Assessing the Credit Risk of Aviation ABS in Light of Spirit Airlines' Lease Rejection Uncertainty

The aviation asset-backed securities (ABS) market, long a cornerstone of structured finance, is facing renewed scrutiny as Spirit Airlines' Chapter 11 bankruptcy filing in August 2025 raises questions about the resilience of these instruments. With the airline rejecting leases on 27 aircraft and planning to return 87 more-some of which are embedded in KBRA-rated ABS transactions-the sector's ability to absorb shocks is being tested. This analysis examines the interplay between airline restructuring, lease rejections, and the structural safeguards of aviation ABS, drawing on historical precedents and current market dynamics.

Spirit's Restructuring and the ABS Exposure

Spirit Airlines' latest bankruptcy filing, its second in 2025, underscores the fragility of airlines operating in a high-cost, low-margin environment. The airline's agreement with AerCap to reject 27 leases and return 87 aircraft-including two in KBRA-rated ABS transactions-has immediate implications for cash flows. According to KBRA, these transactions collectively hold no more than 11% of any portfolio's value, with individual rejected aircraft representing less than 4% of a single pool. However, the servicer's ability to re-lease or sell these aircraft will determine the duration of cash flow disruptions.

Fitch Ratings, meanwhile, has downplayed the risk, noting that Spirit's ongoing operations and restructuring efforts-such as a $475 million debtor-in-possession (DIP) facility-suggest the airline will continue to meet obligations on affirmed leases. This divergence in risk assessment highlights the importance of structural features in aviation ABS.

Structural Resilience: Credit Enhancements and Historical Precedents

Aviation ABS are engineered to withstand defaults through mechanisms like overcollateralization, subordination, and cash reserves. For instance, KBRA-rated transactions exposed to Spirit have already incorporated stress scenarios, including 60% lessee defaults over a four-year downturn, according to KBRA's commentary. This forward-looking design is critical, as shown in the 2010 JAL study. During Japan Airlines' restructuring, ABS tranches with lower priority absorbed losses, while senior tranches remained largely protected due to the collateral value of aircraft.

Similarly, American Airlines' 2011 Chapter 11 filing, though a larger-scale event, had minimal impact on ABS structures. The airline's ability to continue operations during bankruptcy and restructure leases without full termination preserved cash flows for senior tranches, as discussed in a 2011 New York Times article. These examples underscore how aviation ABS are shielded by the liquidity and residual value of aircraft, even in distress scenarios.

Current Market Dynamics and Outlook

The 2025 aviation ABS market is navigating a complex landscape. While KBRA forecasts strong issuance and favorable performance, Fitch's outlook has been downgraded to "deteriorating" due to macroeconomic risks, including trade tensions and interest rate volatility. Spirit's case, however, is not an isolated incident. The year has seen multiple airline bankruptcies, from Silver Airways to Air Belgium, each testing the limits of ABS resilience.

A key differentiator is the diversification of ABS portfolios. With no single airline's exposure exceeding 11% in Spirit-related transactions, the risk of systemic disruption remains low. Moreover, the $150 million payment from AerCap to Spirit as part of its lease rejection agreement provides a buffer for re-leasing efforts, according to Spirit's announcement. This contrasts with the 2020–2022 period, when a lack of liquidity and prolonged grounding of aircraft led to a near-halt in ABS issuance, as described in a Muzinich analysis.

Conclusion: Balancing Risk and Resilience

The aviation ABS market's ability to weather Spirit's restructuring hinges on its structural safeguards and the broader industry's capacity to adapt. While lease rejections create short-term turbulence, the historical performance of ABS during airline bankruptcies-coupled with robust credit enhancements-suggests a resilient framework. Investors must, however, remain vigilant about concentration risks and macroeconomic headwinds. As Spirit's case unfolds, it will serve as a litmus test for the sector's preparedness in an era of heightened airline fragility.