uploads///problems

How Pilot Strike Affected Spirit Airlines in 2Q17

By

Jul. 31 2017, Updated 6:40 a.m. ET

Pilot strike

In early May, Spirit Airlines (SAVE) ended up canceling more than 300 flights due to a pilot strike. The pilots were demanding better wages in accordance with industry standards. Recently, peers Delta Air Lines (DAL), United Continental (UAL), American Airlines (AAL), and Southwest Airlines (LUV) have all raised pilot pay.

Though Spirit has offered a 30% pay hike to its pilots, Air Line Pilots Association International (or ALPA) is demanding a much higher wage rise. According to Spirit, such a rise would cost it $1.9 billion and has the potential of wiping out its entire profits.

The clash between ALPA and Spirit management has been going on for a long time now. There have been many negotiations since 2015. However, an agreement hasn’t yet been reached. The management has now sued the ALPA for a “pervasive illegal work slowdown.”

Article continues below advertisement

Impact

The flight cancellations resulted in thousands of customers being stranded at airports across the United States and also led to customer fights with SAVE employees. As bad luck would have it, a video depicting one of these fights went viral, which marred the company’s reputation further.

Customers naturally have moved away from booking with Spirit Airlines to avoid all the hassle related to flight cancellations. The pilot strike came at a time when customers were booking their July and August summer vacations. The strike is expected to cause 150 to 200 basis points of total TRASM decline YoY.

Outlook

According to Spirit Airlines, recent customer surveys indicate that customer concerns about booking flights with SAVE are falling. The company thus expects no further impact on its operations due to this issue.

CFO Edward Christie said, “While the labor negotiation process can take a long time and be frustrating, nothing about the current environment changes the long-term prospects for the success of our business model.”

Investors can gain exposure to Spirit Airlines by investing in the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), which invests 1.8% of its total portfolio in Spirit Airlines. Next, we’ll look at Spirit Airlines’ profitability.

Advertisement

More From Market Realist