of the engine. So after it comes off, how long does it take for it to come back once it's through the shop? And historically, and I'm really reaching back into my early days in the business, we used to see the engine manufacturers get wing-to-wing turn time somewhere in the 90- to 120-day range. Unfortunately, we're seeing Pratt numbers that are in the 300-plus range. And we're not sure whether or not that is stable, whether or not it will continue to increase or decrease. And so until we get a feel for that, it's hard to say how many "engines" will be through the process. The reason that they will be removed over the course of the year is because they will have reached their threshold to be removed. So this is obviously the way that the process would work. And we'll just have to see how quickly they can either start to move that turn time up and get us back engines and/or produce more spares available for the worldwide fleet to start offsetting some of the pressure. And I think Scott said earlier that it's hard to guess on what's going to happen in 2025 right now. And that's one of the primary reasons is we don't yet have clarity from them on how they're going to -- how quickly they'll be able to move through this process.
And our next question comes from the line of Jamie Baker with JPMorgan.
This is James on for Jamie. Just a couple of quick follows on liquidity. For the predelivery payments, my understanding is that the OEM has been breached for those to be returned. Is that correct or is there some negotiation that Spirit can have to reclaim them?
We're not in discussions around the return of PDP payments at this point. I think if you're commenting on my previous words, it was around the PDP financing, not a return of PDPs.
Okay, got you. And then just a quick one. The new HQ, is that unencumbered? And if it is, can you give a value there?
It is unencumbered. We've built that with cash at this point, and then we'll probably look to use it as collateral for some sort of financing in the future. Of the $350 million hard asset number I said for unencumbered, it's a significant portion of that in the $250 million to $300 million range.
And our next question comes from the line of Dan McKenzie with Seaport Global.
Matt, putting a finer point, I guess, on the network questions, big picture, what percent of the network needs to get reconfigured to get back to profitability? And I guess how far along are you today? I mean, are we halfway there, 3/4 of the way there? And just sort of the time frame for completion. I'm just trying to get a sense of how easy or how hard it is from where you sit.
Yes, Dan, thanks. That's a great question. I would tell you that the moves we're making now and the moves that we had planned to make throughout the rest of the first half of this year is what we need to do to get us back on track to head towards profitability. I quoted some numbers for you there earlier in terms of city exits and new routes and suspensions. All of that is us moving methodically towards getting the network to a place where we can take advantage of our strengths and look for where the supply/demand balance is more appropriate. So I don't have an exact percentage that I'll give to you for that question. It's a great question. But the moves that we're making throughout the first half of this year should set us up for that. And of course, once we then hit after summer and into the fall and winter, we may have some additional moves that are just seasonal in nature. But the vast majority of what we should be doing should be in place by the first half -- by the end of the first half of this year.
Yes, okay. Very good. And then Scott, in response to an earlier question, you mentioned generating operating cash and margins being positive. And I think that was for the second and third quarter. Does that positive margin reference reflect the compensation from Pratt? And does the current outlook contemplate profitability in any of the quarters this year?
Yes, it does. I mean, as I mentioned earlier, the guidance that we issued does include compensation from Pratt. Now I mentioned in my prepared remarks as well that the compensation doesn't fully cover what the impact of the AOGs are for the business as well. It partially offsets in both the direct sales and an opportunity cost. I mean, our unit cost would be lower but for the AOGs. Our margins would be higher but for the AOGs. So just to be clear, that is the case. But notwithstanding, we do still think that we will be in a situation to have positive margins for the second, third, and probably the fourth quarter as well. It's all part of the discussions we had earlier around market recovery and our own unit cost management.
And our next question comes from the line of Savi Syth with Raymond James.
This is Ara on for Savi Syth. Our question today is that there seems to be investor concern around credit card pullback, which seems premature. What type of discussions are you having with your administrator on this topic and what are the thresholds they look at?
Yes. As I mentioned earlier, we can't disclose the credit card holdback number, and that is competitive commercial arrangements. But I mentioned that the ATL balance today is just under $400 million, and credit card holdback is usually some factor of that number. And we had an agreement renegotiated with them a couple of years ago that lowered the actual holdback that we were required to have or, I should say, lowered the minimum cash balance that we were required to have. So we feel like we're in a pretty good spot there.
Sorry, go ahead.
Go ahead.
No worries. And then 1 more, although you guys touched on this earlier, if you could talk about any additional cost headwinds and tailwinds in 2024, that would be great.
Yes, sure. I mean, I think it's a similar story as we've talked about. The big movers are labor costs, aircraft rent due to more leased aircraft than owned. And as we look through the year, it's going to be those things that we'll have to address. Airport costs are also part of that. And the good guidance though, I mean, we saw it in the fourth quarter, it was running a good operation. That was critical for us. We saw that throughout the P&L, including fuel burn. As I mentioned, running a good operation has obvious direct expenses with labor and interrupted trip expense, but we benefit in fuel burn and not having to fly so fast and really thinking about as the network team allocates NEOs to market-appropriate places, we'll see real benefit in fuel burn in '24.
Greg, we have time for 1 more question. Move on to the next one, please.
And our final question comes from Helane Becker with TD Cowen.
Matt, can you say what percentage of the forecast revenue for 2024's first quarter is already booked?
Yes. So we don't comment specifically on that, Helane. I would tell you, though, that for the spring break period, we like the setup very well. We think our revenue management plans there are going to bear fruit for us. And we're looking forward to getting closer and closer to March because we do believe that the setup is really good for spring break, and we're looking forward to getting there.
Okay, thanks. That was my only question.
Great. Well, thanks, everyone, for joining us today, and we will catch you next quarter.
All right. Ladies and gentlemen, that does conclude today's call. Again, thank you all for joining and you may now disconnect. Have a great day, everyone.