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November 4, 2024
Spirit Airlines

Spirit Airlines

Care to share?

Beleaguered Spirit Airlines is contemplating a pre-planned Chapter 11 bankruptcy filing to restructure its $3.3 billion in debt.  The company faces an October 21st deadline under covenants with its credit card processor, and will need to restructure to maintain credit card processing, the lifeblood of airline revenues.

Spirit has not made a profit in the last five years and was crippled by the pandemic, and later problems with the Pratt & Whitney GTF engines that power it Airbus narrow-body fleet,  The company currently has more than 20 aircraft on the ground waiting for engine maintenance or stored, and has been hit hard by the Pratt & Whitney GTF problems.  The carrier deferred many of its Airbus orders.

A proposed merger with JetBlue did not pass regulatory muster as harmful to competition, placing Spirit in a totally different situation than it expected to be in.  Now they are in deep turn-around territory without control of their own destiny.

What this means for the industry?

There is currently overcapacity at the low end of the market in which Southwest, Spirit, JetBlue and Frontier compete.  While a Spirit bankruptcy filing would not change the situation, a 20% reduction in flying planned by Spirit only begins to address the overcapacity issue. Spirit operates about 5% of industry capacity, which will reduce to 4% after its restructuring.  That will not, of itself, solve the overcapacity issue. The problem is that no carrier wants to be the first with cutbacks, including Southwest, JetBlue, Frontier and  JetBlue.  As a result, the overcapacity in the LCC segment will remain.

With several carriers currently losing money, each of the low-fare carriers have modified their business model, including Spirit.  Spirit was once an “al-a-carte” airline that allowed customers to change amenities and pay for them individually.  It recently introduced bundled products that put several of the amenities together in branded packages to increase revenues.  Frontier made similar moves, and Southwest will soon introduce assigned seating as the LCCs struggle to find business models that effectively compete with the legacy carriers.

Most of the legacy carriers offer “basic economy” service at prices similar to LCCs, and can open fewer or more seats to adjust to economic conditions.  With a consumer preference advantage, LCCs find their volumes increase as the major carriers sell out of their lower fare buckets.  But during an industry recession, those buckets can be expanded to match market realities, effectively shutting out the LCCs.  As a result, Frontier and Southwest, each losing money, could be next to fall.

The new reality is that the once burgeoning LCC business model is now obsolete, and LCCs are trying to reform their product offerings to better compete with the legacy carriers, but are falling short in that process.

The Bottom Line

Spirit will likely shrink by 20%, cancelling routes and letting go of leases for A320neo aircraft that are problematic and waiting for maintenance.  The reduced schedule, eliminating the least profitable routes, should help their weak financial situation to a degree.  

Of course, in the bankruptcy process, shareholders will be wiped out.  Already shares of Spirit have fallen precipitously in today’s trading after articles emerged about the pre-planned bankruptcy possibility.

As we first reported several months ago, Spirit’s survival is now in real doubt.  The question is who will miss a carrier with a spotty reputation for service that has been the long-standing joke with late night television hosts.  Without a merger to better compete, Spirit as a stand along doesn’t have the power to determine its own fate.

author avatar
Ernest Arvai
President AirInsight Group LLC

1 thought on “Spirit Airlines coming Chapter 11 – What it Means

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