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Due to its failure to combine with other airlines, growing losses, unsustainable debt, and rising competition for consumers looking for deals, Spirit Airlines filed for bankruptcy protection on Monday.
As it restructures its debt, the airline stated it would keep running. According to a statement, “Guests can continue to book and fly without interruption and can use all tickets, credits, and loyalty points as normal.”
In the United States, airlines and other businesses often declare bankruptcy and come out stronger on the other side.
In the last 25 years, the majority of the biggest US airlines, including the three biggest, American Airlines, United, and Delta, have declared bankruptcy.
According to Spirit’s statement, the company will be able to emerge early next year with less debt and more financial flexibility as a result of its bankruptcy and negotiations with current creditors.
This will “position Spirit for long-term success and accelerate investments providing guests with enhanced travel experiences and greater value.”
It also said that in order to finance the airline’s operations throughout the bankruptcy process, the creditors had agreed to provide an extra $300 million.
However, it is also feasible that Spirit (SAVE) will be forced to liquidate or be acquired by another airline.
The assets of many airlines, notably American, have been bought out of bankruptcy and combined with another airline.
Nearly 13,000 full-time and part-time employees, as well as 8,000 independent contractors and temporary workers, are employed by Spirit, according to its filing.
The US Treasury Department is listed as its second-largest creditor, and taxpayers are responsible for the remaining $136 million on an unsecured loan.
As part of a government program that gave grants and loans to the country’s airlines to help them stay in operation during the start of the epidemic.
When most air travel came to a near-halt owing to health concerns, the loan was given out in 2020 and 2021.
The majority of the funds were given out as grants, but the country’s airlines also received loans totaling $21.2 billion.
Spirit has made two merger attempts in recent years: one with JetBlue Airways, which beat out Frontier Airlines’ bid, and another with another low-cost airline, Frontier Airlines.
However, a federal court barred the acquisition on antitrust grounds. Spirit is renowned for offering very cheap base fares.
According to statistics from aviation analytics company Cirium, its average domestic round-trip economy cost this year is $136, excluding taxes and fees.
That is 69% less than the average for the four main US airlines, American, United, Delta, and Southwest, and 61% less than the average for the US sector.
The industry-wide increase in fares may result from Spirit’s issues. Major airlines have responded to its low-cost strategy by including basic economy seats on their aircraft.
There won’t be as much incentive to provide cheaper rates if it is forced to limit its schedule or the places it serves, falls out of business, or is acquired by a bigger airline.
Given that Spirit’s bankruptcy filing would increase the likelihood of liquidation as an option, a fresh agreement to purchase the airline and combine it with a bigger carrier could not encounter the same problems this time.
Furthermore, the Justice Department of President-elect Donald Trump, which upholds antitrust rules, may not be as hostile to corporate mergers as the Biden administration has been.
Over the last four years, a number of transactions that may have previously been completed have been contested on antitrust grounds.
Spirit is in “productive” talks with its lenders to restructure its debt, which is due in 2025 and 2026, the Securities and Exchange Commission said last week.
According to its prior disclosures, its financial sheet showed $3.1 billion in long-term debt. Spirit said on Monday that it anticipates being delisted from.
The New York Stock Exchange “in the near term” as a consequence of the bankruptcy case, and that its ordinary stock would likely be canceled and rendered worthless as part of the reorganization.
Spirit’s stock fell 59% on Wednesday after the company said it was in discussions with its creditors and that the conversations were preventing it from finishing its third-quarter financial report by the deadline.
Amid rumors that the bankruptcy filing was impending, Spirit’s shares dropped another 18% during Friday’s trade. They have now lost 93% of their value this year.
Spirit was the first low-cost airline in the US to provide very cheap base rates with additional fees for almost all other choices, including carry-on luggage.
However, Spirit also received a lot of complaints from passengers as a consequence of its cheap fares.
According to JD Power’s most recent customer satisfaction study, Spirit and Frontier were the two airlines with the lowest ratings.
Because of its cheap tickets, there were also worries that a sale to JetBlue would result in increased fares for the whole industry.
As a consequence, the Justice Department filed an antitrust complaint to stop the acquisition. Despite obtaining billions of dollars in government support to continue operations and avoid major layoffs, all US airlines lost billions of dollars during the first two years of the epidemic.
However, the biggest airlines’ profitability increased in 2022 along with the demand for air travel. Smaller airlines, such as Spirit, who provided cheaper tickets to draw in budget-conscious vacationers have been struggling ever since.
In the first half of this year, Spirit had operational losses of $360 million, which is over four times the losses recorded in the first half of 2023.
The airline recently announced the sale of 23 of its Airbus aircraft and postponed future aircraft deliveries as part of a number of cost-cutting and cash-raising initiatives.
Additionally, the corporation put hundreds of its pilots on furlough, and in January, it intends to lay off more employees.