How Massive Debt, Stiff Competition Dashed Spirit Airlines

Authored by Austin ALonzo via The Epoch Times (emphasis ours),

Spirit Airlines’ financial failure could mean fewer options and higher ticket prices for Americans flying on a tight budget.

On Nov. 18, the Dania Beach, Florida-based ultra-low-cost carrier famous for its cheap base fares, announced it was seeking Chapter 11 bankruptcy protection.

Spirit is currently attempting a reorganization in bankruptcy court so it can pay back its creditors and return to business. Ahead of its Chapter 11 filing, the company had already announced a new vision designed to make the airline more like America’s other low-cost carriers.

Spirit Airlines spokeswoman Nicole Aguiar told The Epoch Times via email that the airline will continue to operate as usual during its restructuring process.

Still, others in the industry—notably United Airlines Holdings Inc. CEO J. Scott Kirby—say the reorganization process is merely a milestone on the road to Chapter 7 liquidation.

“I think the current business plan is not going to work,” Kirby told reporters in early December. “Chapter 11 will be a brief pit stop on the way to Chapter 7.”

Whether the company can keep flying is yet to be determined, but it seems inevitable that Spirit’s ultra-low-cost version will fade into memory. If Spirit disappears completely or abandons its ultra-low-cost business model, its pricing pressure, which forces competing carriers to lower their prices, may disappear forever.

A Perfect Storm

Ryan Ewing, a longtime industry observer and the editor of airline trade publication AirlineGeeks, told The Epoch Times that Spirit found itself in a tempest created by competition from other airlines, a rapidly increasing cost of doing business, a massive shift in airline demand that began during the COVID-19 pandemic of 2020, and finally, a failed acquisition by JetBlue Airways Corp.

Ewing said that Spirit, founded in 1992, was profitable for much of its existence, despite consumer criticism of its business practices. In May, consumer insights firm J.D. Power ranked Spirit as the second-worst economy or basic economy airline in terms of consumer satisfaction. Only its ultra-low-cost rival Frontier Airlines fared worse.

Joseph Smith, director of aviation services at Miami-based investment banking firm Cassel Salpeter & Co., told The Epoch Times the company was able to make money because it attracted a younger clientele, vacationers looking to travel on a budget, and served routes other airlines may avoid due to a lack of profitability.

It was successful in its niche.

Everything changed in 2020 when pandemic panic ground both international and domestic flights to a halt or kept planes nearly empty for months. While demand recovered by 2024, financially, Spirit never has.

Shortly after Spirit announced it was beginning the process of reorganizing its business to pay back its creditors, the company released a third-quarter earnings report with the Securities and Exchange Commission. That report, published on Nov. 25, said the company’s collective liabilities were almost twice as great as its assets.

It said Spirit’s assets on Sept. 30 totaled about $1.21 billion. Meanwhile, its liabilities were $2.54 billion. Those liabilities included more than $1.25 billion in “long-term debt, net, and finance leases.”

The report was released without an earnings call as the company has been delisted from the New York Stock Exchange as part of the bankruptcy process.

Spirit’s third-quarter report also disclosed that the company recorded a quarterly net loss of $308.2 million and had lost $643.8 million through the first nine months of 2024. In the same nine-month period the year before, the company had lost $263.8 million.

The report revealed the company had seen its total operating revenue fall to about $3.67 billion in the first nine months of 2024 from about $3.97 billion in the same period of the prior year.

These were not new problems for Spirit, however. It has not turned an annual profit since 2019. Its annual report from 2023 said the company recorded a net loss of $447.4 million in 2023, $554.1 million in 2022, and $472.5 million in 2021. The 2021 annual report said the company recorded a net loss of $428.7 million in 2020. The 2020 yearly statement indicated it was profitable from 2016 to 2019.

From an operational standpoint, Ewing said Spirit was saddled with elevated labor, fuel, and airplane maintenance costs driven by inflation, new labor agreements with union employees, and unreliable jet engines. The pain was exacerbated by growing, costly service interruptions caused by cancellations and delays related to air traffic controller shortages near its base of operations in Southern Florida.

“That business model that Spirit pioneered requires that the structural costs remain lower,” Ewing said.

James Gellert, the founder and executive chairman of financial analytics firm RapidRatings International Inc., told The Epoch Times that Spirit also became a victim of its own success. The company was so good at undercutting so-called legacy carriers that it inspired companies such as Chicago-based United Airlines Inc. to expand their basic economy offerings.

Additionally, as a publicly traded company always seeking quarter-to-quarter profits and growth, Spirit started entering into markets where it could not profitably operate, Gellert said.

Both Gellert and Smith said Spirit was dealt a significant blow when an attempted $3.8 billion acquisition by JetBlue fell through in January.

The deal called for the Long Island City, New York-based airline to acquire Spirit but was blocked by a federal judge’s decision that was made on antitrust grounds. Originally, Spirit was looking to merge with Frontier, but JetBlue made an unsolicited offer to purchase Spirit during the courtship.

In his decision, U.S. District Judge William Young said JetBlue’s acquisition would have taken away a critical, ultra-low-cost option for American consumers. In effect, Young’s decision likely sealed Spirit’s fate.

Turnaround or Shut Down?

In its second-quarter earnings release published on Aug. 1, Spirit president and CEO Ted Christie acknowledged the company’s struggle to generate income. The company said Spirit was launching a turnaround plan focused on “low-fare travel with new, high-value travel options that will allow guests to choose an elevated experience at an affordable price.”

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