Spirit Airlines is reportedly seeking ways to fix its finances. But its odds on its own look shaky, analysts say.

By Bill Peters

Ultralow-cost carrier faces 'serious headwinds toward improving its profitability,' Fitch analysts say

With more observers bracing for a future in which JetBlue Airways Corp. and Spirit Airlines Inc. each have to go it alone, Fitch analysts became the latest to cast doubt on Spirit's prospects as a standalone airline, saying the ultralow-cost carrier faces "serious headwinds" to improving its profits.

The credit-rating firm made that assessment after a federal judge this week blocked JetBlue's (JBLU) $3.8 billion bid for Spirit (SAVE), arguing that the proposed tie-up would stifle competition in the U.S., where the airline industry is already dominated by four major carriers.

The Wall Street Journal reported on Thursday that Spirit was looking at ways to patch up its finances in the wake of the ruling, as some analysts speculate on a possible bankruptcy filing. Both airlines have said they are weighing their legal options in response to the decision.

Fitch analysts said the airlines could appeal the judge's ruling. But they added that such a move seemed unlikely.

"Spirit faces significant refinancing risk in the next year, with its $1.1 billion loyalty-program debt coming due in September 2025," they wrote on Wednesday. "Meanwhile, the company faces serious headwinds toward improving its profitability, including engine-availability issues, overcapacity in certain leisure markets, and intense competition."

Fitch, which did not change its credit rating on Spirit, said it expected the carrier to guard its liquidity - noting that Spirit received some $419 million in cash from a sale-leaseback transaction involving 25 jets. The analysts said more of those transactions could help the company's finances, along with payments from jet-engine maker and RTX Corp. (RTX) subsidiary Pratt & Whitney following a recall.

"Overcoming standalone refinancing risk will ultimately be dependent on restoring market confidence in the company's ability to establish an operational/strategic plan that enhances profitability and generates adequate cash flows," they wrote.

Spirit, when reached for comment on the report from the Journal on Thursday, said it "has been taking, and will continue to take, prudent steps to ensure the strength of its balance sheet and ongoing operations." The carrier could explore options to refinance debt, according to a person familiar with the matter.

Later in the day, the company added: "Spirit is not pursuing nor involved in a statutory restructuring."

Shares of Spirit tanked yet again on Thursday, falling 26.7%. That followed a 22.5% drop on Wednesday and a nearly 50% drop on Tuesday, when the acquisition deal was blocked. At the market open on Tuesday, the stock was trading at around $15. On Thursday, it was trading at around $4.60.

Spirit has struggled to turn a profit since 2020, when pandemic-related restrictions and traveler anxieties stifled the industry and left many airlines burning through cash. When leisure travel rebounded in the years that followed, other airlines cut prices to compete, the Journal noted on Thursday.

In its third-quarter earnings release in October, Spirit Chief Executive Ted Christie said "we are evaluating our growth profile and our competitive position" following weaker demand. Chief Financial Officer Scott Haralson said at that time that the company had "identified $100 million of structural cost reductions and are evaluating how best to capture those savings in 2024."

Compounding Spirit's issues, RTX last year said that Pratt & Whitney had found that a "rare condition" in powder metal used to make some engine parts "will require accelerated fleet inspection." The inspections and replacements, Spirit said in its October earnings report, could lead to dozens of its Airbus jets being grounded at various points this year.

"For 2024, Spirit assumes the average number of grounded neo aircraftwill climb steadily from 13 in January to 41 in December, averaging 26 grounded for the full year 2024," executives said.

Elsewhere this week, Raymond James analyst Savanthi Syth said an appeal of the judge's ruling was unlikely. Other analysts, at J.P. Morgan and Melius Research, have said Wall Street's focus will now turn toward Spirit's financial struggles and its odds of survival.

Prior to the deal between Spirit and Jet Blue, struck in 2022, some analysts had noted that JetBlue's prospects for organic growth were thin. TD Cowen analyst Helane Becker, in a note on Tuesday, observed that business at Spirit had "turned negative" since the time the deal was announced.

"We believe Spirit is likely to look for another buyer (maybe private equity?) but a more likely scenario is a Chapter 11 filing, followed by a liquidation," she said.

Becker said questions lingered around whether discount airline Frontier Group Holdings Inc. (ULCC), which JetBlue beat out in the bidding battle for Spirit, might swoop in with another offer. But she noted that Frontier's stock has its own issues.

"That is of course a possibility, but recall Frontier intended to use its shares to pay for the initial Frontier/Spirit merger," she said. "Frontier's shares have lost over 60% of their value since then."

-Bill Peters

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01-20-24 0811ET

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