Wild week for Spirit shares ends with rally on antitrust appeal

The worst week on record for shares in Spirit Airlines Inc. took a turn late Friday, when the cut-rate carrier and its would-be merger partner, JetBlue Airways Corp., appealed a regulatory decision to block a tie-up of the airlines.

Spirit shares jumped as much as 17% in late trading Friday after news of the court filing landed, adding to a 17% advance in the cash session. Overall, the stock plunged 55% in the holiday-shortened week, the worst showing in its 13-year trading history. Skepticism was mounting over Spirit’s ability to survive as a stand-alone company after a federal judge ruled JetBlue’s $3.8 billion takeover would harm cost-conscious travelers who rely on Spirit’s cheap fares.

While not unexpected, the appeal adds another variable to an increasingly complicated calculus for investors trying to assess the value of Spirit and JetBlue. Immediately after the antitrust ruling, sell-side analysts turned more bearish on Spirit’s shares than they’ve ever been, worried mostly about its debt burden and other balance-sheet woes. Short sellers also lined up to bet against the stock, with the percentage of shares borrowed to make bearish bets jumping to 20% of the total outstanding, according to S3 Partners LLC.

Now, judging the stock’s next move has become fraught, though analysts remain skeptical the deal can pass regulatory muster.

“JetBlue’s appeal of a Department of Justice decision to block its purchase of Spirit might not be successful, since it requires a ‘clear error’ in the judge’s interpretation of the evidence,” according to Bloomberg Intelligence antitrust analyst Jennifer Rie.

There are reasons to have doubts. Just this week, Citi Research, Susquehanna Financial Group and Bank of America Global Research instituted sell-equivalent ratings on the stock. Seaport Research Partners analyst Daniel McKenzie downgraded Spirit to neutral and withdrew his price target.

“Investors are understandably worried that SAVE will run out of cash,” McKenzie said in a note on Friday. “SAVE is one macro event away from a liquidity crisis but on our base outlook, limps along and is viable.”

Late Friday, Spirit and JetBlue filed a one-sentence appeal that didn’t specify reasons for the move. Spirit had previously said the deal was still in effect as it explores ways to shore up its liquidity. The company declined to comment for this story.

Earlier, some positive operating news following this week’s rout sparked a rebound in official trading Friday, likely fueled at least in part by investors forced to close newly deployed bearish positions. Spirit’s descent was a boon for short sellers, which reaped paper profits of roughly $181 million this week alone through Thursday’s close, according to data from S3 Partners. 

The stock ended at $6.68 in official trading Friday, below the $31 payout investors would get if the deal closes.

The court decision has added turbulence to Spirit’s dire financial situation. New labor contracts for pilots will boost pay by an average of 34% over two years, adding to costs. Competition has grown stiffer as legacy airlines have expanded promotions on domestic routes, and industry supply is outweighing leisure demand within the US market, forcing budget-friendly airlines to slash already-low fares to drum up traffic.

Travelers who are still taking vacations have to deal with the inconvenience of engine removals tied to Pratt & Whitney’s manufacturing defects — which are expected to ground Spirit aircraft throughout the year — in addition to Airbus SE delivery backlogs and ATC staffing shortages that have caused severe delays and network disruptions.

As for JetBlue, analysts say a legal defeat is actually a positive outcome, given the high cost of the deal and Spirit’s disappointing financial performance since the proposal was first announced. The company is banking on the combination to give it sufficient scope to compete with the nation’s largest airlines for market share. JetBlue shares ended the week up about 2%.

“JetBlue can now focus on more promising opportunities like further developing its premium offering or expanding its international profile,” said Xavier Smith, director of E&I Research at AlphaSense. “Given industry conditions, these actions will bolster JetBlue’s return on capital more than the Spirit acquisition.”

Spirit plans to conduct a conference call to discuss fourth quarter results and its forward outlook on Feb. 8, though earnings season for the industry kicks off in earnest next week. United Airlines Holdings Inc. reports fourth-quarter earnings on Monday, followed by Southwest Airlines Co., Alaska Air Group Inc. and American Airlines Group Inc. on Jan. 25.