Spirit Airlines’ broken finances sow narrow path to survival

Spirit Airlines Inc.’s bonds got a boost on Friday after the company told investors it was looking to refinance upcoming debt maturities. But their deeply distressed prices suggest it faces an uphill battle to avoid becoming the latest in a long line of US air carriers to go bust.

The company’s 8% notes due 2025 jumped nearly 12 cents on the dollar to 63.25 cents, but still yield almost 40%, signaling bondholders’ skepticism about Spirit’s future. They have good reason to be cautious: with about $2.5 billion in debt and flagging revenue, the budget airline already enjoys no advantages in a market tightening the reins on risky borrowers.

A bright spot — and potential lifeline — for Spirit is its fleet, which is one of the youngest among US carriers when there’s a premium on good planes. Airlines have had luck raising money using their fleet and even spare parts, which Spirit began doing in December in a series of sale-leaseback deals on its planes. 

After a federal antitrust ruling Tuesday scuttled JetBlue Airways Corp.’s proposed $3.8 billion acquisition of Spirit Airlines, stakeholders are rushing to determine the latter’s path forward. Its remaining financing options may require a heavy dose of creativity. Both airlines appealed the ruling Friday in a last-ditch effort to save the deal. 

Representatives for Spirit didn’t provide a comment Friday on the company’s financial prospects. In statements Thursday, the company said it was “not pursuing nor involved in a statutory restructuring,” and that it “has been taking, and will continue to take, prudent steps to ensure the strength” of its finances and ongoing operations.

High-Yield Deal 

Debt markets have been relatively accommodating in recent weeks, with borrowers looking to tweak some of the terms of their loans and even issuers rated at the lower end of the junk spectrum addressing their maturities. Spirit, however, is contending with challenges stemming from its slim margins combined with payments on leases and debt. 

The company has bled cash in three of the past five quarters, according to data compiled by Bloomberg. That doesn’t bode well for its refinancing prospects on notes due in September 2025. 

It’s set to receive $70 million via a “breakup fee” if the merger fails to go through and could also see as much as $500 million from engine maker RTX Corp. to compensate it for problems that have grounded some of its fleet, according to George Ferguson, a Bloomberg Intelligence analyst. These are short-term payments and don’t solve the issue of cash burn. 

Valuable Assets 

Companies like Spirit, which rely on expensive machinery in order to operate, have a history of using their fleet as collateral to borrow fresh cash.

The airline could ask current bondholders to swap their notes for longer-dated maturities backed by new or better equipment, in what’s often deemed a distressed exchange. 

Spirit had a fleet of 202 Airbus SE A320-family aircraft, as of Sept. 30. Delivery delays from aircraft manufacturers, the temporary grounding of Boeing Co.’s Max 9, parts shortages and lengthy or delayed engine repairs have resulted in a shortage of planes across the industry.  

Spirit’s operating fleet has an average age of 6.4 years, making it second youngest in a group of 13 US carriers, just behind rival deep discounter Frontier Group Holdings Inc., according to data from Cirium. 

Yet with a business that is fundamentally challenged, even valuable equipment has limits to its appeal.

“Whoever provides financing, number one, has to be convinced that Spirit is viable as an independent-going enterprise, and I’m not sure it is,” said Blake Haxton, a credit analyst at Brandywine Global Investment Management.

Even though Spirit has its fleet, most of the equipment is already pledged as collateral on existing debt. What remains isn’t enough to support the amount of cash it needs to raise, according to Bloomberg Intelligence’s Ferguson.

“That is going to make it extremely challenging.” he said. “They have to manage 2024 very carefully,” and “minimize cash burn.”

Private Credit 

Spirit could alternatively lean on the $1.6 trillion private credit market, which often provides financing in distressed situations.

Doing so could also prod existing creditors to cooperate before potential funds from new investors subordinate their holdings and further crush recovery hopes in the event of a bankruptcy or liquidation.

“The bondholders have a huge incentive to get in there and help Spirit through the situation,” Ferguson said.

Sale for Parts

While ending up in the halls of bankruptcy court doesn’t always mean the demise of an enterprise, Spirit’s options are limited when it comes to using Chapter 11 protection to shed burdensome liabilities and reemerge as a more functional business. 

The industry’s aircraft shortage may mean lessors or banks could decline to negotiate lower rates if the planes would be worth more in the open market, Conor Cunningham, a Melius Research analyst, said in a note. There’s likely not much room to seek employee concessions either, he said, with pilot rates 14% below those at Delta Air Lines Inc. 

Spirit also may face “a mass exodus altogether” among employees, he added.