The Zhitong Finance App learned that on November 18 EST, the US low-cost airline Spirit Airlines (SAVE.US) said it had filed for bankruptcy protection and would try to restructure. Ahead of the busiest travel time of the year in the US, Spirit Airlines is making visitors worry about whether they can reach their destinations before the Thanksgiving holiday. Passengers are thankful that under Spirit Airlines' so-called Chapter 11 bankruptcy procedure, the airline was not shut down, but rather restructured to keep the business running. Spirit Airlines told passengers that at the 84 airports where the company provides services, flight operations will continue to operate normally, and passengers can use all tickets, points, and credits as if nothing had happened.

Spirit Airlines filed for so-called pre-arranged bankruptcy, which meant that the company reached an agreement with most creditors to restructure its $1.6 billion debt, and existing bondholders would receive the company's shares and new bonds. Meanwhile, shareholders will get nothing — this happens in almost every major corporate bankruptcy, and their common shares are expected to be cancelled with no value as part of the restructuring.

Why did Spirit Airlines go bankrupt?

According to reports, since the beginning of 2020, Spirit Airlines has lost more than 2.5 billion US dollars, and will face a total debt of more than 1 billion US dollars next year. After the pandemic, the American airline industry gradually recovered, but Spirit Airlines failed to turn a loss into profit like several other US full-service airlines. In the first half of 2024, Spirit Airlines' revenue fell 8.48% year on year to 2.546 billion US dollars, a loss of 0.336 billion US dollars, and a balance ratio of 91.5%.

Some analysts pointed out that after the pandemic, business travel in many countries, including the US, recovered rapidly. Full-service airlines with business class and more seat class options recovered faster, while low-cost airlines, which mainly focus on tourists, recovered more slowly.

Some of the issues Spirit Airlines faces are unique to its class of airlines — that is, those that focus on cheap domestic service. Larger rivals fared better during the pandemic than during the previous economic downturn, as the US government provided billions of dollars in aid. Since then, major airlines have taken thousands of pilots from airlines such as Spirit Airlines to fill vacancies caused by record numbers of pilots retiring early or leaving the aviation industry. A new round of post-pandemic labor contracts raised pilots' wages by 34% over two years, making Spirit Airlines' staffing problems even more complicated.

Meanwhile, several of the largest airlines in the American airline industry are now selling basic economy tickets, which are specifically designed to attract price-sensitive travelers while also offering more flights and destinations, putting more competitive pressure on budget airlines like Spirit Airlines.

Furthermore, when US travel demand surged in 2022 and 2023, airlines dramatically increased capacity, but excessive expansion has caused current capacity to exceed the demand of the US market and dragged the entire American airline industry into the ticket price war. This has certainly made matters worse for budget airlines such as Spirit Airlines.

Spirit Airlines is also facing the dilemma of being forced to stop flights due to Pratt & Whitney, a subsidiary of RTX Corp., recalling engines with manufacturing defects. Spirit Airlines tried merging with other airlines before filing for bankruptcy and restructuring. In February 2022, Frontier Airlines plans to acquire Spirit Airlines for $2.9 billion in cash and shares. Afterwards, another US airline, JetBlue, offered a higher price to buy Spirit Airlines for 3.8 billion dollars, but the deal was ultimately rejected by US regulators due to antitrust issues.

What is the future of Spirit Airlines?

The American airline industry has a long history of bankruptcy, which has enabled airlines to restructure debts and recover without stopping operations. Some of America's largest airlines, including American Airlines, Delta Air Lines, United Airlines, etc., have filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Some of these airlines were acquired during bankruptcy, while others (mostly smaller ones) went out of business.

The benefit of Spirit Airlines' pre-arranged bankruptcy restructuring is that the low-cost airline may be able to escape bankruptcy protection in the first quarter of next year. However, its restructuring plan must also be approved by a bankruptcy court judge and is likely to be opposed by shareholders.

Spirit Airlines is likely to become a smaller airline after bankruptcy. The company has agreed to sell 23 Airbus SE aircraft, leave nearly 500 pilots on vacation, and cut unprofitable routes. The company also hired what it called a “world-recognized” advertising agency and brand consultant to help rid it of fame as one of America's least popular airlines. The company has also added premium options to its products to respond to the growing preference for premium options among American travelers, especially younger visitors.