Spirit Airlines' Chapter 11 filing creates more questions than provides answers
Spirit Airlines' recent Chapter 11 filing was hardly surprising. The airline hasn't been profitable in years, and debt payments were looming large.
The airline has forged a pre-arranged reorganisation with bond-holders, and also released a turnaround plan that's arguably a business model shift away from the aggressive product unbundling that served Spirit well for many years.
But none of its planned changes are new or innovative in a market dominated by larger airlines, whose products will remain superior to Spirit's.
For now, Spirit's bond-holders seem willing to give the company time to execute on its plan; however, the airline's fate is far from certain.
- Spirit points to COVID-19 pandemic fallout for its woes – but its competitors starting adapting to compete more than a decade ago.
- The airline is pivoting, and creating more upscale products.
- It’s not clear that the pivot will be successful, given competitive dynamics in the US market.
- Bondholders are looking for a return on investment.
Spirit's competitors were devising ways to vie more effectively against ULCCs long before the COVID pandemic
Spirit's 300-plus page bankruptcy filing consistently points to fallout from the COVID-19 pandemic, naming factors such as shifting customer demand, operating headwinds and soaring premium leisure demand, plus a slower recovery in business travel.
The Fort Lauderdale-based airline believes that the preference for premium products has allowed legacy and value airlines "to compete for an even greater proportion of basic economy share" relative to the ULCCs. This margin advantage has reshifted to favor legacy and value airlines that enjoy optionality to attract price-conscious customers while responding to premium leisure demand".
But even as early as 2012 Spirit's legacy rivals were devising ways to compete more effectively against the no-frills model. That same year, Delta Air Lines began trialling its own version of "Basic Economy," and United Airlines wasn't far behind.
Fast forward to 2024, and what began as an experiment for United has become a "solid home run", the airline's executives said on a third quarter earnings call, reporting a 20% year-over-year uptick in basic economy revenues.
The beleaguered airline has outlined a plan to shore up revenue...
In conjunction with its bankruptcy filing Spirit introduced "Project Bravo," a plan to bolster its revenue through significant product refinements.
The company has already teased out some of the changes, including product tiers with bundled offerings, and blocking the middle seat in certain rows. Other facets of Spirit's plan to drive revenue through more upscale offerings include shifting some ancillary fees into fares and redeploying 20-30 aircraft from markets with the lowest revenue performance.
It's not clear which markets Spirit plans to exit, but some of its top markets measured by seat deployment touch Las Vegas - a market that other airlines have concluded is oversupplied.
Spirit Airlines: top ten markets measured by one-way seat deployment as of late Nov-2024
Spirit also aims to initiate a codeshare with a "moderately strong partner", and extracting more value from its co-branded credit card and loyalty programme.
The airline has reached a conclusion similar to Frontier Airlines' - that significant opportunities exist to boost loyalty revenue. Spirit estimates that loyalty only contributes approximately 2% to its topline revenue, "though the potential exists to achieve up to 9% uplift with a targeted redesign".
Frontier CEO Barry Biffle has previously said that the airline's loyalty revenue per passenger was a "couple of bucks", compared with a range of high teens to USD20 for some US airlines. He believes the airline could push loyalty revenue per passenger in the USD5-USD7 range in the "several coming years".
See related CAPA - Centre for Aviation report: Can Frontier convince financial markets that it's a 'premier ULCC'?
Putting all of those various pieces together, Spirit estimates that if all the elements of 'Project Bravo' were applied to its 2023 total revenue per available seat mile (TRASM), its performance in that metric would grow from 9.6 cents to 10.9 cents, and the overall effect on revenue, based on the airline's 2023 capacity, would be USD700 million.
Additionally, Spirit has concluded that it could boost its revenue per passenger by 13% if the airline was "able to successfully rebrand as a higher value airline in its current markets".
The company believes that implementation will modestly increase its unit costs excluding fuel by 3.8%, but it has concluded that performance will still reside below legacy and low cost operators, "maintaining Spirit's cost advantaged status".
...but success is by no means guaranteed
The key question for Spirit is: will it ultimately succeed in in its efforts to create more upmarket products in a fiercely competitive marketplace?
All of Spirit's competitors have the same, if not better, product offerings. Additionally, the three large US global airlines - American, Delta and United - have vast networks to market to potential and existing customers at various product and price points.
Those airlines can usher customers into their ecosystem and become a preferred airline with loyalty benefits and other attributes that far outweigh what both Spirit and Frontier are trying to create.
And even if Spirit and Frontier maintain a cost advantage, their expenses are still rising, given new labour contracts and the costs of the changes that each airline is planning to institute.
Spirit's fate is far from certain as bond-holders are waiting for results
For now, its bond-holders seem willing to allow Spirit to make the effort to transform its business.
Under the restructuring support agreement signed by a supermajority of bond-holders, Spirit would restructure approximately USD1.635 billion of outstanding funded debt (USD1.11 billion of outstanding senior secured notes, USD25.1 million of outstanding 2025 convertible notes, and USD500 million of 2026 convertible notes) and reduce total funded debt by approximately USD795 million.
Spirit aims to emerge from Chapter 11 in Mar-2025, and if that does happen, it faces formidable competition.
At the same time, its bond-holders will be waiting for a return on investment.