Spirit Airlines announced on Monday that it has initiated bankruptcy protection under Chapter 11 as it attempts to revitalize its operations after facing significant challenges in the wake of the pandemic, increasing competition from larger airlines, and an unsuccessful attempt to merge with JetBlue.
The largest budget airline in the U.S. filed its bankruptcy petition after reaching agreements with its bondholders. Since the onset of 2020, Spirit has incurred losses exceeding $2.5 billion and is confronted with upcoming debt repayments surpassing $1 billion due in 2025 and 2026.
Despite the bankruptcy filing, Spirit Airlines plans to maintain normal operations. The airline reassured customers that they can continue to book flights and redeem frequent-flyer points as usual. Employees and vendors will also continue to receive payments during this period.
As part of its restructuring plan, Spirit has secured a $350 million equity investment from existing bondholders, who will convert $795 million of their debt into equity in the restructured company. Additionally, a $300 million loan from bondholders, along with Spirit’s remaining cash, is expected to support the airline throughout the restructuring process.
The announcement led to a significant drop in Spirit’s stock, which plummeted 25% last Friday following reports of impending bankruptcy discussions. Spirit’s shares have fallen about 97% since late 2018 when the company was still profitable. CEO Ted Christie characterized the agreement with bondholders as a strong endorsement of Spirit’s long-term strategy.
In the first half of this year, Spirit saw a 2% increase in passenger volume compared to the same timeframe last year. However, passengers are paying 10% less, leading to a near 20% drop in revenue per mile from fares, worsening the airline’s financial situation. This financial downturn is attributed to rising costs, particularly labor, as well as stiff competition as larger airlines offer their own low-cost ticket options. Furthermore, a greater supply of leisure flights in the U.S. has contributed to falling fares, impacting Spirit’s core business.
In response to these challenges, Spirit has altered its traditional low-cost model by introducing bundled fare options that encompass perks like larger seats, priority boarding, and complimentary services. Additionally, the airline has waived cancellation fees, following a similar move by competitor Frontier Airlines.
To combat its struggles, Spirit plans to reduce its schedule by nearly 20% for the fourth quarter compared to last year, although analysts believe this may ultimately benefit competitors rather than Spirit itself.
The airline has also been impacted by necessary repairs to Pratt & Whitney engines, leading to the grounding of several Airbus jets and the furlough of pilots. Spirit’s relatively young aircraft fleet has made it a target for potential takeovers, though previous merger attempts have faced legal challenges.
While bankruptcy filings from U.S. airlines were common in previous decades, the landscape has shifted significantly. The last major U.S. airline to emerge from bankruptcy was American Airlines in December 2013, following a merger with US Airways.
Despite current difficulties, there is optimism that Spirit’s restructuring efforts and strategic adjustments will enable it to rebound in the competitive airline industry, retaining its position as a notable player within the budget travel segment.