New York CNN –
Spirit Airlines could go bankrupt and be forced out of business because of a federal court decision to block a planned sale to JetBlue Airways, according to an airline analyst note.
Unlike many airline bankruptcies, where the airline in bankruptcy court either reduces its debts and becomes a financially healthier company or is eventually acquired by another airline and integrated into its operations, the more likely scenario for Spirit would be a liquidation of its assets to a note from Helane Becker, an analyst at Cowen.
“We realize this sounds alarming and harsh, but in reality we believe there are limited scenarios that allow Spirit to be restructured,” she wrote in a note to clients on Wednesday. “We believe Spirit will initially look for an alternative buyer, but another airline could suffer the same setback.” [from antitrust regulators.]”
Spirit was a pioneer in offering extremely low base fares in the US market, but charged a premium for virtually all other options, including carry-on luggage. The tariffs prompted major airlines to offer a certain number of no-frills “basic economy” seats on their planes. It also sparked concerns that JetBlue's purchase would lead to higher fares across the industry – concerns that led to a Justice Department antitrust lawsuit that blocked the deal.
But if Becker is right, Spirit could still disappear. And if that happens, it could lead to criticism of the Biden administration's move to block the agreement and statements from Attorney General Merrick Garland and Transportation Secretary Pete Buttigieg praising the decision.
“After decades of airline consolidation, this ruling shows the importance of putting competition first,” Buttigieg posted on To support airfares.”
All U.S. airlines lost billions in the first two years of the pandemic, despite receiving billions of dollars in federal aid to keep flying and prevent mass layoffs. But as demand for air travel picked up again in 2022, so did the profitability of larger airlines.
But smaller airlines — like Spirit — that offer lower fares to attract award-winning leisure travelers continue to struggle. After $1 billion in losses in 2020 and 2021, the company lost $264 million in the first nine months of 2023. The company is forecast to lose another $175 million in the final three months of 2023 and another $310 million this year, according to analysts polled by Refinitiv.
Spirit has $1.1 billion in debt due in September 2025. In a note Wednesday, Fitch said it will face challenges refinancing that debt.
“Spirit faces significant refinancing risk next year,” said the note from Fitch, which said Spirit was already on guard ahead of a downgrade from its current junk bond rating of B due to availability issues, overcapacity in certain leisure markets and intense competition.”
Not all analysts see bankruptcy and liquidation in Spirit's future, but many warned that the financial outlook remains bleak.
“We are not (yet) assuming an immediate forecast [Spirit] “Chapter 11 filing,” airline analysts at JPMorgan Chase said, citing the bankruptcy code used in such filings. However, they added: “We cannot expect a viable return to profitability any time soon.”
Spirit did not comment directly on Becker's analysis, but said it was confident it could weather the current problems.
“Although we are disappointed by it [court decision] “We are confident in our strengths and strategy,” said a company statement sent to CNN. “We remain committed to providing affordable rates and great service to our guests and providing outstanding opportunities for our team members. Spirit has taken and will continue to take prudent steps to ensure the strength of its balance sheet and ongoing operations.”
The bankruptcy process is intended to allow companies that are losing money to reduce debts and other expenses they cannot afford and stay in business. Many companies, including most of the country's major airlines, went bankrupt and went on to record record profits.
But Becker said it was unlikely that Spirit would be able to renegotiate its contracts, particularly with the aircraft leasing companies that own many of its planes, all of which are Airbus single-aisle jets. Because demand for these jets is currently strong, the leasing companies that own the jets are much more inclined to simply take them back from an airline that can't pay rather than negotiate with them for a lower price.
“Demand for narrowbody aircraft is high, especially given ongoing problems at Boeing and lessors would be more likely to buy back aircraft than renegotiate leases,” she wrote. “In fact, JetBlue may lease Spirit aircraft from lessors during the company’s likely restructuring.”
Spirit shares, which fell 47% on Tuesday after the court decision, lost another 22% on Wednesday after Becker's announcement and were down more than 20% on Thursday. Taken together, that represents a loss of more than two-thirds of their value so far this week.
In a decision announced Tuesday, federal Judge William Young agreed with the Justice Department's arguments that allowing JetBlue to buy Spirit would violate antitrust laws and reduce the pricing pressure that Spirit's business model had exerted on the U.S. airline industry.
“The court has made its best attempt to predict the future of a dynamic market recovering from the Covid-19 pandemic in decidedly uncertain times,” he wrote. “The proposed acquisition would eliminate Spirit as a competitor to all other airlines in the market, resulting in less competitive pressure for all other airlines.”
JetBlue and Spirit issued a joint statement after the decision saying they were considering whether or not to appeal the decision.
“We continue to believe our combination is the best opportunity to increase much-needed competition and choice by offering low fares and great service to more customers in more markets, while improving our ability to compete with the dominant U.S. airlines “JetBlue and Spirit said in a joint email statement to CNN. “We are reviewing the court’s decision and evaluating our next steps in the legal process.”