Spirit Wants Taxpayers To Own Part Of The Airline — In Exchange For A Bailout

Spirit Airlines is asking the federal government for a taxpayer bailout. We know they want hundreds of millions of dollars. And we now know that would come in the form of an ownership stake: cash for equity in the airline.

Spirit Frames The Problem As Expensive Jet Fuel, That’s Trump’s Fault

This is being framed as an emergency due to the cost of fuel. But this is not because of fuel. And the Trump administration isn’t going to want to see an airline go under because of its military operation in Iran.

Spirit Airlines has spent most of the last two years in bankruptcy. It’s in its second try. They had the opportunity to sell themselves to Frontier and walked away. They do not have a clearly viable business model, and they have a terrible brand with consumers.

Plus, the Trump administration can blame the Biden Department of Justice for blocking JetBlue’s acquisition of the airline (on the other hand, he can say he has to do this to rescue them from the mess that President Biden created).

There Is No Legal Authority For Taking A Stake In Spirit Airlines

There is absolutely no legal authority for the adminsitration to take an ownership stake in Spirit Airlines as a form of bailout. It would presumably come in the form of bankruptcy exit financing. The Bloomberg Law piece revealing the plan analogizes to the federal government taking 9.9% of Intel last year. However, that used the Commerce Department’s semiconductor incentives program, which was explicitly authorized by law for up to $75 billion, although that was supposed to be direct loans and loan guarantees.

The government has bailed out airlines before. But that was with explicit legislation. In fact, Spirit itself received $754 million in direct payments from taxpayers during Covid.

The Exchange Stabilization Fund allows the Treasury to deal in “gold, foreign exchange, and other instruments of credit and securities,” but only consistent with U.S. IMF obligations in support of a stable system of exchange rates. That’s for foreign country bridge loans, although it was used domestically for the broad guarnatee of money market stability in 2008 and in 2020 for Federal Reserve emergency lending facilities. Then Treasury Secretary Tim Geitner was explicit that this authority does not permit investing in a failing private company.

They could try the Defense Production Act’s authority for loans to private businesses when required for national defense, when private financing is unavailable on reasonable terms, and repayment is reasonably assured. That law says it cannot be used primarily to prevent insolvency or bankruptcy unless would have a direct negative effect on national defense production. There’s no plausible connection here.

Taxpayers Owning Spirit Is A Bad Idea

This is a huge conflict of interest and leads to bad decision-making.

• When the Department of Transportation has to hand out slots at congested airports in the public interest, isn’t supporting Spirit in the public interest because the public owns it (and not other airlines)?
• When the FAA is enforcing safety rules or imposing fines, the government is risking its own assets. You want them operating at true arms-length.
• What if the FAA were to take steps that undercut Spirit’s reputation and drove them back into bankruptcy? That would make the administration which made the investment look bad. Would that cause political meddling? Once the state owns part of a firm, it becomes harder to let that firm fail.

The planes, pilots and gates do not disappear when an airline does. There would be some disruption over a few weeks, but air travel capacity would grow to replace the loss of Spirit, which only plans to be about 2% the size of American Airlines, Delta, United and Southwest.

The fact that this administration has taken stakes in other companies (at least in those cases as opposed to here, arguably legally) makes the next one even worse. The economy as a whole doesn’t benefit when investment decisions get made politically, based on electorial incentives or lobbying or symbolism.

Socializing losses and privatizing gains doesn’t just lead to a cronyist economy, it leads to too much risk-taking because owners don’t really risk loss themselves. Meanwhile, tilting the tables in favor of Spirit gets us too much Spirit when their business is failing precisely because Spirit Airlines isn’t what consumers and passengers have wanted.

Other Airlines Want In On The Action

Low cost carriers are meeting with the Department of Transportation this week seeking a temporary suspension of the 7.5% excise tax on domestic tickets and $5.30 domestic segment tax supporting FAA operations and air traffic control, which is expected to cover about one-third of the increase in jet fuel.

Meanwhile, if the government takes a stake in Spirit Airlines, why not Frontier and JetBlue? Surely those are better investments for the American people than Spirit is. And what about American Airlines? Critics say onboard service there already resembles the DMV, so it could be a natural fit.