Spirit Aviation's Liquidity Crisis and Lease Challenges: A High-Risk Bet for Contrarian Investors?

Spirit Airlines’ second Chapter 11 filing in less than a year underscores a liquidity crisis that has spiraled beyond even the most pessimistic projections. Emerging from bankruptcy in March 2025 with a $795 million debt-to-equity swap and $350 million in new capital, the airline initially appeared to stabilize its finances. Yet, by Q2 2025, it reported a staggering $246 million net loss, with liquidity reserves plummeting to $407.5 million—a 53% drop from Q1 2025 [2]. This collapse has forced the airline to confront a $600 million free cash flow deficit for the year and a debt burden of $2.689 billion, including $1.1 billion in repayments due in 2025 alone [4].

The airline’s lease obligations, a critical but underappreciated component of its financial strain, further complicate its path to recovery. As of 2025, Spirit operates 146 aircraft under operating leases with terms expiring between 2026 and 2043. These leases account for $7.66 billion of its $14.729 billion in total future contractual obligations [3]. Despite its recent restructuring, the airline failed to renegotiate these leases during its first Chapter 11 filing, a missed opportunity that has left it saddled with high leasing costs and an aging fleet of Airbus A320s [1]. This oversight has exacerbated its operational inefficiencies, with adjusted cost per available seat mile (CASM) ex-fuel rising to 8.77 cents in Q2 2025—well above the industry average of 7.36 cents [2].

The airline’s survival strategy hinges on aggressive cost-cutting and asset sales. It has sold 23 Airbus aircraft and 14 spare engines for $449 million and $250 million, respectively, while reducing Q3 2025 flight capacity by 27.7% to align with profitable demand [2]. However, these measures come at a cost: furloughing 270 pilots and grounding aircraft due to Pratt & Whitney engine issues have eroded operational flexibility and customer trust [4]. Meanwhile, its revolving credit facility—a $275 million lifeline—has been fully drawn, and its credit card processor is demanding additional collateral to renew its agreement [5].

For contrarian investors, the question is whether these steps can catalyze a sustainable turnaround. The airline’s restructuring aims to generate “hundreds of millions of dollars in annual operating savings” by rightsizing its fleet and redesigning its network [1]. Yet, the feasibility of this plan is clouded by external headwinds. Fuel prices remain elevated at $87 per barrel, and the adoption of Sustainable Aviation Fuel—priced 4.2 times higher than conventional jet fuel—threatens to further strain its low-cost model [2]. Additionally, Spirit’s pivot to tiered fare classes (Spirit First, Premium Economy, and Value) may not offset the reputational damage from its cost-cutting measures [2].

The valuation risks for investors are stark. Spirit’s credit rating has been downgraded to CCC- by Fitch and Caa3 by Moody’s, reflecting its weak liquidity and high debt burden [5]. Its parent company, Spirit Aviation Holdings, has issued a “substantial doubt” warning about its ability to continue as a going concern within 12 months [3]. While the airline’s Chapter 11 filing in August 2025 provides a legal framework to renegotiate leases and reduce debt, the absence of a clear path to profitability—particularly in a market dominated by more efficient rivals—makes this a high-stakes gamble.

In the end, Spirit’s story is one of desperation and incrementalism. Its restructuring efforts, while necessary, lack the transformative vision required to compete in a post-pandemic aviation landscape. For contrarian investors, the allure of a potential rebound is undeniable, but the risks of a second bankruptcy filing—and the associated losses—remain formidable. As the airline navigates its latest crisis, the question is not whether it can survive, but whether it can thrive in an industry that has already moved on.

Source:
[1] Spirit Airlines Takes Action to Build a Stronger Foundation and Future for America's Leading Value Airline [https://ir.spirit.com/news/news-details/2025/Spirit-Airlines-Takes-Action-to-Build-a-Stronger-Foundation-and-Future-for-Americas-Leading-Value-Airline/default.aspx]
[2] Assessing the Viability of Spirit Airlines Post-Chapter 11 Restructuring: A High-Risk, High-Reward Bet [https://www.ainvest.com/news/assessing-viability-spirit-airlines-post-chapter-11-restructuring-high-risk-high-reward-bet-2508/]
[3] Spirit Airlines' Liquidity Crisis and Strategic Pathways for Survival [https://www.ainvest.com/news/spirit-airlines-liquidity-crisis-strategic-pathways-survival-navigating-restructuring-stressed-airline-sector-2508/]
[4] Spirit Airlines Faces Imminent Second Bankruptcy Less Than a Year After Exit [https://www.visaverge.com/news/spirit-airlines-faces-imminent-second-bankruptcy-less-than-year-after-exit/]
[5] Spirit Airlines Fate Shaky After Avoiding Hard Decisions in Bankruptcy [https://www.cnbc.com/2025/08/21/spirit-airlines-lessors-bankruptcy.html]