We know that Spirit Airlines is on the verge of liquidation, as the airline is in Chapter 11 bankruptcy for the second time in two years. Over the past week, we’ve learned that the government is planning on bailing out the airline.
President Trump claims he doesn’t want the jobs to be lost, so he plans to use the Defense Production Act to give the airline a $500 million lifeline, which will likely ultimately result in the government owning a 90% stake in the airline, given the rate at which Spirit is burning through cash.
While I hate the thought of Spirit employees losing their jobs, the airline has been losing money since before the pandemic, and unfortunately I believe it’s time to let the company just die, and focus on healthy competition. It’s one thing if this were just a temporary issue due to high jet fuel prices, but this is a much bigger structural issue than that due to how the industry has evolved.
An odd argument in favor of bailing out Spirit Airlines
Kyle Stewart at Live and Let’s Fly writes a post titled “Why The Government (Morally) Has To Save Spirit Airlines.” I certainly get the impression that Kyle is a MAGA fan, which is fine (you’re free to call me a socialist who wants the government to get involved in everything — oh, wait). 😉
I only mention that because I’m not sure where this argument falls on the spectrum of sincerely held beliefs vs. something that makes a good headline and is an attempt to play devil’s advocate. He argues that he’s “not generally a bailout guy,” and “companies should be allowed to fail.”
But that doesn’t apply to Spirit. Kyle’s argument for having a moral obligation to bail out Spirit comes down to the following main points:
- The Department of Justice under the Biden administration blocked JetBlue’s takeover of Spirit, and therefore it’s largely Biden’s fault that Spirit is in the situation it’s in
- There’s precedent for a bailout that serves taxpayers, because when the auto industry was bailed out, the government invested around $80 billion, and a study found that the bailout saved 1.5 million jobs and preserved $105.3 billion in tax collections
- Amtrak is government subsidized, and is a form of national passenger transportation, so if rail is a public necessity, why would an ultra low cost carrier not be?
- Spirit’s assets are worth something, so that has to be factored into the math as well in terms of saving the airline, because this shouldn’t actually cost taxpayers the full amount
Why I disagree with the concept of “saving” Spirit Airlines
I fully agree with Kyle that the Department of Justice under the Biden administration shouldn’t have blocked JetBlue’s takeover of Spirit. It was the wrong decision, and it failed to take into account that Spirit no longer had a viable business model (admittedly Spirit’s executives and lawyers did a very poor job making that case).
That being said, we also have to be realistic — it’s a blessing for JetBlue that the Spirit takeover was blocked, or else the combined airline would almost certainly be in Chapter 11 bankruptcy right now, if not worse. This was a merger where 1+1=1.5, and not 1+1=3. And when they’re both money losing companies, that’s not pretty.
JetBlue also hasn’t turned a profit since before the pandemic, the airline is approaching $8 billion in debt, and the company isn’t that far off from a bankruptcy filing. It’s not like this would be a healthy company if the airlines had been able to combine, since it was a bad merger idea in the first place.
The issue with Kyle’s argument is that Spirit is burning cash at a very fast pace, and there’s no sign of that stopping. Seemingly the only thing that Spirit can do to slow down cash burn is to keep shrinking, and that costs a lot of jobs as well. Beyond that, here’s why I don’t agree with this argument:
- There’s a huge difference between Amtrak (the only national rail service) and Spirit (one of many airlines in the country, which largely overlaps with other airlines in the market)
- Kyle simultaneously argues the government should save Spirit because ultra low cost carrier competition needs to survive, but then also acknowledges that Spirit will likely be sold off for its assets, so that would do nothing to actually preserve competition
- Kyle argues that “Spirit leases its aircraft but there’s no question the leased assets are in demand,” but that’s not really true; I mean, Spirit has a bunch of planes already parked in the desert that are available to other airlines
I would agree with Kyle’s take if I believed Spirit’s issues were due to something very temporary (like the increase in jet fuel prices… something he doesn’t reference), in which case I could see merit to the support. But just pouring more money into an airline that has been through bankruptcy twice, and which continues to burn money at an alarming rate, serves no one.
If Spirit’s assets were worth anything meaningful, why haven’t other airlines bought them yet, as the opportunity has been there? And if you start selling assets, how does that save jobs?
I can’t ask this often enough — is this about saving jobs and preserving ultra low cost carrier competition, or is this about selling off the airline for its assets, and having another airline acquire it? Because those two points seem at odds with one another.
I’d just love someone to actually lay out how they see this playing out. Given the rate at which Spirit is burning through cash, the airline would burn through $500 million in a matter of months. The government would then be left owning an airline that loses a lot of money… then what?
Bottom line
I hate that Spirit is on the verge of liquidation, and that lots of people could be looking at losing their jobs soon. However, the airline is now in Chapter 11 bankruptcy for the second time in two years, the airline hasn’t turned a profit in seven years, and it also has among the worst margins in the industry.
This isn’t like Amtrak, which is the only rail service in the country. This also isn’t a matter of the government giving a loan that bridges some gap due to extraordinary circumstances. Instead, this would be the government soon owning the airline with the worst margins in the industry, and with very few assets.
For so long, Spirit tickets have been subsidized by shareholders, who lost their shirts with the airline. Let’s not do the same to taxpayers.
What do you think — does the government have a moral obligation to save Spirit?
