(Bloomberg) -- Spirit Airlines Inc. joined a lengthy list of US carriers to succumb to financial pressure when it filed for bankruptcy protection Nov. 18. In doing so just before the busiest travel stretch of the year in the US, the company generated anxiety among ticket holders about whether they’d make it to their destinations for the Thanksgiving holiday.
Under Spirit’s so-called Chapter 11 bankruptcy filing, the airline isn’t shutting down but rather reorganizing in an effort to keep the business alive. Spirit told customers that flight operations would continue as normal at the 84 airports it serves and that they could use all tickets, credits and loyalty points as if nothing happened.
What is Spirit’s plan?
The carrier filed what’s known as a prearranged bankruptcy, meaning it reached an agreement with a majority of its creditors to restructure its $1.6 billion in debt. Existing bondholders will get stock and new debt in the carrier. Stockholders will get nothing, which happens in nearly all big, corporate bankruptcies, including airline cases. Spirit didn’t respond to a request for comment.
How did Spirit end up in bankruptcy?
Some of Spirit’s issues are particular to its class of carrier — those focused on low-fare domestic service. Thanks to billions of dollars in government aid, larger rivals emerged from the pandemic in better shape than they had in previous downturns, during which domestic-focused, low-fare carriers historically had gained market share. The major carriers then hired thousands of pilots away from airlines such as Spirit to fill holes created when a record number of aviators took early retirement or walked away from the industry. Spirit’s staffing issues were compounded when a round of post-pandemic labor contracts boosted pilot pay at the carrier by 34% over two years.
Discounters such as Spirit are under added pressure because the industry’s largest carriers now sell basic economy fares designed specifically to lure away price-conscious travelers while also offering more flights and destinations.
Some of Spirit’s difficulties are industry-wide. Airlines bulked up on flying capacity when travel soared in 2022 and 2023, but they overshot demand in the US market and were forced to slash fares to fill planes. The situation blocked carriers from raking in higher profits during record demand this past summer.
Finally, Spirit is among the airlines that have been forced to ground planes because of a manufacturing flaw in engines made by RTX Corp.’s Pratt & Whitney. The repairs will take longer than normal because of supply chain bottlenecks and parts shortages. On Aug. 1, Spirit said 60 of its aircraft would be grounded in 2025 for work that would take more than 400 days for each repair. The carrier has 213 aircraft, with 182 in service, according to data from Cirium. It has reached an agreement with Pratt on some compensation, with talks ongoing.
Wasn’t Spirit supposed to merge with another airline?
In February 2022, Spirit agreed to be acquired by rival Frontier Group Holdings Inc. for $2.9 billion in cash and stock, a deal that would have created a massive US fare discounter. But JetBlue Airways Corp. made a counteroffer in April, triggering a testy battle for shareholder support that stretched until July, when Spirit ended the Frontier deal and agreed to a $3.8 billion JetBlue purchase. In January 2024, a federal judge blocked the acquisition on the grounds that it would stifle competition and raise fares. Like Spirit, JetBlue and Frontier are unprofitable.
What’s the future of Spirit Airlines?
The US industry has a long history of bankruptcies that allow airlines to reset their debt and emerge without stopping operations. The nation’s largest — American Airlines Group Inc., Delta Air Lines Inc., United Airlines Holdings Inc. — all have been through Chapter 11 bankruptcies, along with Continental Airlines, US Airways, Trans World Airlines and Frontier. Some carriers have been acquired during bankruptcies and some, mostly smaller ones, have failed.
The benefit of Spirit’s prearranged filling, which largely avoids creditors fighting in bankruptcy court over who gets paid what, is that the carrier could emerge from Chapter 11 during the first quarter of 2025. Its reorganization plan must still be approved by a bankrupty court judge, and there’s likely to be some opposition from shareholders.
What’s changing at Spirit?
A post-bankruptcy Spirit would be a smaller airline. It’s already agreed to sell 23 of its Airbus SE planes, furlough nearly 500 pilots and cut unprofitable routes.
The carrier hired what it described as a “world recognized” advertising agency as well as a brand adviser to help it shed its reputation as one of America’s most disliked airlines.
It has already joined its peers in adding premium options to its offerings, a response to a growing preference for them among US travelers — particularly younger ones. The discounter now has fares with options including extra leg room and priority check-in.
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