Originally Posted by
TAFsMatter
The reduction in rent will likely be greater since they primarily rejected newer, more expensive leased NEOs including the paperweights in the desert as well as some operational ones that likely just cost too much, maintaining only the ones they needed for the lessor and IAE deals. Most of the retained planes are older CEOs on more favorable terms as far as plane cost (though with higher fuel cost per flight).
Revenue will shrink with flight cuts somewhat, yes, but they are cutting staffing costs to an even greater percentage than the flight reductions. And most of the cancelled routes were underperforming LAS flights or small stations with consistently half empty planes. So the revenue reduction will be to a lesser extent than the cost reductions, improving the margins.
Will it be enough? Open question. And I agree with some of your earlier posts about a pending debt disaster down the road even if the operational fixes work. But fixing the operational bleeding is the immediate priority, and they seem to be taking decisive action on that front.
So this is another way to think about this.
Imagine that the airline is a sum of routes, each one having its unique planes, pilots etc. Currently you could account for the airline this way and the -38% profit margin means that that's the average or maybe even the median profit margin on all routes.
So this means roughly half of the routes lose more than 38% and half less. So even if you cut 50% of the flights, your worse route is still losing 38%.
That's just cutting the most unprofitable routes (if it were accounted for this way). You'd still have a negative margin, because at -38% there's not a chance that somehow the middle top 50% of routes are profitable.
Then you have to assume that the cuts in the lease payments plus labor is enough to make money, including the fact that the $12M a month in average monthly debt payments doesn't change as you move forward with a smaller operating footprint. Also keep in mind that this operating margin only includes operating.
Another problem is that if you cut a flight segment, does that now impact other flights that might be doing ok, because you lose the through passenger because you cancelled the flight that brought them on the connecting flight? You lose the network effect as you lose scale. Spirit only has 15% of passengers connecting, but still you are going to lose half or more of them so figuring out which routes to cut isn't very straightforward.