[UNITED STATES] Spirit Airlines was projected to be one of the biggest winners in the travel business following the pandemic. However, the no-frills pioneer was unable to adapt to a changing business and operating environment. On Monday, the Florida-based carrier filed for bankruptcy. While questions over Spirit's future began almost immediately after a federal judge stopped its US$3.8 billion merger with JetBlue Airways in January, analysts claimed its Chapter 11 petition was much longer in the works. Prior to the pandemic, Spirit was outperforming the industry, drawing price-conscious travelers and prompting larger carriers to launch their own versions of low-cost offers. The airline's business model of an integrated fleet, keeping planes flying more hours per day and providing more seats on each flight, helped optimize its resources and kept cost down.
The airline's troubles were compounded by a fierce competitive landscape, which saw larger airlines like Delta and United offering basic economy fares to attract budget-conscious travelers. This strategic shift by full-service carriers diluted Spirit's market share and pressured its pricing power. Furthermore, Spirit faced operational challenges due to engine issues with Pratt & Whitney, affecting its fleet availability and increasing maintenance costs.
Its strong fleet utilisation resulted in double-digit operating margins for nine consecutive years, till 2020. However, the global health crisis altered the operational environment and travel patterns, leaving Spirit struggling to adapt. Spirit's average daily aircraft utilisation is down 16% this year compared to 2019, increasing expense constraints. Consumer demand has swung in favor of full-service airlines over the last two years, as medium and upper-income households took long vacations, while inflation harmed lower-income spenders. Spirit, like many other airlines, pursued growth by incurring more than US$2 billion in debt between 2020 and 2023. Sticking to its pre-pandemic strategy, it increased capacity on average by 27% over the last three years in an attempt to capture a larger share of the leisure travel market.
Despite these efforts, Spirit's financial health continued to deteriorate. The airline reported a staggering loss of $360 million in just the first half of this year alone1. This financial strain was exacerbated by an inability to secure a merger with JetBlue or Frontier Airlines—both potential lifelines that could have provided much-needed capital and operational synergies3. The blocked merger with JetBlue was particularly detrimental, as it left Spirit without a strategic partner capable of helping it navigate the challenging post-pandemic recovery phase5.
Analysts advised Spirit and its no-frills competitors to curb their growth aspirations. Higher labour costs and a problem with the RTX's Pratt & Whitney geared turbofan engines exacerbated the situation. Spirit spent 82% of its sales on non-fuel operational costs in the first half of this year, an increase of around 22 percentage points from 2019. On Monday, the business stated that inflationary pressures have "disproportionately" impacted low-fare carriers' profitability. Delta and United, full-service airlines, have relied on strong demand for high-margin premium cabins and long-haul foreign flights to keep inflation under control. United said its bookings to European destinations are up over 10% from the previous year and nearly 30% from 2019.
Spirit's attempt to pivot towards higher-value services by introducing premium fare bundles has been met with skepticism from industry experts4. This strategic shift aimed at increasing revenue per passenger has not yet yielded significant results due to Spirit's entrenched brand perception as a low-cost carrier6. Additionally, the ongoing economic pressures have made it difficult for Spirit to sustain this rebranding effort without substantial financial backing or a successful merger2.
Spirit declared a move into the high-end travel industry in June, claiming that rebranding as a higher-value carrier could increase revenue per passenger by 13%. However, Hooman Yazhari, a lawyer and aviation bankruptcy expert at law firm Michelman & Robinson, stated that the airline lacked "the muscle and balance-sheet power" to compete in that market. "There are so many reasons why this just didn't go right," Yazhari told me. A slow return of business travelers following the epidemic also affected, as it forced all American carriers to chase holidaymakers, resulting in an oversupply of airplane tickets in cities like Florida and Las Vegas.
Ticket costs dropped. Spirit's average fare per passenger fell 19% in the first six months compared to a year ago1. Other cheap airlines, including JetBlue and Frontier Airlines, have also struggled. In April, Frontier's CEO, Barry Biffle, compared the rivalry in Florida to "Costco, Sam's Club, Walmart, and Target all opening up on the same block". The consequences were easily seen. Delta shares are up 87% in the last two years, while Frontier and JetBlue are down 23% and 58%, respectively. Prior to filing for Chapter 11, spirit shares had lost practically all of their value.
Sandeep Dahiya, a Georgetown University professor, said the company's debt became harder to fulfill because it has not generated a full-year profit since 20195. "The writing was pretty much on the wall," Dahiya explained.
Looking forward, Spirit Airlines aims to emerge from bankruptcy with a more sustainable business model. The airline plans to reduce its debt burden significantly through restructuring agreements with creditors3. It is also focusing on enhancing operational efficiency and exploring potential partnerships that could bolster its market position once it exits bankruptcy protection6. Whether these efforts will be enough to secure a stable future remains uncertain amidst ongoing industry challenges and economic volatility2.
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