Where Does Spirit Airlines Go from Here?
Last spring, when the U.S. Justice Department blocked Spirit Airlines' acquisition by JetBlue, I stated that their rationale was not appropriate. The Justice Department argued the acquisition would eliminate Spirit's competitive pricing, negatively affecting overall travel costs in the market. My perspective was, given Spirit's operating challenges, the airline had few options, and becoming part of JetBlue— a low-cost, albeit not ultra low-cost carrier— would be better than Spirit failing. Last week, Spirit Airlines filed for bankruptcy protection due to its rising cost structure and significant debt load.
Bankruptcies are not unusual for airlines. The three largest carriers— United, American, and Delta— have each gone through bankruptcy proceedings and emerged stronger, building more stable and sustainable positions in commercial aviation. However, due to challenges with its core business model, I do not foresee the same positive results for Spirit Airlines.
Several factors contributed to Spirit's bankruptcy:
- Competition forces Spirit to maintain low ticket prices
- Spirit does not offer the higher-tier fares or additional services provided by major carriers
- The airline carries a substantial debt load from expansion costs and operating losses
- Spirit primarily operates mid-life planes which are less fuel-efficient and face engine maintenance challenges.
When Spirit emerges from bankruptcy in early 2025, its debt load will be reduced; however, the other issues related to its business model will remain. Spirit is also likely to use bankruptcy as an opportunity to make modest compensation reductions in its labor contracts. Even with these cuts, its business model will still face significant challenges. As a stand-alone entity, Spirit may struggle to survive, let alone thrive in the long-term.
Unable to achieve stability on its own, Spirit should consider exploring strategic alternatives through a partnership with other airlines. Spirit possesses valuable assets, including:
- A comprehensive route map covering much of the U.S., Mexico, the Caribbean, and several destinations in South America.
- An exclusive Airbus fleet consisting of mainly A320s and A321s.
- A loyal customer base that appreciates its low fares.
- A hub at Fort Lauderdale International Airport, located adjacent to one of the nation’s largest cruise ports, handles approximately 50,000 passengers a day.
The pressing question is who would be the best fit for a partnership? An acquisition by one of the major airlines would be ineffective. The large carriers service most of the same airports and do not consider Spirit a true competitor, meaning acquiring Spirit would not yield any real benefits.
Two other types of potential acquirers could bring mutual benefits. Every one of these potential acquirors would certainly face an anti-trust review. With Spirit’s bankruptcy filing and with a new pro-business administration, I think that the Justice Department may take a different view on a combination this time.
- The first option would be an acquisition by another domestic ULCC, either Allegiant or Frontier, both of which offer low ticket prices but charge extra for ancillary services. Combining with Allegiant or Frontier would create an airline with good scale and a dominant position in the ultra-low-price sector of the market.
- The second option would be an acquisition by JetBlue or Alaska Airlines. Jet Blue should be able to move quickly since they have done much of the due diligence. Alaska knows how to do acquisitions and integrations after buying Virgin America and Hawaiian. Spirit’s hub in the southeast would help both Jet Blue and Alaska significantly enlarge their coverage of the US.
Overall, Spirit Airlines faces significant challenges with its business model and balance sheet, making it the weakest of the three largest domestic ULCCs in a crowded market. To ensure long-term survival, Spirit should pursue a strategic transaction to improve both its business model and its financial standing. After emerging from bankruptcy in early 2025, Spirit must act quickly to complete a strategic transaction with either Frontier, Allegiant, JetBlue or Alaska before liquidity issues arise again.
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Aerospace and Defense Mergers and Acquisitions
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By William Surman
