Major airline fires back at analyst over bankruptcy claims

The airline industry isn’t easy. Buying planes and staffing them isn’t cheap, and jet-fuel costs can be notoriously volatile, making the industry prone to bankruptcy.

After losing a bundle on his own airline investments, Warren Buffett, the Oracle of Omaha, once quipped, “If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Wall Street’s dustbins are littered with airlines that have gone bust. The list is long. It includes major airlines like Pan Am and dozens of smaller players. 

Sometimes, airlines reemerge after Chapter 11 restructuring, like American Airlines in 2013. Other times, they disappear forever, leaving travelers in the lurch.

It remains to be seen what happens this time around, but at least one Wall Street analyst thinks the list of failed airlines could get longer after a federal judge blocked JetBlue’s  (JBLU) - Get Free Report acquisition of Spirit Airlines  (SAVE) - Get Free Report this month.

Spirit Airlines is on shaky ground

TD Cowen analyst Helene Becker says Spirit Airlines has few choices and may be destined for the dustbin, too. 

Related: Analyst: Major U.S. airline likely to file bankruptcy and liquidate

While it may not have many options, management suggests that assertion is hogwash. It told Bloomberg it was seeking to restructure bonds to sidestep a looming debt maturity, but it also said it's not pursuing a “statutory restructuring,” such as Chapter 11.

That's nice, but management may not have a choice. 

Its survival may depend on how willing debtholders are to restructure what they're owed. Spirit Airlines has $1.1 billion in loyalty-program debt due in September 2025. That’s not tomorrow, but it’s not that far into the future, either.

If the company's balance sheet was pristine or it was highly profitable, its debt burden wouldn't be a big deal. Unfortunately, the company doesn't have a lot of financial wiggle room. 

As of September 2023, current debt on its balance sheet was $236 million and current maturities of operating leases totaled $211 million. Its long-term debt was $3 billion and it owed $3.1 billion in long-term operating leases. Meanwhile, it had only $930 million in cash, equivalents and short-term bonds.

It recently got more financial flexibility by orchestrating a sale-leaseback agreement for 25 airplanes. That deal removed $465 million in debt and provided an additional $419 million. The airline, which flies mostly Airbus A320s, could receive a $70 million breakup fee from JetBlue, too.

Nevertheless, Spirit's finances, while not terrible, aren't overly encouraging, particularly given it operates in the cutthroat ultra-low cost carrier market and it lost $189 million in the third quarter alone.

On Jan. 17, Fitch Ratings kept its rating unchanged on Spirit but said, "Spirit needs to clearly articulate a near-term plan to preserve and generate liquidity, address its refinancing risk, and improve profitability to avoid a negative rating action."

A bankruptcy restructuring could be its best bet, analyst suggests

Given the company's financials, it’s little wonder TD Cowen’s Becker thinks the airline is in trouble.

"We recognize this sounds alarmist and harsh, but the reality is we believe there are limited scenarios that enable Spirit to restructure,” said Becker.

Perhaps, the airline can find a white knight. After all, Spirit had explored a sale to Frontier Airlines before agreeing to sell itself to JetBlue. 

More Airlines:

• United Airlines has little-known travel perk that passengers love  
• American Airlines passengers face potential schedule disruption  
• Southwest Airlines making a major onboard change

Maybe it can rekindle a deal, but that’s far from a certainty. Frontier Group Holdings  (ULCC) - Get Free Report wanted to acquire Spirit for stock. That may be a tougher deal to make now, given that its shares are valued at less than half what they were then.

"In the short term, we believe the base case for [Spirit Airlines]  (SAVE) - Get Free Report is to go into Chapter 11 sooner rather than later to preserve capital," Becker added in the note. "Whether we are correct or not remains to be seen, but we are not convinced an airline with limited free cash flow (none right now) and continued losses will be able to successfully restructure."

Bankruptcy can make sense, particularly when it comes to labor costs. Unions have a lot of sway, but their hands are more tied during a bankruptcy process. 

Also, bankruptcy doesn't necessarily mean passengers will be left high and dry. There are plenty of examples of airlines that operated during bankruptcy, emerged from it, and survived or merged later, including American, US Air and Continental.

If Spirit eventually goes the route of a Chapter 11 restructuring, it could mean travel disruptions. The prospect of having flights canceled or, worse, being unable to get money back if the company goes bust could create a self-fulfilling prophecy. Consumers may opt for other carriers to avoid risks, adding to Spirit's woes. Whether travelers are shifting to more expensive carriers because they’re concerned is unclear, but the possibility shouldn’t be ignored.

If Spirit successfully renegotiates debt and gets back on solid fiscal ground, the decision to scuttle its merger with JetBlue to preserve customer access to its deep-discount fares will look smart. However, if Spirit fails because of the ruling, consumers clearly won’t benefit from regulators blocking the merger.

For now, Spirit Airlines is staying the course. It told TheStreet in a statement that it "has been taking, and will continue to take, prudent steps to ensure the strength of its balance sheet and ongoing operations.”

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