Spirit Airlines soars despite bankruptcy risk, JetBlue merger decision

Spirit Airlines is looking to avoid bankruptcy following the scrapping of its merger with low-cost rival JetBlue.

Jan 19, 2024 - 19:30

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Spirit Airlines soars despite bankruptcy risk, JetBlue merger decision

Spirit Airlines (SAVE) - Get Free Report shares moved sharply higher in early Friday trading following reports suggesting it's urging rival JetBlue (JBLU) - Get Free Report to appeal a ruling that scrapped their $3.8 billion merger.

Spirit Airlines, which focuses on short-haul flights at discounted prices, has been facing significant financial headwinds for much of the past year, tied in part to a hefty debt load, a surge in jet-fuel prices and a tight labor market.

Jet fuel, which comprises around a third of an airline's overall cost base, has firmly outpaced the advance in crude oil over the past eight months. Oil prices are higher due to both OPEC-agreed production cuts and supply risks linked to geopolitical tensions in the Gulf region.

Delta Air Lines (DAL) - Get Free Report said last week that its overall adjusted fuel expense was $2.9 billion in the fourth quarter, a 6% increase from 2022 levels, and it forecast first-quarter 2024 prices of between $2.50 to $2.70 per gallon.

Spirit has also suffered from a lack of capacity linked to issues with its Airbus A320neo airplanes following a summer fleet inspection of GTF engines made by RTX Corp.'s (RTX) - Get Free Report Pratt & Whitney division.

Collectively, the operating cost stresses and the autumn capacity hit have added significant pressures on the Florida-based carrier's balance sheet, which has more than $1.1 billion in debt tied to its loyalty programing coming due next year.

"Overcoming stand-alone refinancing risk will ultimately be dependent on restoring market confidence in the company’s ability to establish an operational/strategic plan that enhances profitability and generates adequate cash flows," Fitch Ratings said in a credit opinion published earlier this week.

Time for an appeal of SAVE-JBLU merger?

Spirit had looked to its $3.8 billion tieup with JetBlue to solve some of its balance sheet issues, but U.S. District Judge William Young blocked the deal on Wednesday.

The merger between Spirit and JetBlue was scuttled for competition reasons.
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Judge Young echoed concerns expressed by the U.S. Department of Justice that combining two discount airlines would cause harm to "consumers that rely on Spirit's unique, low-price model."

"The government has demonstrated that consumers value Spirit flights as a unique, economical product option," Young said in his final decision. "The removal of Spirit as an option for consumers, therefore, would constitute a cognizable harm."

However, with Spirit now facing series restructuring risks that could include either Chapter 11 bankruptcy or a complete liquidation under Chapter 7 rules, Reuters has reported that the carrier is urging JetBlue to join it in launching an immediate appeal.

"Spirit has stated that it disagrees with the U.S. District Court's ruling and continues to believe that a combination with JetBlue is the best opportunity to increase much needed competition and choice by bringing low fares and great service to more customers in more markets while enhancing their ability to compete with the dominant U.S. carriers," Spirit said in a Securities and Exchange Commission filing Friday.

"JetBlue's termination of the Northeast Alliance and commitment to significant divestitures have removed any reasonable anti-competitive concerns that the Department of Justice raised," the statement added.

Merger might make sense for JetBlue, too

The move could make sense for JetBlue as well, which is facing "outsized impacts from air traffic control delays due to its concentration in the Northeast," according to Fitch, as well as the "winddown of (its) alliance with American Airlines and engine availability issues."

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Spirit has told investors that it's looking to refinance its loyalty program debt, and is also seeking compensation from RTX for damages linked to the Pratt & Whitney engine issues.

The group also said it's looking to increase capacity in the first quarter of this year, and it lifted its guidance for fourth-quarter operating profit margins while hinting at lower operating costs and stronger-than-expected bookings.

Spirit Airlines shares, which have plunged more than 60% since Judge Young's decision on Wednesday, were last marked 22.5% higher in premarket trading to indicate an opening bell price of $6.99 each.

JetBlue shares, meanwhile, edged 0.6% higher to $5.08 each.