Several weeks ago, there were reports that Spirit Airlines was considering a bankruptcy filing. There was temporarily some hope, as the airline reportedly revived merger talks with Frontier Airlines. However, those talks were called off last week.
There’s now a major update, as the airline has just announced that it intends to file for Chapter 11 bankruptcy protection.
Spirit Airlines plans Chapter 11 restruturing
Spirit Airlines has announced that it’s filing for Chapter 11 bankruptcy protection, following its failed merger attempt with JetBlue, plus merger talks with Frontier not going anywhere.
The airline is entering into a restructuring support agreement (RSA) supported by a supermajority of the company’s bondholders. The restructuring is expected to reduce Spirit’s debt, provide increased financial flexibility, position Spirit for long-term success, and accelerate investments to provide guests with “enhanced travel experiences and greater value.”
Spirit has received backstopped commitments for a $350 million equity investment from existing bondholders, and will complete a deleveraging transition to equitize $795 million of funded debt. Bondholders are also providing $300 million in debtor-in-possession financing, which is expected to support the company throughout the process.
Spirit expects to continue operating its business in the normal course throughout this process. Passengers can continue to book and fly with the airline, and use all tickets, credits, and loyalty points, as normal. Employees will continue to be paid as usual, and vendors, aircraft lessors, and holders of secured aircraft indebtedness, will also continue to be paid in the ordinary course.
Here’s how Spirit CEO Ted Christie describes this development:
“I am pleased we have reached an agreement with a supermajority of both our loyalty and convertible bondholders on a comprehensive recapitalization of the Company, which is a strong vote of confidence in Spirit and our long-term plan. This set of transactions will materially strengthen our balance sheet and position Spirit for the future while we continue executing on our strategic initiatives to transform our Guest experience, providing new enhanced travel options, greater value and increased flexibility. I’m extremely proud of the Spirit team’s hard work and dedication, which is key to our sustained progress in advancing our business and delivering for our Guests.”
As you can see, the carrier’s plan is to continue operating, though it remains to be seen what exactly that will look like. It’s hard to run a profitable airline, and as much as competition is good, one wonders how the small players are supposed to be profitable without consolidation. Even if Spirit has less debt, how exactly is the carrier supposed to return to profitability?
You can’t help but feel bad for Spirit Airlines…
This entire situation is just unfortunate. As a reminder, in mid-2022, plans were announced for JetBlue to acquire Spirit, in a $3.8 billion deal. The idea was that this would make JetBlue a stronger competitor to the “big four” US carriers, and personally, I think it would’ve been good for consumers, assuming the combined airline could find a viable path forward.
The Department of Justice (DOJ) ended up suing to block the merger, and after a lengthy court battle, a judge ruled in favor of the DOJ. The problem was, Spirit’s business model was no longer working, due to how demand has evolved in the United States post-pandemic.
The airlines that are actually profitable are making most of their profits from their loyalty programs, from premium demand, and from long haul demand, and that’s not something an ultra low cost carrier can tap into in the same way. Even the profitable airlines are complaining of overcapacity in the domestic market, though I think the logic there is questionable.
Some ultra low cost carriers have now completely evolved their business models, as we’ve seen Spirit introduce fare classes in line with the legacy airlines, while even scrapping change fees.
I continue to believe the merger being blocked was a huge failure on the DOJ’s part, at least in terms of looking out for the best interest of consumers. Now Spirit has changed its initial business model anyway, and the carrier’s future is in limbo.
Bottom line
Spirit Airlines is starting its Chapter 11 bankruptcy filing, as the company has come to a restructuring agreement with bondholders. Spirit has struggled to make money post-pandemic, due to how trends have shifted, plus management obviously losing focus on the core business for the 18-month period where the merger was moving forward.
It’s really unfortunate that this is the situation that the carrier is in. And it’s even wilder to think that Spirit being acquired by another airline was blocked by the government, in order to preserve ultra low cost competition.
What do you make of Spirit’s financial situation?
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