The biggest aviation story of the week is that a judge blocked JetBlue’s takeover of Spirit, which has major implications for both airlines. Spirit hasn’t made money in a few years, and the company’s stock has crashed. Many (rather baselessly, I’d argue) suggested that Spirit might file for bankruptcy in the near future, as the airline has $1.1 billion in debt that becomes payable in September 2025.
Well, the airline has issued an update to investors today, and it’s almost entirely good news. While Spirit is far from profitable, the company also seems to be nowhere close to going out of business…
In this post:
Spirit Airlines provides update to investors
For the past several months, Spirit hasn’t been providing many updates to investors about the carrier’s independent performance, as the focus was on getting the merger done. With that now unlikely, Spirit has provided an update to investors, and I’d say it’s more or less the best case scenario:
- Total revenue for the fourth quarter of 2023 is expected to be at the high end of the company’s initial guidance, as bookings for the peak travel period over Christmas and New Years were very strong; furthermore, operating expenses have come in better than expected, thanks to lower fuel costs, lower airport costs, and other items
- The adjusted operating margin guidance for the fourth quarter 2023 is positively revised 450 basis points, from negative 15% to 19%, to negative 12% to 13%
- The company expects 1-2% capacity growth in the first quarter of 2024, compared to the previous year
- As of December 31, 2023, Spirit had $1.3 billion in liquidity, including unrestricted cash and cash equivalents, short-term investment securities, and $300 million of liquidity under the company’s revolving credit facility
- In recent months, the company has engaged in sale-leaseback transactions that have resulted in net cash proceeds to the company of approximately $419 million
- Spirit and Pratt & Whitney continue to negotiate compensation for the financial damages related to the engine issues on A320neo family aircraft, and while no agreement has been reached, the company believes the compensation will be a significant source of liquidity over the next couple of years
- The merger agreement between Spirit and JetBlue continues to remain in full force, so the airline is potentially looking at up to $470 million in total compensation in the event that a merger appeal isn’t successful (though some of that has already been paid)
This is all positive news for Spirit Airlines
Spirit of course still has a profitability issue, and has a lot of work to do. However, I think this update is just about the best case scenario. For the past couple of days, the narrative for many has been “well, Spirit is toast, who is gonna get Spirit’s planes and gates and staff when the airline liquidates?” That was obviously way premature.
Spirit is in a better than expected position in terms of cash, and is looking at many hundreds of millions of dollars in settlements between JetBlue and Pratt & Whitney. The fact that the airline is seeing better than expected results in terms of passenger demand is great news as well.
It sure seems to me like the airline has time to figure things out:
- If the JetBlue appeal isn’t successful, Spirit still seems like an attractive acquisition target for Frontier, to create a mega ultra low cost carrier in the United States (and that was the planned merger in the first place, before JetBlue outbid Frontier)
- Consumer demand and the economy are constantly evolving, and there’s no reason the tides couldn’t turn back in the favor of strong domestic travel, and demand for travel on ultra low cost carriers
- There’s no reason that Spirit couldn’t tweak its business model to try something new, and have better luck; the airline has valuable gate space at some airports
I think sometimes we collectively fall into the trap of trying to view the industry in a vacuum, without zooming out and looking at the big picture. Airlines like Spirit were profitable before the pandemic. Ultra low cost carriers are certainly in a rut at the moment, but I don’t believe that we’ve necessarily seen a permanent shift in terms of demand away from wanting lower cost airfare options.
The United States is a country full of people who love to travel. Every day, millions of people travel by air in the United States, and most of those people are traveling domestically. I think there are a variety of circumstances that have put ultra low cost carriers in a tough spot, but I don’t believe that the entire business model is permanently doomed. It would be foolish to think that.
Bottom line
Earlier this week, a judge ruled that JetBlue shouldn’t be allowed to acquire Spirit, which obviously has major implications for both carriers. For the past year, both airlines have been so focused on a merger, that it almost seems like they haven’t been focused on their own operations.
News of this merger being blocked had especially bad implications for Spirit. The company has now provided an update about its financial position, and it’s better than expected. The airline has a better operating margin than planned (though it’s still not in a great situation), and it has the cash to stay in business for quite some time.
I don’t know what the future holds for Spirit, but the details don’t sound to me like a company that’s on the verge of filing for bankruptcy…
What do you make of this update from Spirit Airlines?
I'm hoping the appeal is successful. We need a nationwide premium low-cost option to compete with the big 4
There is no big payout from B6, that money goes to the shareholders, not NK, and is already 80% paid up
If any readers do believe these positive spin by the airline they should buy shares right now when the price is cheap and go bet against the market.
From statements:
negative 15% to 19%, to negative 12% to 13%
$1.3 billion in liquidity
sale-leaseback transactions
Pratt & Whitney + JetBlue compensation
The only thing I see from reading this is rather than going bankrupt in x months, we now have ourselves...
If any readers do believe these positive spin by the airline they should buy shares right now when the price is cheap and go bet against the market.
From statements:
negative 15% to 19%, to negative 12% to 13%
$1.3 billion in liquidity
sale-leaseback transactions
Pratt & Whitney + JetBlue compensation
The only thing I see from reading this is rather than going bankrupt in x months, we now have ourselves a few extra months to burn more money.
Their management have done nothing to convinced me that something has changed for better.
*Not a financial advice.
That margin means they're burning perhaps $150 million a quarter. With over a billion in liquidity that's more than "months".
True, however $150 x 6 months = $900 million and they need to keep some % of liquidity as well. Unless they are having positive cash flow (and eventual positive earnings),the future still looks bleak for them.
I don't really see why anybody would believe Spirit is in a bad place at the moment. The failure of the JetBlue merger will mean a big payout, giving Spirit time to weather the current storms. At the end of the day, the public likes low fares. The major US airlines are more expensive and don't offer much more than Spirit when you compare head to head routes, so it seems hard to imagine Spirit is not well placed to be competitive again.
IDK. Any passenger can go up to any American Airlines gate agent and check their bag for free. They won't get charged for a boarding pass or even using an agent to check in. If they're traveling with a family at least some of the family will be seated together. They might have a chance at a MCE seat/exit row for free. If there is a flight interruption the ability to get reaccommodated is much...
IDK. Any passenger can go up to any American Airlines gate agent and check their bag for free. They won't get charged for a boarding pass or even using an agent to check in. If they're traveling with a family at least some of the family will be seated together. They might have a chance at a MCE seat/exit row for free. If there is a flight interruption the ability to get reaccommodated is much easier. Significantly important if a person needs to be somewhere or a weather/ATC issue (source of most delays/cancellations) in which the airline doesn't cover lodging and meals.
Yes. Everything you stated is pretty much true. Then go fly American.
Again. That payout goes directly to the shareholders of spirit stock. It does not go to Spirit Airlines
The sale lease backs and likely break up fee from JetBlue certainly improves their near term prospects. But long term will this business model survive? Face it, Spirit makes it money on ancillary fees that are designed to more than make up for the losses incurring on actual flying. So question, once consumers (as dense as they now seem to be) understand the fee structure and how to avoid fees what happens? Spirit might disclose...
The sale lease backs and likely break up fee from JetBlue certainly improves their near term prospects. But long term will this business model survive? Face it, Spirit makes it money on ancillary fees that are designed to more than make up for the losses incurring on actual flying. So question, once consumers (as dense as they now seem to be) understand the fee structure and how to avoid fees what happens? Spirit might disclose all their fees on their website but the business model is built upon most consumers not understanding the fee structure and forced to pay unexpected fees.
@ George Romey -- I'm not sure I'd agree that the business model is exclusively based on essentially "fooling" consumers into not realizing what they're paying. Spirit has a real cost advantage in terms of labor costs, how the airline configures planes (and cost per seat mile), etc. For consumers looking for basic transportation between two points, the airline does the trick.
Now, I could see the airline evolving. Maybe it's time the ULCC model...
@ George Romey -- I'm not sure I'd agree that the business model is exclusively based on essentially "fooling" consumers into not realizing what they're paying. Spirit has a real cost advantage in terms of labor costs, how the airline configures planes (and cost per seat mile), etc. For consumers looking for basic transportation between two points, the airline does the trick.
Now, I could see the airline evolving. Maybe it's time the ULCC model change, and that a ticket on Spirit includes the same things you get on legacies, but just with marginally lower fares. If the airline can serve the right markets, there's no reason that model wouldn't work.
Right now long haul international travel and premium travel are hot, and that's why the legacies are doing so well, along with their loyalty revenue (which is really the biggest competitive disadvantage ULCCs have).
There are several factors that could cause both premium demand and international demand to decrease, and then I'd argue that the legacies would be in a much worse position than the ULCCs.
Anyway, we'll see how this evolves. I still think a Spirit and Frontier merger, if approved, makes a lot of sense. A national ULCC could be a lot more competitive, and there are synergies to be had.
Lucky -- Spirit "evolving" as an airline is all very well, but to what extent is their brand permanently associated with "hidden" fees, tight seating, and so-called unexpected charges for bags, seats, check-in etc.? Even those I know in the US who have no real interest in airlines are aware of Spirit's ultra low cost nature, just as laymen in EU are all aware of Ryanair's service ethos. I'm not convinced that an evolution of...
Lucky -- Spirit "evolving" as an airline is all very well, but to what extent is their brand permanently associated with "hidden" fees, tight seating, and so-called unexpected charges for bags, seats, check-in etc.? Even those I know in the US who have no real interest in airlines are aware of Spirit's ultra low cost nature, just as laymen in EU are all aware of Ryanair's service ethos. I'm not convinced that an evolution of business model would be possible under the current branding and Spirit name.
I don't see a merger between Spirit and Frontier being allowed. Wasn't the governments argument that a ULCC would be eliminated and prices would go up. If 2 ULCCs get combined then there is only one and again, prices will go up.
Agreed
Like you mentioned. The fees are on the website. If you can read, you should be able to understand that. Cheaper to take care of all fees on the website versus at the airport.