Spirit Airlines, one of America’s largest Ultra Low Cost Carriers (ULCC) filed for Chapter 11 bankruptcy protection in New York on Monday. The airline faced quarterly losses and increasing debt, making them enter into a restructuring support agreement (RSA). The airline also faced issues regarding competition from bigger airlines, their Airbus engines, and a failed merger with JetBlue Airways.
Restructuring Support Agreement (RSA)
Spirit Airlines filed for Chapter 11 bankruptcy protection in New York, also entering into a Restructuring Support Agreement (RSA). The aim of the RSA is to financially stabilize the airline through reducing its debt and increasing financial flexibility. The airline has received commitments for a $350 million equity investment from bondholders.
Spirit has received backstopped commitments for a $350 million equity investment from existing bondholders and will complete a debt consolidation to balance $795 million of funded debt.
Ted Christie, Spirit’s President and Chief Executive Officer, said
“This set of transactions will materially strengthen our balance sheet and position Spirit for the future while we continue executing on our strategic initiatives to transform our guest experience, providing new enhanced travel options, greater value, and increased flexibility.”
What issues is Spirit Airlines facing?
The airline was facing trouble after a federal judge blocked their merger with JetBlue Airways in January. Judge William G. Young of the U.S. District Court for the District of Massachusetts sided with the Justice Department, ruling that the merger would harm the competition between the airlines.
If JetBlue Airways merged with Spirit Airlines, it would gain 10% of the US market share, creating the nation’s fifth-largest airline. This merger was also a lifeline for Spirit Airlines, whose last annual profit was in 2019, pre-pandemic.
The airline faced challenges due to increased competition as larger US airlines began offering their own versions of budget-conscious tickets, thereby capturing a portion of Spirit’s customer base.
With lower fares, even though the airline has more customers flying, they are not earning as much profit. In the last 6 months, their revenue per mile from fares was down nearly 20%.
Spirit Airlines has also seen setbacks due to Pratt & Whitney engines, with required repairs forcing the company to ground dozens of its Airbus jets. Pratt & Whitney recalled their PW1100G geared turbofan engines due to a quality control issue with powder metal.
The airline will have to ground approximately 20% of its fleet, the A320neo family, by the end of 2024. With repairs taking up to 400 days per engine, this poses problems for the airline.
How does this affect the customers?
Spirit Airlines released a statement claiming that while going through the Chapter 11 bankruptcy process, the airline will operate as usual.
“Guests can continue to book and fly without interruption and can use all tickets, credits and loyalty points as normal.”
The airline also claimed that their employees will not be impacted by the new arrangement.
Do you think they will be able to avoid full bankruptcy? Let us know in the comments below.
