Skift Take
Spirit made headlines Monday morning when it announced it was filing for a Chapter 11 bankruptcy — here’s what you need to know.
Spirit Airlines became the first major U.S. airline in 13 years to file for a Chapter 11 bankruptcy after facing mounting debts and declining revenues.
The bankruptcy filing comes after a federal judge rejected the JetBlue-Spirit merger in January, arguing that a combined airline would ultimately cause airfares to increase.
Spirit will continue to operate and customers can still book Spirit flights using their credit cards or loyalty points.
But there are a lot of questions still swirling around Spirit. Here’s what you need to know.
1: Why Is Spirit Filing for Bankruptcy?
Spirit was once one of the most profitable carriers in the industry, reporting operating margins as high as 20%. Under the leadership of former CEO Ben Baldanza, who died earlier this month, Spirit adopted its bare bones service and unbundled fares that made it so popular with customers.
But things changed after the pandemic.
Spirit and other ultra-low-cost carriers had significantly expanded capacity in the domestic market post-pandemic, bullish that they would experience a travel resurgence.
But international travel recovered a lot quicker than domestic travel. In leisure markets like Florida, Mexico and the Caribbean, legacy carriers also expanded their presence, making it difficult for Spirit to compete. The carrier slashed fares to these markets by as much as 28%, hoping it could offset the oversupply of domestic seating.
Consumer preferences also changed, with many willing to splurge on premium seating and products.
Issues with Pratt & Whitney geared turbofan engines also forced Spirit to ground a portion of its aircraft, creating more disruptions for the carrier. Spirit operates the largest fleet of GTF engines in the U.S.
Spirit had around $3.3 billion in debt, with approximately $1.1 billion expected to reach maturity in 2025, a debt it struggled to renegotiate.
2: What Is in Spirit’s Bankruptcy Deal?
Spirit said that its Chapter 11 and restructuring agreement had the support of a supermajority of bondholders as part of a pre-packaged filing. Previous airline bankruptcies have typically involved negotiations with stakeholders like unions and suppliers.
As part of the agreement, bondholders have agreed to swap $795 million of debt into stock. Bondholders also agreed to purchase an additional $350 million in stock and Spirit is receiving $300 million in “debtor-in-possession” financing.
Spirit expects to exit bankruptcy in the first quarter of 2025.
“However, the airline industry (particularly in the United States) is contending with shifting consumer demand and operational headwinds, such that it is unrecognizable from what it was pre-pandemic,” said Spirit chief financial officer Fred Comer in a court filing submitted to the U.S. Bankruptcy Court for the Southern District of New York on Monday. “Among other things, non-ULCC carriers have increased their low-fare offerings, and business travel is still not operating at pre-pandemic levels; these, in turn, increase capacity for leisure travel.”
3: Can I Still Book Spirit Flights?
Yes. CEO Ted Christie said in a letter to customers on Monday that they can still book Spirit flights and use loyalty points as normal.
A Chapter 11 doesn’t mean Spirit is going out of business, but rather that it would sell off some of its assets and restructure its operations.
The biggest impact for customers would be route cuts. So far, Spirit has already cut dozens of routes in an attempt to strengthen its balance sheet. Earlier this month, Spirit cut 24 routes out of cities like Boston, Charlotte, Dallas-Fort Worth, Fort Lauderdale and Los Angeles, according to a report from The Points Guy.
While it’s likely that Spirit won’t make too many drastic cuts during the holiday travel season, customers can still expect more route cuts in the coming year. Wall Street analysts have expected Spirit to cut capacity by as much as 30% to 35% in 2025.
4: What Happens if Spirit Cancels My Flight?
Customers are entitled to refunds if an airline cancels a flight and doesn’t rebook them, according to Department of Transportation rules.
However, when an airline files for bankruptcy, receiving a refund becomes more complicated.
The DOT says when an airline files for bankruptcy, it may be prohibited from issuing refunds or vouchers in order to conserve assets.
If an airline has filed for bankruptcy and refuses to offer a refund, then customers could be eligible to receive a credit from the credit card company they used to purchase the ticket under the Fair Credit Billing Act.
5: What Happens Next?
If Spirit exits bankruptcy, it’s unclear if it will be able to turn a profit given the headwinds affecting ultra-low-cost carriers in the U.S. It’s likely that the carrier will be smaller and some of its competitors could benefit from the bankruptcy.
Before filing for bankruptcy, Spirit was in talks with Frontier to revive a merger, but those talks soon broke down. However, Frontier could still make an offer for Spirit, given that a bankruptcy could allow Frontier to merge with Spirit at a more attractive price.
Melius Research analyst Conor Cunningham said he expected Frontier to “keep ongoing tabs” on Spirit in a note to investors on Monday. United Airlines could also be interested in Spirit’s assets in Florida given its lack of a hub in the state and connection to Latin America. JetBlue could be another beneficiary as it looks to bolster its network across the East Coast.
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