Spirit Airlines is on shaky ground after judge blocks JetBlue deal

Spirit Airlines, once a fast-growing low-cost carrier, 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 on Tuesday, agreeing with the Justice Department that the deal would harm consumers by limiting their choices and raising rates. The airlines, which could appeal, say they are considering their options.

Before inking 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 budget carrier is losing money, and some analysts say it's hard to see how Spirit can pull itself out of its financial hole, other than finding another airline. buyer. Some aviation experts say the airline may have to file for bankruptcy protection.

“It's a challenging financial picture for the company,” said Xavier Smith, director of energy and industrial research at AlphaSense.

In the three days since the ruling, Spirit's shares have lost more than half their value, from about $15 to $5.70. Shares fell sharply on Thursday after The Wall Street Journal reported that Spirit was exploring restructuring options.

Asked about that report, the company said it was “not pursuing nor involved in any legal restructuring.”

Spirit, like other airlines, has paid down a lot of debt during the pandemic but has not seen the financial recovery that larger airlines have seen. The company now has about $6.6 billion in debt, down from $3.6 billion in 2019. This month, the company sold and leased back 25 aircraft, helping it reduce its debt by $465 million.

“Spirit has taken and will continue to take prudent steps to ensure the strength of its balance sheet and ongoing operations,” the company said in a statement Thursday.

Unlike larger airlines such as Delta Air Lines and United Airlines, Spirit flies primarily within the United States; the few international routes are relatively short. As a result, the country has been unable to achieve the strong profits that many larger airlines have made on flights to Europe or Asia, and is more exposed to fierce price wars on US routes.

Additionally, Spirit's expenses have increased more than 60 percent since 2019 due to higher wages for pilots and flight attendants and more expensive jet fuel.

The airline is also experiencing problems with Pratt & Whitney engines in some of its aircraft. Spirit has grounded 26 of its nearly 200 jets after the supplier revealed manufacturing defects.

Analysts say there are two likely outcomes for Spirit: Another airline could acquire the company, or the company could use a bankruptcy filing to restructure its debt or sell its assets.

At its current valuation, Spirit could be an attractive option for an airline looking to expand. Buying another airline is often the easiest and most efficient way to grow, as there are few or no gates available at popular airports. There is also a shortage of aircraft because the two main manufacturers – Airbus and Boeing – have order books that can stretch to five years.

Frontier Airlines, which proposed buying Spirit before JetBlue outbid it, or another low-cost carrier would likely have the easiest time gaining antitrust approval, said Dylan Carson, an attorney with Manatt, Phelps & Phillips.

“That, I think, has the potential to secure the blessing of antitrust enforcers,” said Mr. 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 that JetBlue was willing to pay. Now that Spirit's valuation has fallen, another airline may be able to strike a deal at a lower price.

But Frontier's stock price has also fallen more than 60 percent since the offer to buy Spirit, which could pose a challenge for a new bid. Frontier planned to use stock to pay for part of the earlier deal. A Frontier representative declined to comment on whether it 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 no-nonsense experience. It has more seats on its planes than other airlines, giving passengers less legroom. The company charges for carry-on luggage, which is included with other airlines. Because many of its customers fly to save money, Spirit has limited ability to increase 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 view, the worst-case scenario is that Spirit disappears and we are left with a less competitive environment,” said Dr. Tan.

Judge William G. Young said in his ruling this week that if the proposed merger goes through, JetBlue would absorb an airline that charged very low prices, significantly shrinking the category of such airlines and raising fares.

“Spirit is a small airline,” he said in the ruling. “But there are people who love it. To Spirit's dedicated customers, this one's for you.”

Madison Lee, a budget travel blogger, is one of those people.

She said Spirit's cheap flights and influence on other airlines' prices gave Americans “an equal opportunity to travel.” Ms Lee, 25, has visited 60 countries, mostly on budget airlines.

“It may not come with all the bells and whistles, you may not feel as comfortable, but honestly, for a lot of people, the purpose of traveling is not necessarily to be comfortable,” she said. “The mind gets the job done.”