Spirit Airlines announced on Monday that it has entered bankruptcy protection and will work toward revitalizing the airline after facing significant challenges, including the sharp decline in travel during the pandemic and a failed attempt to merge with JetBlue.

As the largest budget airline in the U.S., Spirit has incurred losses exceeding $2.5 billion since 2020, with over $1 billion in debt payments due within the next year.

The airline assured customers that its operations would continue as usual while it navigates through the Chapter 11 bankruptcy process. Passengers can still make bookings and fly without disruptions.

Shares in Spirit, headquartered in Miramar, Florida, plunged by 25% on Friday after The Wall Street Journal reported that the airline was in talks with its bondholders regarding potential bankruptcy proceedings.

This latest setback is part of a series of challenges that have caused Spirit’s stock to plummet by 97% since late 2018, a period when the airline was still profitable.

In August, CEO Ted Christie acknowledged that Spirit had been in discussions with bondholder advisers about upcoming debt obligations. He emphasized the importance of these talks, aiming to secure the best possible deal swiftly.

“The chatter in the market about Spirit is notable, but we are not distracted,” he told investors during a conference call.

“We are focused on refinancing our debt, improving our overall liquidity position, deploying our new reimagined product into the market, and growing our loyalty programs.”

Despite these financial struggles, Spirit continues to see passengers flying, though at a significantly lower rate of income.

Over the first half of the year, Spirit saw a 2% increase in passenger traffic compared to the same period last year. However, fare prices have dropped by 10%, leading to a nearly 20% decrease in revenue per mile, contributing to the airline’s financial losses.

This decline is not a new development. Spirit has yet to achieve profitability even as the pandemic’s effects lessened and travel began to rebound. Several factors contribute to this downturn.

Spirit’s operating costs, particularly for labor, have risen. Larger U.S. airlines have captured some of Spirit’s budget-conscious clientele by offering their own stripped-down fare options. Additionally, the U.S. leisure travel market, which forms the core of Spirit’s business, has seen a decline due to an oversupply of new flight options.

While the premium segment of air travel has seen substantial growth, Spirit’s no-frills model has failed to keep pace.

In response, Spirit introduced new bundled fares this summer, offering more perks like larger seats, priority boarding, free baggage, internet access, and snacks—moving away from its long-standing strategy of attracting customers with ultra-low base fares and charging additional fees for basic amenities.

In a rare move, Spirit announced it would reduce its flight schedule by nearly 20% from October to December, compared to the same period last year. While analysts suggest this may help boost fares, it is likely to benefit competitors more than Spirit itself.

According to analysts at Deutsche Bank and Raymond James, airlines such as Frontier, JetBlue, and Southwest are poised to gain the most from Spirit’s schedule cuts, as they compete on many of the same routes.

Spirit has also faced issues with the required maintenance of Pratt & Whitney engines, forcing the airline to ground many of its Airbus jets.

This recall has contributed to the furloughing of pilots as the airline works to address the situation.

Spirit’s relatively young fleet has made it an attractive target for acquisition.

In 2022, Frontier attempted to merge with Spirit but was outbid by JetBlue.

However, the U.S. Justice Department intervened, suing to block the $3.8 billion merger on the grounds that it would drive up fares for Spirit’s budget-conscious customers. In January, a federal judge ruled in favor of blocking the merger.

JetBlue and Spirit subsequently abandoned their merger plans two months later.

Bankruptcies were common among U.S. airlines during the 1990s and 2000s, as the industry struggled with intense competition, soaring labor costs, and volatile fuel prices.

Major airlines like PanAm, TWA, Northwest, Continental, United, and Delta all faced bankruptcy during this period.

Some of these airlines were liquidated, while others took advantage of bankruptcy laws to restructure their debts, such as renegotiating aircraft leases, in order to continue operations.

The last major U.S. airline bankruptcy was in 2013, when American Airlines emerged from Chapter 11 protection and simultaneously merged with US Airways.

{Matzav.com}