Spirit says its prearranged Chapter 11 bankruptcy proceeding will position the airline for long-term success. But analysts say that despite having reached a debt-restructuring agreement with bondholders, Spirit will need to quickly stem its losses to survive.
"I think they have quarters, to be honest, not years," Bloomberg Intelligence aviation industry analyst Francois Duflot said.
Francois Duflot
Under the restructuring agreement announced on Nov. 18, existing bondholders will convert $795 million of debt into Spirit equity, while also committing to a new equity investment of $350 million. In addition, bondholders will provide a $300 million loan to bolster Spirit's cash position.
If approved by the court, the arrangement saves Spirit from being on the hook for $1.6 billion in debt that was to come due by September 2026. Instead, $840 million in debt would be due in 2030.
The arrangement will wipe out equity for Spirit shareholders.
During the bankruptcy, the carrier's operations are continuing normally. Flight credits and loyalty points can also continue to be used normally.
"We expect to complete this process in the first quarter of 2025 and emerge even better positioned to deliver the best value in the sky," Spirit said. "Other airlines that are operating successfully today have undertaken a similar process."
The Chapter 11 filing is the first by a large mainline U.S. carrier since American in 2011.
Once among the U.S. industry leaders in financial performance, Spirit has been deeply hurt by the evolution of consumer preferences toward premium seats in the aftermath of the pandemic. Since 2020, the ultralow-cost carrier has reported nearly $2 billion in operating losses. A company estimate put Spirit's operating margin during the third quarter at a dismal negative-27%.
Spirit's exit plan from its financial woes was a $3.8 billion merger agreement with JetBlue. But in January, antitrust regulators at the Department of Justice prevailed in their suit to block the merger as anticompetitive. Since then, the airline has scrambled to increase liquidity, lower costs and improve revenue.
In August, Spirit introduced a package of new fare bundles and priority check-in lanes in an effort to grow appeal among higher-spending flyers. The airline also slashed flying by 20% in Q4 and instituted pilot furloughs. Last month, Spirit reached an agreement to sell 23 Airbus planes for $519 million.
As it announced the Chapter 11 filing, Spirit put forward a plan geared toward building on those measures as it emerges from bankruptcy. Customer-service proposals include the implementation of snack service for all customers, free WiFi for Free Spirit loyalty program members and a premium economy product with stretched seats.
Rebranding, cost-saving measures and changes to its route network are also outlined in the plan.
Still, a turnaround will be difficult, said Scott Keyes, founder of the subscription service Going, which helps travelers find bargain flights. Especially challenging for Spirit, Keyes said, will be appealing to higher-end flyers. Spirit has long been the butt of late-night talk show jokes for its no-frills service model, he said, but until the pandemic, Spirit was laughing all the way to the bank.
"You never get a second chance at a first impression, and Spirit's first impression has been so cemented for many years that it will be difficult to turn it," Keyes said.
He predicted that the most likely long-term outcome for Spirit remains an acquisition by Frontier or even JetBlue, though liquidation or a successful turnaround are also possibilities.
Meanwhile, even with the debt restructuring deal, time isn't on Spirit's side. The company expects to end 2024 with $840 million in liquidity, meaning that it will need to stop burning cash in a hurry once it exits Chapter 11.
George Ferguson, another Bloomberg Intelligence aviation industry analyst, said that airlines typically need liquidity equivalent to 20% of their 12-month revenues in order to operate. In 2023, Spirit, brought in $5.4 billion.
"If they don't find some way to make some cash next summer, I think that's a very bad sign," Ferguson said.
And the various changes Spirit is implementing, especially its effort to be more appealing to premium travelers, are likely to take time to materialize Duflot said.
One thing that provides the airline with a bit of breathing room are cash payments expected from engine manufacturer Pratt & Whitney, Duflot and Ferguson said. The payments, compensation for the Airbus A320neo planes that Spirit continues to ground while they are inspected for potential metal contamination, could amount to as much as $400 million next year, they said.