Written by Rajesh Kumar Singh
CHICAGO (Reuters) – Spirit Airlines faces tough choices about its future, including finding another buyer and finding other ways to shore up its finances, industry experts said, after a federal judge on Tuesday blocked a $3.8 billion merger with JetBlue Airways. .
The ultra-low-cost carrier has been struggling to return to sustainable profitability amid rising operating costs and ongoing supply chain problems. This raised concerns about the company’s ability to pay its debts due next year.
The airline this month completed a series of sale and leaseback transactions covering dozens of aircraft in an effort to pay off about $465 million in debt on those planes.
But with no earnings recovery in sight, some analysts said the company may consider filing for bankruptcy to clean up its balance sheet and reorganize itself into a financially stronger airline.
Spirit is likely to look for another buyer, but the most likely scenario is a Chapter 11 filing, followed by liquidation, said Helen Baker, an airline analyst at TD Cowen. The recent capital raise gave the company money to self-finance to potentially file for Chapter 11, she said.
“We realize this sounds alarming and cruel,” Baker said. “But the reality is that we believe there are limited scenarios that enable Spirit to restructure.”
The airline is expected to burn cash over the next few years and will have to continue raising capital to survive, said Conor Cunningham, an analyst at Melius Research.
“The way forward for Spirit turns to survivability,” Cunningham said.
When asked for comment, a Spirit spokesperson referred to the company’s recent capital increase but did not elaborate. The company had no further immediate comment.
The airline was among those hardest hit by the problem with RTX’s Pratt & Whitney Geared Turbofan (GTF) engines. It is the largest operator of GTF-powered aircraft in the United States.
As a result, it was forced to ground a number of aircraft last year. The number of grounded aircraft is expected to rise steadily in 2024, from 13 in January to 41 in December.
At the same time, excess industrial capacity in its key markets is hurting its pricing power, forcing the company to indulge in promotional activity with heavy discounting to fill its aircraft.
After its third-quarter earnings last October, Spirit, based in Florida, said it was evaluating its growth profile as it faced lower demand.
Analysts at Seaport Research Partners downgraded the company’s shares after the court ruling, citing “no reliable path to profitability.”
Spirit’s problems led to a widespread sell-off of its shares, raising concerns about the impact on JetBlue’s balance sheet after the merger. With Spirit shares losing nearly half their value since JetBlue won the takeover battle, some analysts wondered whether that would prompt JetBlue to renegotiate the terms of the deal.
Spirit shares fell 47% on Tuesday after the court ruling, while JetBlue shares rose about 5%.
Another option is to find a way to allay the Justice Department’s competition concerns that arose from the JetBlue deal. The judge presiding over the case had at one point questioned whether additional asset divestitures would allow the deal to go through. But a US Justice Department lawyer said the only remedy was “a comprehensive injunction that would restore competition.”
Analysts also raised the possibility that rival Frontier Airlines, which lost out in a fierce bidding war, could bid again.
Bill Frank, whose airline-focused private equity firm Indigo Partners owns 82% of Frontier, did not rule out making a new bid for Spirit if the deal with JetBlue fails to close. Frontier declined to comment.
“The soul has to discover its third plan,” said Henry Harteveldt, founder of travel consultancy Atmosphere Research Group. “Plan A was to merge with Frontier, and Plan B became a merger with JetBlue.”
(Reporting by Rajesh Kumar Singh in Chicago; Editing by Chris Sanders and Matthew Lewis)