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A federal court decision blocking a proposed sale to JetBlue Airways could force Spirit Airlines into bankruptcy and out of business, according to a memo from aviation analysts.
In many airline bankruptcies, the airline that is sued in bankruptcy court either forgives its debts and is reborn as a more financially sound company, or is ultimately acquired by another airline and integrated into its management. However, the more likely scenario for Spirit is liquidation of its assets. From a memo from Cowen analyst Helaine Becker.
“We know this sounds alarming and bleak, but the reality is that we believe there are only a limited number of scenarios that would allow us to rebuild Spirit,” he said in a note to clients Wednesday. said. “We believe Spirit will first seek an alternative buyer, but other airlines may experience similar pushback.” [from antitrust regulators.]”
Spirit was a pioneer in the U.S. market by offering ultra-low base fares, but charged extra for nearly every other option, including carry-on bags. That fare has prompted major airlines to offer a certain number of no-frills “basic economy” seats on their planes. It also raised concerns that JetBlue’s acquisition would lead to higher fares across the industry, prompting a Justice Department antitrust lawsuit to block the deal.
But if Becker is right, Spirit could still disappear. And if that happens, it could lead to criticism of the Biden administration’s actions to block the deal and statements from Attorney General Merrick Garland and Transportation Secretary Pete Buttigieg praising the decision.
“After decades of airline consolidation, this ruling demonstrates the importance of putting competition first,” Buttigieg said. Posted in X Wednesday. “In order to help consumers make better choices and lower airfare prices, the current administration is suppressing competition.”
All US airlines Bleeding billions Despite receiving billions of dollars in federal aid during the first two years of the pandemic to keep planes flying and prevent widespread layoffs. But as air travel demand recovered in 2022, so did demand. Profitability of major carriers.
But smaller airlines like Spirit, which offer low fares to attract bargain-seeking leisure travelers, continue to struggle. The company, which lost $1 billion in 2020 and 2021, lost $264 million in the first nine months of 2023. It said it had another $175 million in losses in the final three months of 2023 and is expected to lose another $310 million this year. Responses to analysts surveyed by Refinitiv.
Spirit has $1.1 billion in debt due in September 2025. Fitch said in a note Wednesday that it will face challenges refinancing this debt.
“Spirit faces significant refinancing risks next year,” Fitch’s note said. Fitch has already warned Spirit of a downgrade from its current B junk bond rating. “Meanwhile, the company faces serious headwinds to improving profitability, including engine availability issues, overcapacity in certain leisure markets, and intense competition.” ”
While not all analysts see bankruptcy or liquidation in Spirit’s future, many warn that the company’s financial outlook remains bleak.
“We are not predicting the immediate future (yet). [Spirit] JPMorgan Chase aviation analysts said they were “referring to the bankruptcy law used in Chapter 11 filings,” referring to the bankruptcy law used in such filings. However, it added: “We cannot reasonably determine the likelihood of a return to profitability in the near term.”
Spirit did not comment directly on Becker’s analysis, but said it was confident it could weather the current challenges.
“We are disappointed in this, but [court decision] We are confident in our strengths and strategy,” said a company statement sent to CNN. “We remain committed to providing affordable rates and excellent service to our customers, and great opportunities for our team members.Spirit is committed to our balance sheet and continued business strength. We have taken, and will continue to take, careful steps to ensure the same.”
Bankruptcy proceedings are designed to allow loss-making companies to forgive debts and other expenses they cannot pay and continue operating. Many companies, including most of the country’s major airlines, went bankrupt but continued to record profits in the future.
But Becker said it was unlikely Spirit would be able to renegotiate its contracts, especially with aircraft leasing companies that own many of the Airbus single-aisle planes. Demand for these jets is now so strong that the leasing companies that own the jets tend to simply take them back from airlines that can’t pay, rather than negotiate lower prices with airlines.
“The demand for narrowbody aircraft is very high, especially considering the following circumstances: Ongoing issues at Boeing And the lender would be more likely to take back the aircraft than renegotiate the lease,” she wrote. “In fact, JetBlue could possibly lease Spirit’s aircraft from lessors while the company undergoes restructuring.”
Spirit’s stock price fell 47% in Tuesday trading following the court ruling, fell another 22% in Wednesday trading following Becker’s memo, and fell more than 20% in Thursday trading. In total, he’s lost more than two-thirds of his value so far this week.
In a ruling released Tuesday, federal Judge William Young ruled that allowing JetBlue to acquire Spirit violate antitrust laws Reduce fare pressure that Spirit’s business model has placed on the U.S. airline industry.
“The court made its best attempt to predict the future of a dynamic market recovering from the COVID-19 pandemic during a time of great uncertainty,” he wrote. “The proposed acquisition would eliminate Spirit as a competitor to all other airlines in the market, thereby reducing competitive pressure on all other airlines.”
JetBlue and Spirit released a joint statement following the decision, saying they were considering whether to appeal the decision.
JetBlue and Spirit say, “Our partnership strengthens our ability to compete with the leading U.S. carriers while offering lower fares and superior service to more customers in more markets.” “We continue to believe that this is our best opportunity to increase much-needed competition and choice.” A joint statement was sent to CNN via email. “We are reviewing the court’s decision and are considering next steps as part of the legal process.”
