Spirit Airlines Files for Bankruptcy Protection

By Rajesh Kumar Singh

CHICAGO (Reuters) – Spirit Airlines (NYSE:SAVE) was once expected to thrive in the travel industry post-pandemic. However, the no-frills airline struggled to adapt to a changing landscape.

On Monday, the Florida-based carrier filed for bankruptcy protection. Speculation surrounding Spirit's future emerged after a federal judge blocked its $3.8-billion merger with JetBlue Airways (NASDAQ:JBLU) in January. Analysts suggest that Spirit's Chapter 11 filing has been in the works for some time.

Before the pandemic, Spirit outperformed competitors by attracting price-sensitive travelers and forcing larger airlines to create similar budget offerings. Their business model, which featured an integrated fleet and optimized resource usage, yielded impressive operating margins for nine consecutive years until 2020.

However, the global health crisis altered travel patterns and Spirit faced challenges adapting. This year, Spirit's average daily aircraft utilization has dropped 16% compared to 2019, applying pressure on costs.

In the past two years, consumer demand has shifted towards full-service airlines, as higher-income households travel extensively and inflation impacts lower-income spenders. While Spirit aimed for growth and expanded its capacity by an average of 27% over three years, it accrued over $2 billion in debt from 2020 to 2023.

Analysts advised Spirit and other low-cost airlines to reconsider their expansion strategies. Compounded by rising labor rates and issues with RTX's Pratt & Whitney geared turbofan engines, Spirit saw 82% of its revenue consumed by non-fuel operating costs in the first half of this year—up about 22 percentage points from 2019. The company expressed that inflation has affected low-fare carriers' margins disproportionately.

In contrast, full-service airlines like Delta and United capitalized on heightened demand for premium cabins and international flights to mitigate inflation. United reported a nearly 10% increase in bookings to Europe, with figures nearly 30% higher than in 2019.

In June, Spirit announced plans to enter the high-end travel market, aiming to increase passenger revenue by 13% through rebranding as a higher-value carrier. However, aviation bankruptcy expert Hooman Yazhari warned that Spirit lacks the resources to compete effectively.

A slow recovery of business travelers further strained demand, resulting in oversupply of seats in destinations like Florida and Las Vegas. Consequently, average ticket prices dropped, with Spirit reporting a 19% decrease in average fare per passenger in the first half of the year. Other budget airlines, including JetBlue and Frontier Airlines, are also facing challenges.

Frontier's CEO compared the competition in Florida to major retailers opening in close proximity. The financial repercussions are evident, as Delta shares rose 87% over the past two years, while shares for Frontier and JetBlue fell by 23% and 58%, respectively. Spirit shares lost nearly all their value prior to the Chapter 11 filing.

Georgetown University professor Sandeep Dahiya noted that Spirit's debt became unmanageable since it hasn't posted a full-year profit since 2019, indicating that the situation was dire for the airline.

“The writing was pretty much on the wall,” Dahiya stated.