In a sweeping move to regain financial stability and ensure long-term operational viability, Spirit Airlines (NYSE: SAVE) announced a significant restructuring plan on October 24, encompassing asset sales, job cuts, and substantial cost reductions. The airline, known for its ultra-low-cost model, faces a turbulent financial landscape that has required drastic measures to stay afloat amid rising competition and operational challenges.
The announcement had a significant effect on the stock market, with Spirit’s shares closing up 15.3% at $2.79 on Friday. This response indicates that investors are cautiously optimistic about the airline’s approach to navigating the stormy skies ahead.
A central component of Spirit’s strategy involves selling a portion of its fleet, specifically 23 older Airbus aircraft, to GA Telesis, an aviation maintenance and component services provider. This deal is projected to raise $519 million, with the delivery of these aircraft set to span from October 2024 through February 2025. By offloading older planes, Spirit aims to streamline its fleet while reinforcing liquidity, a crucial move in light of its over $3.3 billion in total debt.
Spirit’s restructuring also includes reducing operational expenses by approximately $80 million, a measure achieved through planned staff reductions and demotions. In August, Spirit announced its intentions to demote around 100 captains and lay off roughly 240 pilots, a decision that underscores the airline’s dedication to curbing costs while preserving its core business.
As part of its financial recalibration, Spirit also imposed a temporary hiring freeze on new pilots and flight attendants, offering current cabin crew the option of voluntary unpaid leave. These strategies reflect Spirit’s goal of minimizing costs without sacrificing immediate operational capacity, although it signals a potential reduction in service availability for customers.
This week, reports emerged that Spirit and Frontier Airlines (NASDAQ: ULCC) may be exploring a potential merger. The two airlines have a history of acquisition discussions, with Frontier offering $2.9 billion to acquire Spirit in 2022. However, JetBlue Airways (NASDAQ: JBLU) outbid Frontier with a $3.8 billion offer, which led to protracted regulatory and legal proceedings.
In January, a federal judge blocked the JetBlue-Spirit merger, siding with the U.S. Department of Justice’s (DOJ) view that the merger would reduce competition in the airline industry. U.S. District Judge William Young acknowledged Spirit’s customer loyalty, noting, “Spirit is a small airline, but there are those who love it. To those dedicated customers of Spirit, this one’s for you.”
Wall Street analyst Stephen Guilfoyle commented on the possibility of a merger with Frontier, drawing an unconventional analogy to Iron Maiden’s song Run to the Hills, signaling his skepticism. “That’s a hard ‘no’ from me,” Guilfoyle wrote, highlighting that all 12 analysts following Spirit’s stock had lowered their earnings estimates as the quarter progressed.
Guilfoyle argued that while Frontier may be a better financial performer compared to Spirit, it still presents a speculative investment. “Frontier is losing a lot less money, ran a slightly positive operating cash flow for the past quarter, and the balance sheet is a lot less awful,” he remarked. The analyst also questioned the financial merits of merging Spirit with either Frontier or JetBlue, advising that “there’s nothing wrong with sitting on one’s hands sometimes.”
Earlier this month, Spirit shares experienced a downturn following reports of the airline discussing a debt restructuring plan with bondholders, possibly leading to a Chapter 11 bankruptcy filing. However, the company managed to secure a temporary reprieve, striking a debt refinancing deal that staved off an imminent bankruptcy threat.
According to an October 18 regulatory filing, Spirit successfully negotiated with creditors Visa (NYSE: V) and Mastercard (NYSE: MA) to delay payments on $1.1 billion of loyalty bond debt until December 23, 2024. The agreement also included a revolving credit extension worth an additional $300 million, raising Spirit’s available liquidity to approximately $1 billion. These negotiations were essential for the airline’s short-term survival and have provided Spirit with a financial cushion while it restructures and reduces expenses.
Spirit anticipates ending 2024 with over $1 billion in liquidity, which includes unrestricted cash, short-term investments, and the benefits from recent debt negotiations. While this temporary infusion offers some breathing room, it remains uncertain whether these measures will be enough to counterbalance the carrier’s ongoing cash flow challenges and heavy debt load.
In tandem with its cost-cutting efforts, Spirit disclosed plans to reduce its operational capacity to adjust to a more sustainable business model. The airline’s third-quarter capacity declined by 1.2% year-over-year, and its fourth-quarter capacity is projected to drop by approximately 20% compared to the previous year. This scale-back reflects Spirit’s broader strategic shift to adapt to current market conditions while avoiding overexpansion.
Spirit’s long-term plans indicate a capacity decrease in the mid-teens for the full year 2025. This planned reduction includes the impact of the recent aircraft sale and a decrease in the availability of A320neo aircraft due to issues with Pratt & Whitney’s geared turbofan engines. The latter has impacted airlines globally, forcing many to ground aircraft reliant on these engines. In Spirit’s case, about 25 of its A320neo planes have been sidelined, significantly affecting the airline’s operational capacity.
Looking ahead, Spirit expects the delivery of six new A321neo aircraft in 2025. By carefully balancing fleet additions and removals, Spirit aims to create a more efficient and reliable operational framework that aligns with its current and future market position.
Spirit’s restructuring and financial challenges come amid a broader context of increased regulatory scrutiny within the airline industry. The blocked JetBlue-Spirit merger highlighted the DOJ’s firm stance against market consolidation that might hinder competition, and the department’s involvement reflects a larger trend toward protecting consumer choice.
Despite the failed JetBlue deal, the Spirit-Frontier merger proposal presents unique considerations. A merger between these two low-cost carriers could create a larger, more competitive entity within the ultra-low-cost carrier (ULCC) segment. However, given recent DOJ opposition to airline mergers, there is no guarantee that regulatory bodies would approve a Spirit-Frontier merger without significant conditions.
On the other hand, Spirit’s decision to retain a portion of its fleet and its focus on regional flight routes demonstrates its commitment to preserving its niche in an increasingly competitive industry. This focus could offer Spirit an edge, appealing to budget-conscious travelers who prioritize affordability over premium services.
As Spirit continues its restructuring journey, it must maintain investor confidence while navigating a myriad of industry and financial challenges. The decision to cut costs through staff reductions, offload older assets, and leverage new liquidity agreements highlights Spirit’s urgent need to strengthen its balance sheet.
For Spirit to remain competitive, it must address operational efficiencies and adapt to shifting consumer preferences in the wake of the pandemic. The airline’s strategy of focusing on regional, high-demand routes may position it well to compete with larger carriers, provided it can stabilize its operations and improve its financial standing.
Friday’s stock surge following the restructuring announcement reflects cautious optimism among investors. Spirit’s decision to enhance its liquidity profile, coupled with the speculative potential of a Frontier merger, suggests a tentative path toward recovery. Yet, financial analysts, including Guilfoyle, remain cautious about the airline’s long-term outlook. With all major analysts having recently downgraded their earnings projections for Spirit, the future remains uncertain.
The road to recovery will not be easy, and Spirit’s ability to navigate these headwinds will be tested in the months ahead. The airline’s upcoming third-quarter earnings report, expected in mid-November, will likely serve as an indicator of Spirit’s progress and whether its cost-cutting measures are translating into financial stability.
