Florida-based budget carrier Spirit Airlines has begun preparations to file for Chapter 11 bankruptcy protection after merger talks with Frontier Group Holdings broke down, according to a report published by The Wall Street Journal. The news follows recent reports that the airline’s finances were worsening plus bonds with key shareholders are soon to expire, as reported by AeroTime here.
News of the failed merger talks swiftly spread throughout the investment markets, leading to a colossal 47% decrease in Spirit’s share price on November 11, 2024, as hundreds of millions of US dollars evaporated from the airline’s value, fueling further rumors that the Chapter 11 filing will be made within weeks.
Spirit had been engaged in talks with fellow budget carrier Frontier in 2022 about a possible merger – a move that had been on the cards before Denver-based Frontier was usurped by JetBlue with its own takeover plans. Having revitalized those discussions after the JetBlue tie-up was thwarted by the US Department of Transportation earlier in 2024, it now appears that those talks have ended without agreement, leaving Spirit teetering on the brink of financial collapse.
A spokesperson for Spirit declined to comment on the matter when asked about the situation by Bloomberg journalists. Similarly, a representative for Frontier declined to comment on the state of the talks.
An attempt to sell Spirit via Chapter 11 would likely need the advanced approval of the airline’s creditors to fast-track the bankruptcy process. This would potentially allow the carrier to continue operating and raising cash without requiring a suspension of flight operations.
The airline is already in advanced discussions with bondholders to strike a deal over the looming expiration of bonds (loans made to the airline) said to be worth around $1.1 billion, all of which expire in the next 12 months. Without a successful resolution to these talks, a bankruptcy filing is considered by analysts as “inevitable and unavoidable”. The company is already facing mounting pressure from banks and creditors over a debt said to be worth in the region of $3.3 billion overall.
On November 12, 2024, Spirit announced that it had filed a Form 12b-25 with the US Securities and Exchange Commission. This form disclosed that the airline was unable to file its third quarter 2024 (3Q24) financial results ending September 30, 2024 (Form 10-Q) by the due date “without unreasonable effort or expense”.
The explanation given was that the airline was continuing its talks with bondholders of its “secured notes due 2025 and convertible notes due 2026” with respect to restructuring the obligations owed by the company. Additionally, the airline was still “exploring strategic alternatives and other ways to improve liquidity” for itself. Spirit stated that the negotiations with the supermajority of the bondholders “had remained productive, have advanced materially and are continuing in the near term, but have also diverted significant management time and internal resources from the Company’s processes for reviewing and completing its financial statements and related disclosures.”
In the meantime, Spirit estimates its 3Q24 operating margin and adjusted operating margin will both be approximately 12% lower than the operating margin and adjusted operating margin reported for 3Q24 due to lower total operating revenues and higher total operating expenses. Total operating revenues are estimated to have decreased by approximately $61 million compared to 3Q23. Total operating expenses are estimated to have increased approximately $46 million and adjusted operating expenses are estimated to have increased approximately $52 million compared to 3Q23.
Due to its dire ongoing financial situation, the airline has been reducing the scale of its operations in recent months, due in part to the carrier’s fleet of Airbus A320neo family of aircraft suffering from ongoing maintenance issues surrounding its Pratt & Whitney geared turbofan engines. This has led to a downsizing of the number of flights being operated by 20% in the last quarter of 2024, the disposal of surplus aircraft, and hundreds of its pilot workforce being furloughed.