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…
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?
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