Keeping Spirit Airlines cheap for flyers threatens to kill it altogether

The judge says he did it out of love. 

In Tuesday’s antitrust ruling scuttling JetBlue Airways Corp.’s $3.8 billion acquisition of Spirit Airlines Inc., US District Judge William G. Young made an impassioned case a merger would eliminate a deep fare discounter, driving up ticket prices and hurting consumers. “Spirit is a small airline. But there are those who love it. To those dedicated customers of Spirit, this one’s for you,” he wrote. 

But if the struggling Spirit plunges into disrepair — as the company’s 24% stock decline Wednesday on top of a 47% plunge Tuesday suggests — there may not be a functioning carrier in the not-so-distant-future to offer those rock-bottom prices. Analysts are already raising the possibility of a Spirit bankruptcy filing and reorganization or even a liquidation. 

“We see ongoing cash burn over the next several years at Spirit, and a company that needs to continue to raise capital to survive,” Conor Cunningham, a Melius Research analyst, said in a report. A potential liquidation of the carrier and a permanent reduction of discounted seats in the market “seems like the opposite outcome Judge Young wanted.” 

Spirit and other discount airlines in the US have already had to lower fares to fill seats. They’ve also struggled with escalating labor and operating costs. At the same time, a problem with engines made by RTX Corp.’s Pratt & Whitney means an average of 26 planes out of Spirit’s fleet of about 200 will be grounded each month through this year, hampering the growth that normally fuels low-fare carriers. Spirit didn’t immediately respond to a request for comment.

In the short term, Helane Becker, a TD Cowen analyst, said Spirit could cut prices even further as it seeks to drum up cash.  

“We may see some shocking prices,” she said in a note. But Becker warns that airlines “have a way of going through cash speedily” and that consumers often redeem loyalty points when they’re concerned about an airline’s viability. 

“The best case scenario for Spirit is a Chapter 11 filing followed by a liquidation,” she said.

Market Reaction

Spirit shares, which are around their lowest price in the company’s history, have more than halved since the federal antitrust trial kicked off at the end of October. Meanwhile, prices on the company’s bonds — which were already dropping on concerns over its engine issue — were in utter collapse after Tuesday’s merger decision.

The judge’s ruling blocking the deal sent the notes to fresh lows of 51 cents on the dollar, according to pricing source Trace. For investors who fret over a bond moving by one cent on the dollar, the Spirit collapse signaled a company sinking deeper into financial distress. The bonds have lost almost half their value in the last three months, showing how investors have lost confidence in full repayment.

Still, that doesn’t mean a bankruptcy is imminent. Spirit has $1.1 billion of liquidity and could raise another $300 million via an asset-backed security sale through monetizing its airport slots, gates and routes, according to StoneX’s high-yield desk.

Spirit could benefit as competitors trim US growth plans and increase pricing. But the airline will have to continue to aggressively reduce operating costs and negotiate a compensation plan with Pratt & Whitney over the engine issue, said Savanthi Syth, a Raymond James analyst.

“There are enough variables that can drive improvement,” Syth said. “But Spirit has the least room for error of any airline in the US.”