In a sad development that should surprise no one, Spirit Airlines management has raised concerns about the company’s ability to continue operating…
In this post:
“Substantial doubt” about Spirit’s ability to continue operating
Pre-pandemic, Spirit was one of the best margin airlines in the industry. During the pandemic, the industry changed — labor costs went up, and consumer preferences evolved, in favor of premium and long haul travel. Most of the industry profits also come from loyalty programs, which limits the viability of smaller carriers.
Then we saw JetBlue try to acquire Spirit, in order to allow JetBlue to be more of a national competitor. However, that deal was blocked by regulators, who argued it was anti-competitive. We eventually saw Spirit file for Chapter 11 bankruptcy, which was a very quick process.
While Chapter 11 bankruptcy helped Spirit with its immediate debt, it didn’t change the fact that the airline was hemorrhaging money, and had terrible operational losses. As I’ve covered several times before, the airline is burning through cash, and that can only be sustained for so long. The company has now seemingly confirmed that.
Spirit is trying to decrease costs and increase revenue however it can, ranging from introducing more premium seating, to furloughing pilots, to selling aircraft and leasing them back. Now the company has yet another issue.
Spirit is in discussions with representatives of its credit card processor, which has requested additional collateral to renew its credit card processing agreement, expiring on December 31, 2025. The level of collateral required to be posted “could result in a material reduction of unrestricted cash.”
That brings us to the company’s warning — “because of the uncertainty of successfully completing the initiatives to comply with the minimum liquidity covenants and of the outcome of discussions with Company stakeholders, management has concluded there is substantial doubt as to the Company’s ability to continue as a going concern within 12 months from the date these financial statements are issued.”
It’s also worth noting that cash and cash equivalents at the airline have declined to $407.5 million, reflecting how quickly the airline has been burning through money. That’s not surprising, because unfortunately Spirit’s margins have worsened, rather than improved, in recent times.
There’s nothing surprising here… what can we learn?
I have huge respect for the impact Spirit has had on the industry. It’s a great company that often unfairly gets a bad rap. Unfortunately math is math, and the company’s business model just doesn’t work anymore.
Quite honestly, I really don’t understand what Spirit management has been thinking for the past several years (both before and after bankruptcy), as I haven’t actually seen a true “turnaround plan” attempt. The only turnaround I’ve seen basically consisted of eliminating fees and becoming a more inclusive carrier, but that wasn’t a solution either, and only worsened the company’s margins.
Next, if Spirit does unfortunately go out of business, I’m curious what that means for the industry. Presumably it would be good news for Frontier and JetBlue — it would strengthen JetBlue’s position in Fort Lauderdale, and it would give Frontier a bit more power among the ultra low cost carriers.
Lastly, I really think think the whole Spirit situation is something that regulators should learn from. Keep in mind how the Department of Justice sued to block JetBlue’s takeover of Spirit. While JetBlue was way overpaying for the deal, I think there was huge merit to it in general. We need more “national competitors” that can take on the “big four,” and that would’ve accomplished exactly that. But a judge ruled that takeover violated the Clayton Act, and as he concluded:
Spirit is a small airline. But there are those who love it. To those dedicated customers of Spirit, this one’s for you. Why? Because the Clayton Act, a 109-year-old statute requires this result –- a statute that continues to deliver for the American people.
That’s not looking so good anymore, is it? My point is to say that when we talk about consolidation in the airline industry, it needs to be based in reality, and take into account the industry’s challenging economics. The logic can’t be “we demand Spirit continue operating independently at a negative 20% margin!”
Bottom line
Spirit Airlines has warned that its credit card processor is requesting more collateral to renew its contract beyond 2025, given the carrier’s financial situation. The company has stated that “there is substantial doubt” as to its ability to continue operating, as it continues to burn through cash.
This shouldn’t come as a surprise, since we’ve known how much money Spirit has been losing, and the situation has only become worse. I think far too many people dismiss the impossible reality that so many smaller US carriers are finding themselves in. Of course we all want low fares, but airlines can only lose money for so long before the other shoe drops…
What do you make of this Spirit situation?
Hopefully this airline and Frontier go bust and go away. And maybe, although I won't count on it, legacies will then go back and improve the coach product, including seating made for adult humans. That will mean the end of $39 fares, which was a moronic idea to begin with. Can you imagine if your grocery store sold groceries at 1985 price levels and hope to make up the loss on each transaction on higher volume?
Ben, I respectfully disagree that a merger would have helped.
First let's assume your base assumption is true (I think it's debatable but let's assume it's true): people's travel habits have changed to where the ULCC model is no longer viable. Thus whatever airline emerges through merger or bankruptcy must be a new model that better serves customers' new preferences. Also, let's assume that regardless, Spirit will not survive as an independent entity. It...
Ben, I respectfully disagree that a merger would have helped.
First let's assume your base assumption is true (I think it's debatable but let's assume it's true): people's travel habits have changed to where the ULCC model is no longer viable. Thus whatever airline emerges through merger or bankruptcy must be a new model that better serves customers' new preferences. Also, let's assume that regardless, Spirit will not survive as an independent entity. It will disappear or merge.
Your argument is that allowing JetBlue and Spirit to merge would have been a better way of birthing that new airline, than allowing Spirit to go bust and other airlines picking up the pieces through in a bankruptcy proceeding. I disagree.
First, JetBlue is not a healthy airline. I frankly have no idea why they pursued this merger in the first place aside from desperation. There are no synergies like a strong loyalty program, or geographic distribution. Paying out Spirit's shareholders in a merger would have left JetBlue so financially weakened that they likely would go BK if the merger went through. Then we're out 2 airlines instead of 1.
In contrast, if Spirit goes BK the primary loss is to Spirit's shareholders, who are taking that risk by continuing to hold their stock. Whatever assets JetBlue might have acquired in a merger, eg aircraft and routes, they're free to acquire post-bk.
Furthermore, while aircraft will probably simple go to the highest bidder, routes need to be approved by the government. That is, United (for example) can't just walk in and bid up routes to box out competition. Each route slot can and should be evaluated as to which airline it should be awarded to based on promoting competition and not just highest bid. JetBlue may get some of those routes, and other airlines may get others.
The bottomline is that a BK actually gives the government *more* flexibility in structuring Spirit's assets to promote competition, than a simple merger. If JetBlue bids for most of the routes and it makes competitive sense to give them to JetBlue, then the government is free to do so, regardless of if someone else bids higher but would long-term lead to less competition. Or if it makes sense to distribute routes across different airlines, they can do so. This is a far better outcome for the public than a merger. Plus it doesn't burden the winning airlines with massive debt to payout Spirit shareholders. That will ultimately lead to stronger airlines too. The only loser is Spirit shareholders, who don't need any bailout since they've long been aware of Spirit's financials.
There will be a Netflix documentary about this soon. How an airline was the most profitable in the industry to a rapid decline and then bankruptcy. It's funny what an entitled and lazy workforce can do to companies and industries as a whole. Higher wages, higher insurance costs, increased benefits and still you get a below average effort workforce. Spirit would have had a better chance at survival if they had a decent credit caFinancials.
...There will be a Netflix documentary about this soon. How an airline was the most profitable in the industry to a rapid decline and then bankruptcy. It's funny what an entitled and lazy workforce can do to companies and industries as a whole. Higher wages, higher insurance costs, increased benefits and still you get a below average effort workforce. Spirit would have had a better chance at survival if they had a decent credit caFinancials.
Alas, the big 3 live on with AA being the next one that will begin to have very questionable financials. Oh wait.....
Who cares????
Just put them out of their misery already. Take them off life support. Same goes with Avelo.
Remember that there was an alternate merger around that likely had a better shot of being approved - Frontier and Spirit. The Spirit CEO really wanted the Frontier deal, but activist shareholders screwed it up.
If I recall correctly, the judge specifically called out the loss of a low cost carrier as a rationale for blocking the JetBlue deal. JetBlue's argument was kind of convoluted - we need these assets to better compete with...
Remember that there was an alternate merger around that likely had a better shot of being approved - Frontier and Spirit. The Spirit CEO really wanted the Frontier deal, but activist shareholders screwed it up.
If I recall correctly, the judge specifically called out the loss of a low cost carrier as a rationale for blocking the JetBlue deal. JetBlue's argument was kind of convoluted - we need these assets to better compete with the majors, even if we are going to raise prices. Frontier's argument was "bringing lower fares to more people," which is must more straightforward. If Spirit does eventually go bankrupt, one way or the other (liquidation or whole company sale), Frontier will likely end up with most of the assets.
@ Anthony -- While I think JetBlue was going to overpay in the deal, I don't think JetBlue's argument was convoluted. You need scale to be profitable in the US airline industry, since the ability to profit off a loyalty program requires being a larger carrier.
As far as Frontier taking over Spirit assets... to what end? Frontier's lack of profitability isn't because it's not big enough, but instead, because of its lack of pricing...
@ Anthony -- While I think JetBlue was going to overpay in the deal, I don't think JetBlue's argument was convoluted. You need scale to be profitable in the US airline industry, since the ability to profit off a loyalty program requires being a larger carrier.
As far as Frontier taking over Spirit assets... to what end? Frontier's lack of profitability isn't because it's not big enough, but instead, because of its lack of pricing power, due to the "big three" US carriers keeping everyone else down.
Ben, with respect old bean, you appear to be falling into the points and loyalty program pit. Your argument is not holding up to real scrutiny.
Sorry, but you’re absolutely wrong about criticizing the regulators blocking the merger. Mergers NEVER benefit the consumer, and are almost always anti competitive. If spirit can’t operate without being acquired then, so long and good bye. Some companies should be allowed to fail. I feel bad for the employees of course, but a merger would have resulted in the same effect as going out of business; Higher fares and monopolistic pricing. The whole line about...
Sorry, but you’re absolutely wrong about criticizing the regulators blocking the merger. Mergers NEVER benefit the consumer, and are almost always anti competitive. If spirit can’t operate without being acquired then, so long and good bye. Some companies should be allowed to fail. I feel bad for the employees of course, but a merger would have resulted in the same effect as going out of business; Higher fares and monopolistic pricing. The whole line about “being stronger to challenge the big. 4” is BULL. The mergers are designed to jack up pricing and eliminate competition.
I’ll never understand why the Airline industry hates competition more than other industries and longs for monopolistic power. Passengers are already treated like dirt with the few carriers we have. If airlines are going to consolidate into duopoly’s or monopolies- might as well re-regulate the airlines. At least under government control they’re theoretically held to answer by the People via elected representatives, not greedy sleazy stockholders.
@ Brian -- I'm sorry, I strongly disagree with this take. Higher fares and monopolistic pricing? You understand that even the most profitable airlines in the US are essentially losing money actually flying passengers, and make money on everything else? At profitable airlines, loyalty programs are subsidizing our ticket prices. At unprofitable airlines, shareholders are subsidizing our ticket prices.
Fares are *way* lower than they were under regulation, so to suggest that we might as...
@ Brian -- I'm sorry, I strongly disagree with this take. Higher fares and monopolistic pricing? You understand that even the most profitable airlines in the US are essentially losing money actually flying passengers, and make money on everything else? At profitable airlines, loyalty programs are subsidizing our ticket prices. At unprofitable airlines, shareholders are subsidizing our ticket prices.
Fares are *way* lower than they were under regulation, so to suggest that we might as well just go back to that era seems a bit extreme...
Ben, one has to take exception to some of what you post in response to Brian’s view point.
You are one of the biggest critics of the U.S. airlines. In the event that U.S. airlines are loosing money by “Flying passengers”, then surely they should look to their flying customers concerns, train their staff to offer customers a better inflight experience. Furthermore, become more efficient in flight time management and learn from their basic...
Ben, one has to take exception to some of what you post in response to Brian’s view point.
You are one of the biggest critics of the U.S. airlines. In the event that U.S. airlines are loosing money by “Flying passengers”, then surely they should look to their flying customers concerns, train their staff to offer customers a better inflight experience. Furthermore, become more efficient in flight time management and learn from their basic mistakes of relying upon points and loyalty programs for their revenue.
Get the basics right and the rest will follow. Continue on their downwards spiral to the bottom of the World Rankings, without change and follow Spirt out through the door.
Good news for Greyhound.
This unfortunate countdown seems to have been a long time coming. Basic Economy was the starting gun.
BobS says, "This unfortunate countdown seems to have been a long time coming. Basic Economy was the starting gun."
Agreed. Basic economy, no change fees and far better management of the big three legacy airlines along with higher post-Covid costs have dramatically changed the playing field.
Today is known as “The Glorious Twelfth” in “God’s County”.
The Glorious Twelfth, that is the twelfth day of August, is the start of the Red Grouse shooting season.
God’s County, that is County of Yorkshire, with the real York at its centre.
Ok! I hear you ask, so, what has the Glorious Twelfth got to do with aviation and this website? The Glorious Twelfth has absolutely nothing to do with aviation, however, it...
Today is known as “The Glorious Twelfth” in “God’s County”.
The Glorious Twelfth, that is the twelfth day of August, is the start of the Red Grouse shooting season.
God’s County, that is County of Yorkshire, with the real York at its centre.
Ok! I hear you ask, so, what has the Glorious Twelfth got to do with aviation and this website? The Glorious Twelfth has absolutely nothing to do with aviation, however, it does have as much to do with this website as 90% of all the other irrelevant posts to be found herein.
Ben, your website is now being used by a few fake trolls who are making a mockery out of you, your business enterprise and this website. Your security measures are weaker than the Iranian rial, the weakest currency in the world. There is nothing to stop the John Doe’s of this planet from posting under any login name they choose. Impersonating any other legitimate person causing a nuisance to many Profanities are tolerated without a murmur, as is antisemitism, racism, bullying and homophobia too.
Ben, many people looked to this website for inspiration, help and advice on a variety of aviation topics. Not anymore however, many of the long term followers have deserted you. Driven away by the mindless morons who are allowed to post herein unchecked.
Those same numpties will now be free to castigate me for standing in front of them holding this mirror of truth. You are unlikely to take the necessary remedial action necessary to prevent the patients from taking over this lunatic asylum. Your future and that of your family is at risk if only you could grasp that fact Ben.
As soon as the Jet Blue deal was blocked, a sale of Spirit assets (in whole or piecemeal) was inevitable.