Spirit Airlines' Desperate Measures to Avoid Bankruptcy

Spirit Airlines, once a thriving budget carrier, now finds itself in dire financial straits, prompting it to take drastic measures to avoid bankruptcy. The airline, which has been grappling with a liquidity crisis since its attempted merger with JetBlue was blocked, is now exploring a potential takeover by Frontier Group Holdings Inc. through a consensual bankruptcy plan.

Spirit's financial woes have been exacerbated by rising operational costs and increased competition, leading to a string of losses. In the third quarter of 2022, the airline reported a net loss of $36.4 million, or $0.33 per diluted share. Excluding special items, adjusted net income for the quarter was $3.6 million, or $0.03 per diluted share. The airline's pre-tax margin was negative 3.6 percent, with adjusted pre-tax margin at negative 0.1 percent.

To address its financial predicament, Spirit has implemented cost-cutting measures totaling $80 million, set to begin early next year. These cuts will primarily involve a reduction in workforce, although the airline has not specified the number of layoffs or affected positions. Additionally, Spirit has agreed to sell 23 aircraft to GA Telesis for approximately $519 million, with proceeds and related debt discharge expected to boost its liquidity by $225 million through the end of 2025.

The sale of these aircraft, which include Airbus A320ceo and A321ceo models manufactured between 2014 and 2019, will significantly impact Spirit's future fleet plans. The reduction in aircraft will affect the airline's operational capacity and potential future growth, as it will have fewer planes to service its routes. However, the sale will also help Spirit reduce its debt burden and improve its financial outlook.

Spirit's creditors have been involved in discussions regarding the airline's plans for restructuring its debt and liabilities in bankruptcy. Early-stage talks have focused on working out terms that holders of Spirit's roughly $2.5 billion of debt will agree to, with the airline seeking feedback from certain creditors on what terms they would approve for a consensual bankruptcy plan. The airline's debt includes about $1 billion in so-called loyalty bonds and $500 million in unsecured convertible bonds due 2026.

The potential merger with Frontier, facilitated through a bankruptcy filing, could provide a much-needed lifeline for Spirit. However, the airline's financial struggles and the need for cost-cutting measures highlight the challenges it faces in avoiding bankruptcy. As Spirit continues to explore its options, the outcome of its negotiations with Frontier and creditors will be crucial in determining the airline's future.