by Spirit Airlines, once a fast-growing low-cost airline, is struggling to convince investors it has a clear path forward after an antitrust ruling blocked the company’s sale to JetBlue Airways.
A federal judge in Boston blocked the proposed merger Tuesday, agreeing with the Justice Department that the deal would harm consumers by reducing their choices and raising fees. The airlines, which could appeal, say they are considering their options.
Before reaching a deal with JetBlue in July 2022, Spirit was struggling. Unlike larger airlines, it never fully recovered from the early days of the pandemic in 2020. The low-cost carrier is losing money and some analysts say it’s hard to see how Spirit can dig itself out of its financial hole with the exception of find another. buyer. Some airline experts say the airline may have to file for bankruptcy.
“It’s a challenging financial outlook for the company,” said Xavier Smith, director of industrial and energy research at AlphaSense.
In the three days since the ruling, Spirit shares have lost more than half their value, falling to $5.70 from about $15. On Thursday, stocks plunged sharply after The Wall Street Journal reported that Spirit was exploring restructuring options.
When asked about that report, the company said it was “not seeking or involved in a legal restructuring.”
Spirit, like other airlines, took on a lot of debt during the pandemic, but hasn’t had the financial rebound that larger airlines have seen. It now owes about $6.6 billion, up from $3.6 billion in 2019. This month, the company sold and leased 25 aircraft, allowing it to reduce its debt by $465 million.
“Spirit has been taking and will continue to take prudent measures to ensure the strength of its balance sheet and ongoing operations,” the company said in a statement Thursday.
Unlike larger airlines like Delta Air Lines and United Airlines, Spirit flies primarily within the United States; Its few international routes are relatively short. As a result, it has not made the strong profits that many larger airlines have been making on flights to Europe or Asia, and is more exposed to fierce price wars on U.S. routes.
Additionally, Spirit’s expenses have increased more than 60 percent since 2019 due to higher salaries for pilots and flight attendants and more expensive jet fuel.
The airline is also struggling due to problems with the Pratt & Whitney engines on some of its planes. Spirit grounded 26 of its nearly 200 planes after the supplier revealed manufacturing defects.
Analysts say there are two likely outcomes for Spirit: another airline could acquire it, or the company could use a bankruptcy filing to restructure its debt or sell its assets.
Spirit at its current valuation may be an attractive option for an airline looking to expand. Buying another airline is usually the easiest and most efficient way to grow because there are few or no gates available at popular airports. Planes are also in short supply because the two main manufacturers, Airbus and Boeing, have an order book that extends up to five years.
Frontier Airlines, which proposed buying Spirit before JetBlue overtook it, or another low-cost airline would likely have an easier time getting antitrust approval, said Dylan Carson, an attorney at Manatt, Phelps & Phillips.
“I think that has the potential to secure the blessing of antitrust authorities,” said Carson, a former Justice Department antitrust lawyer.
Frontier’s cash-and-stock deal with Spirit was worth about $2.8 billion, compared to the $3.8 billion JetBlue was willing to pay. Now that Spirit’s valuation has fallen, another airline could strike a deal for a lower price.
But Frontier’s share price has also fallen, by more than 60 percent, since it offered to buy Spirit, which may pose a challenge to another bid. Frontier planned to use stock to pay for part of the earlier settlement. A Frontier representative declined to comment on whether he would consider another offer for Spirit.
Of course, Sprit’s fortunes could improve if demand for domestic air travel grows significantly, although most analysts don’t expect that to happen anytime soon.
Spirit is known for its simple experience. It includes more seats on its planes than other airlines, leaving passengers with less legroom. The company charges fees for carry-on luggage, which are included on other airlines. Because many of its customers fly it to save money, Spirit has limited ability to raise fares.
Kerry Tan, a professor at Loyola University Maryland who has studied airline fares, said that when Spirit offered service on a particular route, its competitors were forced to lower their prices.
“In my opinion, the worst case scenario is that Spirit disappears and we are left with a less competitive environment,” Dr Tan said.
Judge William G. Young said in his ruling this week that if the proposed merger went through, JetBlue would absorb an airline that charged very low prices, significantly downgrading those airlines and raising fares.
“Spirit is a small airline,” he stated in the ruling. “But there are those who love him. For those dedicated Spirit customers, this one is for you.”
Madison Lee, a budget travel blogger, is one of those people.
He said Spirit’s cheap flights and its influence on other airlines’ prices gave Americans “an equal opportunity to travel.” Ms Lee, 25, has been to 60 countries, mostly using low-cost airlines.
“It may not come with all the bells and whistles, you may not feel as comfortable, but honestly, a lot of people’s purpose in traveling is not necessarily to be comfortable,” he said. “The spirit does the work.”
