Spirit Airlines was once the envy of the airline industry. It had the best margins and generated a strong return, making air travel available to more people and stimulating demand by passengers who weren’t flying otherwise. They had lower costs than competitors, lower fares, and customers adapted themselves to Spirit’s business model to save money.

However, consumer preferences changed and the pandemic exacerbated this. Passengers increasingly wanted a premium product that Spirit wasn’t positioned to sell. It had one of the most toxic brands in any industry.

And they began losing their cost advantage. They paid as much for planes and fuel as everyone else, and labor costs were rising. They tried to sell themselves to JetBlue, but the Biden administration successfully blocked this. That was a fatal error – as it could leave Spirit out of business, meaning reduced competition.

Spirit Airlines just issued a warning in its latest SEC filing that they may not last 12 months as a going concern. Their second quarter 10Q filing contains this disclosure:

Because of the uncertainty of successfully completing the initiatives to comply with the minimum liquidity covenants and of the outcome of discussions with our stakeholders, management has concluded there is substantial doubt as to our ability to continue as a going concern within 12 months from the date these financial statements are issued.

The airline indicates that their turnaround plan is not enough. They are concerned about:

• breaching minimum liquidity covenants in their debt obligations
  
• credit card processing agreement requirements not being met
  
• the need for a new credit card processing agreement for 2026 – and the expectation that will mean “additional collateral” required (because the processor doesn’t want to be on the hook for chargebacks if Spirit goes under)

And so they’re looking at the sale of additional assets like planes, real estate and gates and “elimination of certain fixed costs.”

Of course, they’ve warned of their ability to continue as a going concern consistently during and after bankruptcy.

That shouldn’t diminish concern over this new disclosure. On the contrary, (1) they haven’t gotten themselves out of this mess – their turnaround plan hasn’t worked! – despite warnings this was coming, and (2) things continue to get worse as they risk breaching covenants.

They probably shouldn’t have rejected the lifeline that Frontier Airlines threw them earlier this year.

Almost sent her with the luggage pic.twitter.com/K1JlcTtzOe

— DJ Kam Bennett (@KameronBennett) November 13, 2024

Of course, they could make it! They could pull a rabbit out of a hat. And for now they continue business as usual, albeit making greater changes to their route network. But since they’re telling us they might not be around in a year, I say we should believe them. And that means not buying travel far out into the future.

Indeed, I probably wouldn’t buy Spirit Airlines tickets for travel more than a couple of months out – within a period I’d be confident I could dispute the charges if travel weren’t honored. I also wouldn’t be accuulating their miles – but I wasn’t doing that to begin with.

(HT: Enilria)