Struggling with debt and low revenue, budget airline Spirit Airlines is preparing to file for Chapter 11 bankruptcy protection after merger discussions with Frontier Airlines collapsed.
Spirit hasn’t turned a profit since 2019 and has failed to capitalize on the post-pandemic travel boom. It is expected to post a staggering $295 million loss in the third quarter, sending share prices crashing 60 percent since the beginning of the year.
Photo: Courtesy of San Diego International Airport
Spirit is the only U.S. carrier that hasn’t released its third-quarter results. The airline said negotiations with bondholders have diverted the company’s attention from financial disclosures. However, it did say in a statement on Tuesday that its adjusted operating margin for the quarter is down 12 percent from last year on the back of higher costs and lower revenue.
Revenue is estimated to be $61 million lower than last year, largely because the airline stopped charging cancellations and change fees in May amid a crackdown from the Department of Transportation and the Biden administration on airlines’ “junk fees.”
Failed Merger with JetBlue and Frontier
Spirit has been seeking rescue for at least three years, including from its competitors. In 2022, the airline was mulling a merger with fellow low-cost carrier Frontier. That union was abandoned when JetBlue made a $3.8 billion cash offer to take over Spirit, which was favored by shareholders.
The JetBlue merger, which would have created the country’s fifth-largest airline, was blocked by a judge on anti-trust grounds earlier this year.
Photo: Courtesy of Justin Sullivan/Getty Images
In recent weeks, Spirit and Frontier have again discussed an acquisition. However, those talks broke down, sources close to the negotiations revealed to The Wall Street Journal.
With few other options, Spirit seeks to restructure its debt through a Chapter 11 bankruptcy process.
Potential Restructuring Plans
In filings made late on Tuesday, the Florida-based airline said it is in advanced discussions with bondholders on a bankruptcy plan, which would seek new sources of liquidity for the airline.
During bankruptcy proceedings, a statutory restructuring would be implemented, canceling Spirit’s existing equity and leaving shareholders out of pocket.
Photo: Courtesy of Denver International Airport.
Provided an agreement is reached with lenders, Spirit doesn’t expect the restructuring to impact unsecured creditors, vendors, suppliers, employees, and customers.
However, if Spirit can’t reach an agreement with its creditors, other options will be considered. This could include the airline’s liquidation.
Furloughs and Cuts to Operations
Spirit has already made cuts to stay afloat. It’s furloughed hundreds of pilots and will furlough 330 more from January while downgrading around 120 captains to first officers. It’s also postponed the delivery of new jets from Airbus.
To shore up its balance sheet, the carrier signed a deal to sell 23 of its older Airbus planes to aircraft leasing company GA Telesis for $519 million. It also received an extension on a key deadline to refinance $1.1 billion of debt.
Photo: Courtesy of Denver International Airport.
However, creditors hold around $1 billion in loyalty bonds backed by the airline’s Free Spirit frequent flyer program due in 2025 and around $500 million in convertible bonds due in 2026.
Spirit stock prices crashed a further 60 percent on the news of the potential bankruptcy filing.