Vidostream | News, sport and opinion from the Vidostream's US edition

https://vidostream.com

How Spirit Airlines Went From Industry Maverick to Chapter 11 Bankruptcy

The budget carrier’s pivot to ultralow fares brought it success but competition, rising costs and a failed merger bid hurt the business.

The U.S. government envisioned that Spirit Airlines SAVE -18.18%decrease; red down pointing triangle could stand up to industry behemoths on its own. It hasn’t worked out that way.

The budget airline trailblazer filed for bankruptcy Monday, less than a year after a federal judge sided with the Justice Department and blocked its planned merger with JetBlue Airways JBLU -9.49%decrease; red down pointing triangle. Deal opponents argued that eliminating Spirit would harm consumers because cheap seats would disappear and surviving carriers would raise fares.

Spirit is the largest U.S. passenger airline to go bankrupt in more than a decade, and it reflects a reversal of fortunes for an airline that helped make travel more affordable. Spirit pioneered the nickel-and-dime approach to sales, charging extra for everything from water to printed boarding passes. Travelers grumbled, but they snapped up Spirit’s cheap tickets and helped it become the fastest-growing U.S. carrier.

But it lost more than $2.2 billion since the beginning of 2020, nearly wiping out all of the profits it made since becoming an ultradiscounter in 2006. Whether Spirit remains independent or is absorbed by another carrier in bankruptcy, analysts and industry observers expect it to pose less of an immediate threat to the larger airlines it once challenged.

Spirit Chief Executive Ted Christie has said the industry has become a “rigged game” that benefits larger airlines at the expense of consumers.

“It has become ever more clear to me that we exist in an uneven playing field,” Christie said in February, shortly after the merger was blocked. “The law of unintended consequences is in full effect.”

Spirit will continue flying through the bankruptcy proceeding. Matt Klein, Spirit’s chief commercial officer, said in an interview Monday that the airline’s recent pullback in flying will be temporary, and it will become a stronger competitor.

 

Undercutting rivals

Spirit Airlines changed the air travel experience for Americans. Airline tickets were long sold as a bundle that included things such as luggage, seat selection and in-flight meals. 

It imported the a la carte pricing model from Ryanair in Europe in 2006—charging passengers a price that included nothing more than a seat. Anything else costs extra. Complaints rolled in from consumers who found the fees and the “pre-reclined” seats outrageous. The airline had operating stumbles, and it developed a spotty reputation for reliability. 

 

Spirit is the largest U.S. passenger airline to go bankrupt in more than a decade. Photo: Angus Mordant/Bloomberg News
Spirit is the largest U.S. passenger airline to go bankrupt in more than a decade. Photo: Angus Mordant/Bloomberg News

 

But the strategy worked. Spirit undercut rivals’ high fares, drew cost-conscious travelers out of cars and off buses, and generated enviable profit margins. Other airlines followed in its footsteps. The new crop of ultralow-cost carriers began to serve major cities, prompting bigger airlines to slash fares.

The airline and its bright yellow planes have fans. Luis Rosario said Spirit was a lifeline when he and his girlfriend—now wife—were trying to sustain a long-distance relationship. Sure the seats weren’t the most luxurious, and they had to pack light. But the cheap tickets, often $70 to $120 round trip, allowed them to make frequent visits for over two years.

“It gets the job done,” he said.

 

Joining forces

Spirit has been among a chorus of small airlines that argued they needed to be allowed to join forces to compete against the four U.S. carriers—Delta Air Lines, United Airlines, American Airlines and Southwest Airlines—that now dominate the industry after their own mergers.

Spirit was at the center of a fierce bidding war in 2022. The company’s management championed a $2.9 billion tie-up with Frontier, another budget carrier, in February of that year. It argued the deal stood the best chance of passing muster with antitrust enforcers.

JetBlue also wanted to supercharge its growth by acquiring Spirit and absorbing its planes and pilots. It won Spirit’s investors over with a higher, $3.8 billion offer. A hefty breakup fee if the deal was barred helped persuade shareholders to brush off warnings of a tough regulatory battle.

“We’ve been talking about the lack of competitiveness in our industry for several years now,” former JetBlue CEO Robin Hayes told The Wall Street Journal in 2023. “This combination is the remedy to that.”

The Justice Department disagreed, arguing the best way to promote airline competition would be to leave Spirit alone.

Lawyers for the government said that most of Spirit’s problems were temporary and that it would quickly get back on track to resume its rapid expansion.

“There is also nothing wrong with or inherently vulnerable about the [ultralow-cost carrier] business model,” they wrote in a brief after the trial last year.

Representatives from the Justice Department declined to comment on Spirit’s bankruptcy.

 

New industry order 

Spirit’s no-frills business model was unraveling in the months after the government’s merger challenge. 

As cooped-up consumers clamored to go on vacation after Covid restrictions lapsed, Spirit and other airlines that focus on domestic leisure travel made ambitious expansion strategies. 

Bigger rivals crowded into those routes to make up for the business travel traffic that was slower to return. The supply of seats, in some cases, outstripped demand, pushing fares lower. Spirit’s losses mounted.

 

Spirit drew cost-conscious travelers out of cars and off buses, and generated envy-inspiring profit margins. Photo: Eva Marie Uzcategui/Bloomberg News
Spirit drew cost-conscious travelers out of cars and off buses, and generated envy-inspiring profit margins. Photo: Eva Marie Uzcategui/Bloomberg News

 

In testimony last year defending the JetBlue merger, Christie, Spirit’s CEO, acknowledged larger airlines had a winning formula with their international networks, premium seating, and lucrative credit-card offerings. Big airlines were also able to win over cost-conscious fliers with their own discount tickets. 

Other problems piled up. Labor costs soared and Spirit’s operations grew less efficient as the industry grappled with a shortage of pilots and air-traffic control issues.

Spirit faced an outsize impact from a problem discovered in some Pratt & Whitney engines. The required inspections have kept a chunk of its fleet on the ground for months.

“Everything kind of happened at the wrong time,” Melius Research analyst Conor Cunningham said.

A lengthy antitrust process proved harmful for Spirit, said Aengus Kelly, CEO of AerCap, one of the world’s biggest jet-leasing companies. The airline faced limits on fixing its problems while the sale to JetBlue was pending, he said in an interview. AerCap leases planes to Spirit but expects to be unaffected by the bankruptcy as Spirit has said it plans to honor leases amid the process.

Bill Baer, the Justice Department’s antitrust chief during the Obama administration, said Spirit investors bear the blame for its current predicament. They rolled the dice on a risky merger with JetBlue instead of sticking with Frontier in a deal with a better chance of approval.

“DOJ was totally appropriate in challenging the elimination of one of two ultralow-cost carriers,” he said, referring to Spirit and Frontier. When the judge ruled the deal would suppress competition, “Spirit was left holding the bag. But it was their bag—they created it.”

 

JetBlue wanted to supercharge its growth by acquiring Spirit and absorbing its planes and pilots. Photo: Associated Press
JetBlue wanted to supercharge its growth by acquiring Spirit and absorbing its planes and pilots. Photo: Associated Press

 

A slimmer Spirit?

Some industry officials believe Spirit still needs a partner. Alaska Air and Hawaiian Airlines were allowed to merge earlier this year.

It is possible Frontier or another bidder will re-emerge once Spirit restructures its debt and other liabilities through bankruptcy. Spirit revived merger discussions with Frontier in recent weeks, though Frontier decided not to continue those talks.

JetBlue said in October that it is no longer interested in Spirit as it focuses on its own turnaround. It was rethinking the deal and its terms as the merger trial neared, according to people familiar with the matter.

Fierce competition among carriers has been great for fliers but not so much for airlines. Spirit said its passenger traffic ticked up in the first half of 2024, but passengers paid much less in fares and fees. Third-quarter revenue was down about $61 million from a year ago.

For now, the airline will continue flying through its bankruptcy, which it said will be wrapped up in the first quarter of next year. Restructuring Spirit’s balance sheet and getting an infusion of cash from bondholders will position the airline for the future, Christie said Monday.

The company is taking steps to evolve its business model, with new offerings targeted at more upscale consumers willing to spend a bit more on creature comforts—moving beyond its bargain basement roots.

“We believe that these changes we’re making are what customers want, and we’re going to become more relevant to more customer segments,” Spirit’s Klein said.

Sharon Terlep contributed to this article.

Write to Alison Sider at alison.sider@wsj.com

Appeared in the November 19, 2024, print edition as 'Spirit, Once a Maverick, Files for Chapter 11'.

Author: Alison Sider

Source: WSJ:

We are using cookies to give you the best experience on our website. By continuing to browse, you are agreeing to our Cookie Policy.
You did not use the site, Click here to remain logged. Timeout: 60 second