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Spirit Airlines bankruptcy rumors gained steam this week and that could make things interesting for United and other legacy carriers.


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Spirit Bankruptcy Rumors Gain Traction

Speculation grew Friday after a report that Spirit Airlines may seek Chapter 11 bankruptcy protection. Leadership held conversations with bondholders as a $1bn payment looms next year primarily funding new aircraft. Spirit CEO, Ted Christie, said this:

“We are engaged in productive conversations with the advisors of our bondholders to address the upcoming debt maturities. Because those conversations are ongoing, we are not going to go into detail or take any questions on this topic or speculate on potential outcomes,” he said in August. “Needless to say, it is a priority, and we are focused on securing the best outcome for the business as quickly as possible, while staying focused on driving performance and implementing our new travel options and elevated guest experience.” – Fox Business

The carrier has $3.3bn of debt which isn’t necessarily dramatic in the airline business but the Ultra Low Cost Carrier (ULCC) hasn’t been profitable since before the pandemic and that’s a larger problem. The airline was the target of tie-ups with Frontier and JetBlue Airways bidding against each other in 2022 to combine with the Miramar, FL carrier.

What makes Spirit such an attractive target is the size of its fleet (more than 100), one of the youngest in the world, at a time in which access to operable narrowbody aircraft is limited by Boeing’s 737-MAX program concerns and engine issues with new Airbus A320s.

United, Other Legacy Carriers Could Benefit From Asset Sale

While Spirit could negotiate with creditors and bondholders to avoid a potential bankruptcy filing which can be costly and faces risks in the court process, let’s explore what happens if creditors and the courts do not cooperate.

We haven’t seen an outright bankruptcy from a significant US carrier in a long time, but if Spirit were to shut its doors, United and other legacy carriers would be quick (and smart) to scoop up Spirit’s assets including gates at key airports as well as its A320 fleet. Delta Air Lines has made a habit of buying distressed assets but usually later in their lifecycle and for bargain basement prices but buying newer distressed assets could be the same model but a new approach.

American Airlines has a significant amount of debt and finance issues so it wouldn’t likely make sense for American to add to the pile even if it allowed them to retire older aircraft sooner.

United is a different beast. It has cash and financing levers to pull, it has been significantly disadvantaged by a lack of expected narrowbody deliveries and has even worked with Airbus to jump ahead for access to new A320 family aircraft. If Spirit is sold wholesale, United could do a lot with its current aircraft and work with Airbus to trade out future deliveries.

Southwest is unlikely to acquire an all-Airbus fleet though at the moment it appears all concepts are on the table. The carrier continues to radically shift even its most signature traits in an effort to strengthen the airline and keep activist investors at bay.

Alaska Airlines which just acquired Hawaiian would likely run into regulatory headwinds. While the airline has held A320s from the Virgin American purchase, it phased them out and has since sold them to American.

Does This Reopen Closed Doors?

Frontier and JetBlue battled for Spirit over the last two years, with JetBlue winning a bidding war that was ultimately too rich to pass up  A judge historically sided with the DOJ and squashed that deal  leading to the accelerated decline of Spirit’s outlook and JetBlue’s for that matter

Could Frontier Come Back In?

Spirit is considerably less expensive than it was just two years ago but still has an attractive common fleet, remains the same ULCC mode common to Frontier, and could provide an opportunity to gain staff at reduced rates. It could be a great time for Frontier to revisit an acquisition (this time) rather than merger of equals.

Frontier faces a larger existential threat rolling into lower revenue and higher costs as revenge travel slows and higher labor contracts take hold. Alaska-Hawaiian, an uncontested acquisition shows that the DOJ and DOT aren’t entirely unwilling to allow airlines to combine. Reduced cost and combined operating efficiencies make this more attractive than ever.

But Frontier should be wary of the DOJ and a federal judge who have stated Spirit is so unique it can’t be replaced. Yet another acquisition/merger attempt could be a costly boondoggle when airlines need as much strength as possible. Still, its failed merger with JetBlue could result in the loss of the carrier anyway, perhaps in light of this the DOJ would clear a path for a like-for-like competitor to align with the carrier, save jobs and continue to offer ULCC broadly to consumers.

Conclusion

While Spirit Airlines has not yet filed for bankruptcy, the Wall Street Journal reported on discussions with bondholders and creditors coupled with statements made with an earnings call suggest that the airline is moving toward this. Management is cutting costs and exploring all options, but it seems like other carriers may still be the best option to keep this unique carrier intact. What will the government allow and what will the market do?

What do you think? 

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