Spirit Airlines Faces a Rough Road After Failed Merger With JetBlue

Spirit Airlines was once a golden child of the airline industry. But now that a judge has blocked its proposed merger with JetBlue, Spirit is on its own to deal with declining revenues and rising operating costs. 

The airline hasn’t been profitable since 2019 and several analysts say it likely needs to find a buyer or another way to strengthen its financial situation.

“We believe Spirit is likely to look for another buyer,” TD Cowen analyst Helane Becker wrote in a note to investors on Tuesday, “but a more likely scenario is a Chapter 11 filing, followed by a liquidation.”

Fitch Ratings said in a report that Spirit’s credit profile was “under pressure.”

“We believe that Spirit needs to clearly articulate a near-term plan to preserve and generate liquidity, address its refinancing risk, and improve profitability to avoid a negative rating action,” the Fitch report said.

The Wall Street Journal reported on Thursday that Spirit was exploring “restructuring options” related to the need to refinance its debt, citing people familiar with the matter.

But Spirit tamped down any concerns regarding a restructuring.

“Spirit is not pursuing nor involved in a statutory restructuring,” a Spirit spokesperson said in a statement.

Spirit shares plunged by nearly 28% following the WSJ report. Since the ruling, Spirit shares have fallen by nearly 70%. 

Could Spirit Revive Merger Talks With Frontier?

Frontier Airlines, which originally sought to merge with Spirit in 2022 before JetBlue launched a hostile takeover offer, could be a potential buyer. However, some industry analysts have said it may be more difficult now for Frontier to make a bid, since it is also in a financially weaker position compared to 2022. 

“The problem is Frontier’s finances are not as good as they once were, either,” said Henry Harteveldt, president of market research firm Atmosphere Research Group. “So it’s not necessarily assured that Frontier would be able to move forward with a merger deal.”

Spirit did not say whether it would resume talks with Frontier. The carrier said it was evaluating next steps to shore up its balance sheet and operations. “While we are disappointed with this outcome, we are confident in our strengths and strategy,” the company said in a statement.

Frontier declined to comment.

Spirit has struggled with declining revenues following a post-pandemic sluggish demand for domestic travel, rising operating costs and supply chain issues. Since 2019, the carrier has lost more than $1.6 billion. 

Here are a few of the key issues Spirit faces: 

A Heavy Load of Debt

Spirit has a staggering $1.1 billion in debt due in September 2025 and it faces significant risks in refinancing that debt, according to the Fitch Ratings report.

To bolster its liquidity, Spirit recently sold 25 aircraft and leased them back. That allowed the carrier to pay down $465 million in debt and net $419 million in cash. In its third quarter earnings report, Spirit said it also identified $100 million in cost reductions and was “evaluating how to best capture those savings in 2024.”

“Overcoming standalone refinancing risk will ultimately be dependent on restoring market confidence in the company’s ability to establish an operational/strategic plan that enhances profitability and generates adequate cash flows,” Fitch said.

No Appetite for Domestic Travel

While the pandemic brought about “revenge travel,” Spirit didn’t reap many of the benefits. A rising number of travelers have been willing to shell out more for premium seating and long-haul flights to Europe or Asia. That helped carriers such as American, Delta, and United enjoy record profits. 

Spirit, on the other hand, is an ultra-low-cost carrier whose bread-and-butter is domestic travel, along with flights to the Caribbean and Mexico. The carrier also operates in ultra-competitive leisure markets, and the lack of interest in its discounted fares hasn’t given it much pricing power as larger carriers have upped their domestic offerings.

Soft demand has led Spirit to slash fares by as much as 28% in the hopes that it can fill its planes to offset the oversupply of domestic seating, according to CNBC.

The carrier said in its third quarter earnings report — where it reported a net loss of $157.6 million — that it would slow capacity growth due to the sluggish demand.

“We continue to see discounted fares for travel booked through the pre-Thanksgiving
period,” Spirit CEO Ted Christie said in the earnings report. “And, unfortunately, we have not seen the anticipated return to a normal demand and pricing environment for the peak holiday periods.”

Engine Issues and Higher Fuel Costs

Spirit has been snarled in the issues afflicting Pratt & Whitney’s geared-turbofan engines (known as GTF). It’s easy to see why — the airline operates the largest fleet of GTF aircraft in the U.S. 

In July, RTX, which owns P&W, discovered production quality issues affecting around 3,000 engines, with an estimated 600 to 700 likely to need repairs. The engines, largely found in Airbus A320neos, led many airlines that use the aircraft to ground some of their affected fleet. 

Spirit, unfortunately, maintains an all-A320 and A320neo Family aircraft roster. The engine issues have already forced the carrier to ground a number of its aircraft and Spirit has said it expects to see even more disruptions in 2024.  

The price of jet fuel, one of the biggest costs for an airline, has also been on the rise, adding more headaches for Spirit. Other airlines such as American, Delta, United and Southwest have been able to offset the cost of fuel with higher fares, but with Spirit’s ultra-low-cost business model, such a feat isn’t always feasible.