With its planned merger with fellow US carrier JetBlue blocked by a federal judge, the future looks far from rosy for Spirit Airlines, the ultra-low-cost carrier from Fort Lauderdale.
With the proposed $3.8 billion merger between the two carries all but dead, the immediate path ahead for Spirit is unclear. While JetBlue has its own issues to deal with, no more so than falling demand for its services, Spirit has even bigger issues weighing down its “to-do” list that need addressing urgently if it is to survive.
Even before Judge William Young passed down his determination that the deal between JetBlue and Spirit would be anti-competitive and not in the best interests of consumers, Sprit had multiple issues to deal with, any of which could ultimately cause its downfall.
With no merger left to rescue it from its plight, is Sprit now doomed to become another piece of US aviation history, or will this phoenix rise from the ashes that remain from a fire that once burned brightly with the hopes of a high-profile merger with the country’s seventh largest carrier?
Firstly, upon Judge Young’s announcement, Sprit Airlines’ stock lost almost half its value within minutes of that announcement being made. With such a low share value, while this could make Spirit attractive to certain investors, it can also make creditors extremely nervous and can make it virtually impossible to maintain a decent credit rating, making it far harder for Spirit to obtain loans on the open market.
Secondly, Spirit Airlines has been struggling for months to cope with the fallout of issues affecting multiple Pratt & Whitney engines on many of its aircraft. The airline has already announced that it will ground 26 of its aircraft in 2024 to replace the engines on these aircraft because of a manufacturing defect.
The airline has already started the grounding process, with 13 planned for January 2024, and increasing to 41 in December 2024. This action will account for more than 10% of the carrier’s fleet. According to a company statement on the matter issued in October 2023, such necessary action “will drive a dramatic decrease in the company’s near-term growth projections.”
Compounding Spirit’s problems is a failure to make any money for years. Spirit is currently forecasting a $467 million loss to be announced for 2023 when the final figures are all tallied up. Although this figure is eye-watering in itself, the airline has not turned a profit since 2019 and has accrued losses of over $1 billion in the years since. Many analysts see this performance as unsustainable, even in the very short term, and, given the size of the accrued losses, expect Spirit to enter into Chapter 11 bankruptcy protection in the near future.
In late 2023, Spirit managed to raise $419 million by mortgaging much of its aircraft fleet planes. However, as one JP Morgan analyst said at the time, “From here, Spirit’s liquidity-raising cupboard does not appear robust.”
According to ch-aviation, Spirit currently has a total fleet of 203 Airbus aircraft with a further 113 on order. However, should a fire sale of assets become urgent, those delivery positions could possibly raise some much-needed capital just at the crucial time, although the airline’s board won’t be banking on any such cash injection being enough to save the carrier.
Where does Spirit go from here?
The judge’s ruling will see Spirit Airlines receive a $70 million payout from JetBlue as part of a pre-agreed breakup fee. However, given the carrier’s dire debt situation, this will only fill part of the abyss it is facing, and many analysts are saying that the only hope left for Spirit is finding another buyer – and fast.
While some are eyeing Frontier Airlines to possibly return to the negotiating table to revive its previously-made offer for Spirit – an offer that was gazumped by the JetBlue approach which offered cash for Spirit rather than using its shares, others see this as unlikely. Indeed, it may be even more unlikely now given the recent ruling which indicated that regulators do not wish for any more consolidation of the US airline industry for the time being.
Either way, Spirit will have to keep its eye on the ball and figure its own way out of the drastic situation it now finds itself in. Unless a white knight appears on the horizon looking to buy an airline saddled with debt and with much of its fleet grounded, then the future for Spirit Airlines looks bleak.
As an endnote to all of this, it’s almost ironic. A decision that kept JetBlue and Spirit apart to preserve customer choice in the marketplace might just reduce that element of choice in any event, if Spirit doesn’t survive.