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It is hard for a weighed-down aeroplane to achieve lift-off. Last week, a US bankruptcy judge formally confirmed the reorganisation of Spirit Airlines, the super-discount carrier. It remains to be seen whether the still debt-laden airline has what it takes to fly solo.
Spirit had a wild ride over the past five years. Pandemic-era disruptions gave way to high inflation, competition from much bigger and meaner airlines, a jet engine supply snafu, an abortive merger with JetBlue and, finally, a debt crunch.
Then in November last year, Spirit filed for bankruptcy, with a plan in place to wipe out shareholders and hand control to noteholders and convertible bondholders. These latter included such household names as Pimco, Citadel and Ares. Shortly after, Spirit rejected a merger overture from rival low-cost carrier Frontier Airlines — which had bid for Spirit before in 2022, only to be outgunned by yet another US carrier, JetBlue.
After all that, it might not seem surprising that Spirit wants a relatively quiet life. Rather than sell to Frontier, the airline plans to emerge from bankruptcy as a private standalone company. But it does not look altogether straightforward. Spirit’s reorganised enterprise value is $6.5bn, but $6bn of that is net debt, including loans, bonds and aircraft leases.
Airline bankruptcies are, in one way, simpler than they used to be. A recent report from Fitch Ratings noted that historically, carriers needed to restructure burdensome operational features such as labour contracts. Now, their main problem is excessive debt. In Spirit’s case, vendor and employment agreements will stay unchanged — the company is merely swapping maturing debt for a smaller amount of new debt, plus some equity funding.
According to its financial projections, operating profit before lease expense is supposed to rise from $700mn this year to double that figure in two years. Hit that plan, and the current heightened leverage does not seem so formidable. If the reality does not match the ambition, though, Spirit could hit turbulence.
There is always the hope that Frontier returns. The merger terms in this latest approach were never made public, but it is likely Spirit was unimpressed by whatever ownership split Frontier was offering, rather than the logic of a tie-up per se. Back in 2022, both sides had agreed that there were savings of about $500mn a year to be had.
For now, the two major creditor groups are sticking to their flight plan. That nominally includes taking haircuts of between 10 and 55 cents on the dollar, although the equity they are receiving can quickly grow as profits rebound and debt is paid off. They are loath right now to share that upside with another set of shareholders. But the risk is that if Spirit falters again, they may have to.
sujeet.indap@ft.com
