It’s an incredibly challenging time for ultra low cost carriers in the United States, and in particular, for Spirit Airlines. The Florida-based company has been in Chapter 11 bankruptcy twice within the past year, and the carrier’s prospects seem grim. Several times now, there have been suggestions that the airline is on the verge of liquidation, given the rate at which it has been burning through cash.
So there’s an interesting and rather positive update from the company, and I’m not sure what exactly to make of it.
Spirit shares positive news about Chapter 11 proceedings
Spirit Airlines has announced that it has “completed another significant milestone in its restructuring by reaching an agreement in principle on the key terms of a restructuring support agreement with its existing DIP lenders and secured noteholders.” The company claims that this will provide it with “the financial support needed to finalize its restructuring and complete the remaining changes necessary to optimize the Company’s fleet, network and cost structure.”
The expectation is that the company will emerge from Chapter 11 in late spring or early summer, as a “strong low-cost, value-driven carrier offering Guests basic and premium products at the lowest fares in the sky.” Spirit highlights the following focus for the reimagined airline:
Key aspects of the new Spirit:
- Optimized Network: Spirit will align its network and capacity to routes and periods of strongest consumer demand. This includes higher aircraft utilization during peak days while reducing off-peak flying, as well as the flexibility to adjust to seasonal demand across markets.
- More Premium Choices: Spirit will expand its Spirit First and Premium Economy offerings, maintaining its position as the industry price leader, while focusing on value. The Company will also make additional enhancements to its Free Spirit® and co-brand programs to encourage Guest loyalty.
- Stronger Financials: Upon emergence, the Company will have further reduced its cost structure, expanding its cost advantage compared to legacy and other airlines. It is expected that Spirit’s debt and lease obligations will be reduced from $7.4 billion pre-filing to approximately $2.1 billion post-emergence.
Here’s how Spirit CEO Dave Davis describes this:
“This agreement in principle is the result of months of hard work and allows Spirit to move toward completing its transformation. Spirit will emerge as a strong, leaner competitor that is positioned to profitably deliver the value American consumers expect at a price they want to pay.”
“I am grateful to our Team Members for their dedication and unwavering commitment to our Guests throughout our restructuring. I also want to thank our Guests for continuing to choose Spirit to connect them to the people and places that matter most.”
I’m curious if this is just a lot of optimism, or what
The airline industry is a tough business under the best of circumstances, but the past few years at Spirit have really been unlike anything else we’ve seen. First there was the planned Frontier and Spirit merger. Then JetBlue outbid Frontier to buy Spirit. Then a judge blocked JetBlue’s takeover of Spirit.
Then Spirit went into Chapter 11 bankruptcy for the first time, which was obviously necessary. The issue is that the airline did nothing to address costs and its awful margins, so when it emerged, it had to file for bankruptcy again just months later.
While debt can be addressed with Chapter 11 proceedings, it’s only so useful if you have the industry’s worst operating margins. For the past several months, Spirit has seemingly several times been on the brink of collapse, but always managed to make it to the next funding deadline.
Has something actually meaningfully changed for Spirit now, or is the company just going with the best possible narrative, and hoping things will continue to improve? Because last I heard, Spirit’s yields are still very negative…
Anyway, I certainly hope Spirit can survive, and I’m rooting for the carrier. The whole concept of essentially trying to shrink into profitability is an interesting move for an ultra low cost carrier, given that the cost advantage largely also relies on growth (so that as many employees as possible aren’t at the top of the pay scale).
Bottom line
Spirit Airlines claims that it’s close to emerging from Chapter 11 bankruptcy, with the process being complete in late spring or early summer. Given the massive challenges that the airline has faced, plus the continued negative operating margins, one certainly wonders to what extent this is realistic, rather than just wishful thinking.
What do you make of Spirit’s claims about emerging from Chapter 11 bankruptcy protection?