Failed JetBlue buyout leaves Spirit Airlines with a tough path forward

Spirit Airlines is on shaky footing after JetBlue Airways‘ proposed $3.8 billion takeover of the budget carrier was blocked by a federal judge this week.

Industry-watchers say the carrier could be forced to cut its already low fares even more. Some Wall Street analysts argue the discount carrier could have to restructure, if not liquidate.

Spirit’s stock has shed 62% so far this week, ending Thursday at $5.70 a share. The airline has lost about $1 billion in market capitalization compared with Friday, the last session before the ruling was announced.

Spirit is considering refinancing options for its debt, according to a person familiar with the matter.

Spirit, whose last profitable year was 2019, had challenges even before the ruling: It’s navigating groundings of some Airbus narrow-body jets for Pratt & Whitney engine issues, and it’s facing softer-than-expected demand in the wake of the pandemic, along with higher costs. It paused pilot hiring and offered salaried staff buyouts last year.

The carrier could look for another buyer, “but a more likely scenario is a Chapter 11 filing, followed by a liquidation,” said Helane Becker, an airline analyst at TD Cowen, in a note. “We recognize this sounds alarmist and harsh, but the reality is we believe there are limited scenarios that enable Spirit to restructure.”

The threat of bankruptcy could force the airline, known for its low fares and fees for everything else like seat selection and cabin baggage, to slash fares even more.

“We may see some shocking prices on major Spirit routes as the carrier tries to bring as much cash in the door as possible,” Becker wrote.

Spirit and other carriers have been grappling with higher employee salaries and other costs, while a surge in domestic flight capacity has forced them to cut fares, particularly in the off-peak periods. That dynamic might be good in the short term for consumers, but not for airlines that require large amounts of cash to operate.

“Softening demand and rising costs is squeezing from both sides,” said Samuel Engel, a lecturer at Boston University’s Questrom School of Business and senior vice president at consulting firm ICF. “It’s going to start taking a bite out of fares.”

A Spirit spokesperson said Thursday that the company is confident in its “strengths and strategy.”

“We remain committed to delivering affordable fares and great service to our Guests and providing excellent opportunities to our Team Members,” A Spirit spokesperson said in an emailed statement. “Spirit has been taking, and will continue to take, prudent steps to ensure the strength of its balance sheet and ongoing operations.”

Earlier this month, Spirit said in a filing that it had sold 25 of its Airbus planes to lease them back, allowing it to pay down $465 million in debt on those planes and netting the company $419 million.

JetBlue, facing a quarter-life crisis as it approaches its 25th year of flying, argued it needed Spirit’s fleet, pilots and routes to grow and better compete with larger rivals American, Delta, United and Southwest.

Those four airlines combined control about 80% of the U.S. domestic market and are themselves the result of years of mega-mergers that former regulators approved.

“I don’t see how it benefits consumer to entrench the oligopoly of the big four” airlines, said Engel. “Organic [airline] growth in this country is painstaking and slow. If you bar mergers between the second-tier airlines you entrench the big four.”

Engel noted that JetBlue itself has had a big impact on larger airlines, forcing them to revamp their premium cabins after it launched its lower-priced Mint cabin about a decade ago, and offering seat-back entertainment before that.

JetBlue and Spirit said in a joint statement Tuesday that they disagree with the judge’s ruling and are evaluating their options.

“We continue to believe that our combination 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 our ability to compete with the dominant U.S. carriers,” the carriers said after the ruling.

JetBlue didn’t respond to a request for comment on Wednesday about its future plans.

JetBlue’s incoming CEO Joanna Geraghty will be tasked with ensuring JetBlue returns to profitability and to chart a growth path for the New York airline. The carrier operates in the country’s most congested air space and airports, which makes adding flights a challenge.

The airline swooped in with a hostile takeover bid for Spirit in April 2022, weeks after Spirit announced a merger agreement with fellow budget carrier Frontier Airlines. Spirit shareholders ultimately rejected the Frontier cash-and-stock deal and went for JetBlue’s, increasingly sweetened, all-cash $3.8 billion offer instead.

Engel said a combination of Frontier and Spirit might have been easier to get approved.

“If JetBlue didn’t insert itself in this process, a Frontier-Spirit merger might have already happened,” he said.