Spirit Airlines is on shakier ground after avoiding hard decisions in bankruptcy – CNBC
Spirit continues to teeter, most recently agreeing to extend its credit card processor agreement but only after giving up millions to make it happen. The struggle continues.
At least it avoided a 100% holdback. That would’ve been catastrophic.
Nick – But is this not a 100% holdback? It looks like Spirit transferred $50 million into an account for USB to reduce its exposure. And then it says in the 8-K, “Spirit agreed to
allow USB (i) to holdback up to $3 million per day until USB’s exposure is fully collateralized and (ii) to remain fully collateralized as USB’s exposure increases or decreases.”
This is beyond my area of expertise, but it sounds like that’s a 100% holdback, no?
Brett, I’m not an expert either, but back when Frontier had to file bankruptcy because of the 100% holdback that was total. They didn’t get a dime until the flight flew.
Looking at 2024, Spirit had $4.9 billion in revenue. On average that’s $13 million a day. So on average they’ll be getting somewhere between $7 and $11 million a day after the holdback. Given how that section is phrased, it’s probably a percentage hold back, upto the ceiling of $3 million.
I’m sure their revenue is down. But that at least gets them some of the revenue at booking instead of none of it. And some percentage of their costs are always after the flight lands and they get 100% of the revenue . (E.g. Employees, airport fees, maybe fuel if those folks aren’t too skittish..)
That does sound like a gradual build up to 100% hold back. It’s not good news at all.
Trying to interpret that language is giving me a headache, unless there’s some definition of “fully collateralized” that is something less than not releasing revenue to the airline until the flight operates (fully indemnified against loss).
Is there any part of a customer’s purchase that is considered earned at the time of purchase, rather than the time the flight operates? Say, maybe, seat selection fees? I’m just grasping at trying to find something that would explain the difference between full collateralization and full indemnification that would make the “$3mm/day…until fully collateralized” language make sense.
Otherwise, “up to $3 million a day” doesn’t sound particularly extreme, since operating passenger revenue has been running at a little over $11 million a day since emergence. That’d be ~26%, which isn’t good but isn’t the end of the world. The biggest problem is that any further contraction just lets the bank drive the percentage up if they want to, since it’s a hard-dollar cap.
But this never gets them to being “fully collateralized” (again, unless they’re using a definition of full capitalization that I’ve never heard of.) So this interpretation makes no sense either.
And the filing says we won’t see the full text of the contract amendments until the next 10-Q, three months from now. Which tracks, we’re missing something here.
If I’m a fuel provider, I’m reading this and going “okay, so their working cash flow is now not just encumbered, but kind of a black box, and they plowed through the prepackaged line of credit in one quarter, AND liquidated all their investment-grade securities on hand already”…and I’m looking to tighten terms, because I’m the most exposed vendor. This could be some sort of asset securitization, probably against the airplanes they own that are up for sale already, or COD status.
Either way, it’s another push towards the you-know-what…
My interpretation (which might be wrong) is that the collateral increases by a maximum of $3 million a day (gonna go out on a limb and say that the bank will use every bit of that $3 million a day maximum incremental holdback).
So they’re headed to full collateralization, but not all at once. They’re starting at $50 million, each day that goes by the collateralized amount increases by $3 million until they hit full collateralization.
So, as of June 30, 2025, air traffic liability was $407.5 million. Let’s assume it still is. Then on the first day of this new agreement, they collateralized $50 million, leaving $357.5 million uncollateralized which ticks down by $3 million per day thereafter. If $3 million becomes collateralized every day thereafter and the air traffic liability stays what it is, it will become fully collateralized over a 119-120 day period – or about 4 months. So then unrestricted cash will be down by $407.5 million and restricted cash will be up by $407.5 million (assuming the ATL doesn’t move, which is obviously fanciful).
The above also assumes that everything in the air traffic liability goes through this processor, which is likely also wrong.
That’s what makes sense to me, but could be wrong.
Coincidentally, June 30, 2025 unrestricted cash was also $407.5 million. $407.5 million minus $407.5 million equals what? Ruh roh.
So you can see that absent having exercised the revolver, they’ll be cooked. Which they may be anyway.
This is my interpretation as well. The full collateralization is of the value of tickets that Spirit has sold, but not yet flown, essentially what US Bank would be stuck with refunding if Spirit shut down. This is also why there is language around remaining fully collateralized as that amount increases or decreases.
Is this good news? Yes, in the sense that its not a 100% hold back. No, in the sense that its tying up a bunch of Spirit’s cash. But they simply cannot operate without a credit card processor, so one that is willing to work with them is better than one who wants a 100% hold back immediately.
Might they get creative and start pushing gift cards purchased at grocery stores, payment by Western Union and other non-credit card options? Perhaps. (Honestly, given their clientele, I’m surprised they don’t accept some of these already.)
On Nick’s last paragraph: they could, but I’m comfortably certain that the language in either the card processing agreement and/or BofA’s contract for the “Free Spirit” card prohibits them from favoring or promoting any form of payment over those cards.
I did look, and surprisingly for airfare they only take Visa, MasterCard, and American Express. Not even Discover.
I don’t know if anyone still does it but a couple of airlines used to sell their own prepaid cards in Germany to comply with German law that requires consumers to have a no-fee payment option and yet still charge fees for bank cards. (The law may have been changed, this was around 20 years ago IIRC and the EU has updated a lot of these regulations since. But it was a creative idea!)
This interpretation makes a lot more sense than I got to, thanks!
So basically, presuming “Spirit agreed to allow…” really translates to “USB will…” take the additional daily holdback, Spirit is on the clock before they run out of cash (presuming no one out there will lend them any more money.) And if nothing changes, the timer goes off 3-4 months from now, possibly sooner depending on what others do.
There is a tiny glimmer of hope here: as described in the filing, the holdback is “up to…”, not set in stone. If, somehow, Spirit were to show major progress towards radically reducing the losses, USB could relent without any further agreement. I have zero belief this is the case, but I’ve been wrong before.
But this is not good, and I still suspect tighter terms from the fuel suppliers are on their way. Maybe not COD, but tighter.
Just a bit more idle thinking about this. I’d think of the collateralization that Spirit has to provide to US Bank is sort of like a deposit for a rental property. Instead of having to cough up the whole deposit at once, they get to make the full deposit in daily installments over four months.
Its not ideal, but at least it isn’t as much of a shock to the system.
I’m not optimistic about their chances of survival at this point. I wouldn’t be surprised if they go into Ch.7 before 2026. I can’t think of any carrier offhand that would want to buy/merge with the yellow disaster.
They’d be sold off in pieces, planes and pilots are still valuable.
I’ve seen a fair bit of speculation about UA wanting some of the fleet.
It also might be worthwhile for an acquirer to continue operate flights as Spirit until the crews and planes can be converted slowly, a la Southwest’s integration of AirTran.
The other thing is airlines are valuable to the companies whom the airlines buy from, which is why they’re so hard to completely shut down. Remember US Airways went through bankruptcy twice in short order in the 2000s.
I would think there are many airlines that would like a piece of their fleet.
Is that $15.8 million per month lease rate for an A321 engine figures accurate? I was under the impression that the purchase price was in that ballpark. Eve in if that figure includes maintenance costs, it seems high.
I had the same thought. We’re right. Per Gemini, the average monthly lease costs for an Airbus A321 are:
Older A321 (CEO): Mid-life aircraft from the previous generation (CEO, or “Current Engine Option”) lease for around $250,000 per month.
Newer A321neo (NX): The current-generation A321neo, with its more fuel-efficient engines, leases for around $460,000 per month.
Extended-Range A321XLR: This newest, most advanced version is likely the most expensive, with estimated lease rates topping $500,000 per month.
It was three short years ago that JetBlue desperately wanted to buy this heaping pile of garage for a mere $3.8 billion.
The people responsible for that decision should be sacked. They already were? Then they should be rehired so they can be sacked again.
JetBlue wanted Spirit’s pilots and airplanes. They didn’t want Sprit’s business model, and were quite open that they’d be reconfiguring Sprit’s airplanes to JetBlue standards and dropping the routes that didn’t work with JetBlue’s business model. And this honesty is a big part in what got the merger blocked, since it would have meant the loss of a low fare competitor.
That is very well known. Regardless, do you think that made NK worth $3.8 billion?
JetBlue has a difficult time flying its existing planes profitably. What makes you think they could do this with an additional 200+ planes AND having to pay off the better part of $4 billion?
On the money.
Well said. That judge did JetBlue a huge solid by blocking the merger. Even if the legal justification was shaky, B6 breathed a sigh of relief that day. The deal got less attractive everyday that passed. That’s why B6 didn’t bother to appeal.
Prior to the JetBlue bid, Sprit was working on a merger deal with Frontier. So JetBlue probably had to overbid to make their offer more attractive than Frontier’s.
I’m unconvinced that a longer time in Ch 11 would have been, by itself, a big help.
One quote says essentially that they should have shaved 10% off of aircraft lease rates.
Is that realistic? The aircraft market is extremely hot, and I would guess that, while they almost certainly tried to take cash out of the sale-leasebacks that created leases, the leases were probably were still at rates about or maybe even slightly below market, because airlines typically get better prices from OEMs than aircraft lessors.
Plus, an extended stay in Chapter 11 has costs of its own.
To me, this is all putting the cart before the horse. Spirit’s model (and that of Frontier, which is very similar) hasn’t worked since Covid. But Spirit’s been achingly slow to recognize that.
It appears they went into Chapter 11 thinking their model was OK, they exited the same way, any model changes have been tweaks at best (bundled fares… really?), yet here they are making less money than ever.
Chapter 11 might have been more effective if they’d had a clear vision for what the future Spirit needed to be (hopefully something plainly different from past Spirit). But at every turn it seems the execs and board thought that their model was fine, the industry just needed to recover a bit more and they needed to get by the engine issues.
And now they’re in desperate straits.
It’s like Spirit slept walked right up to the side of a cliff and now it’s dawning on the execs and board, ruh-roh, maybe we needed to dig a little deeper. But that’s less of a “spend more time in Chapter 11” issue per se and more of a “re-examine our business model” issue. Which, to be fair, might have resulted in a longer stay in Ch 11 – but only as a consequence of thinking more deeply about what ails the company and not as an aim in itself.
A lot of talk about the “what” but almost no mention of the “why”.
Meaning how, exactly, on a more granular level, did they arrive at this point? Did they buy too many planes too fast? Paying too much for fuel? Is the public simply getting fed up with the a-la carte model?
NK has earned the dubious reputation of being a great place to watch a fistfight break out at FL350. Did they do nothing to try and repair this image-or least wait till now by doing too little, too late.
These are the questions I’d love to see answered.
They have a weak business model. It depends on spill from the big carriers. Consider Chicago to Dallas. Spirit will always get the dregs of demand. There’s no realistic scenario where Spirit pushes aside Southwest, American or United.
Pre-Covid, the legacies spilled enough demand for Spirit to make money. After Covid, the legacies decided to retain most of that demand. Spirit and Frontier have suffered ever since.
Spill models are intrinsically dangerous. A spill airline doesn’t control markets, it can be pushed aside any time the main providers want to, simply by them increasing supply.
It’s been unmistakeable since at least late 2023, when the legacies added huge capacity in Vegas and Florida, significantly hurting Frontier and Spirit.
Leading ULCCs in other geographies do not have spill models – the US is pretty unique in the top two ULCCs using this strategy (further, Sun Country also relies on spill).
If Spirit goes down, Frontier will likely revive a bit, but it won’t have anything to do with them having a good model, it will just be that their main competitor has winked out of existence.
My biggest takeaway is this point:
“Spirit had forecast a net profit of $252 million this year, according to a court filing from December. But its report last week said it instead lost nearly $257 million since March 13, after it exited Chapter 11 through the end of June.”
Spirit’s executives should be in jail for misleading investors with a miss that badly. Who in accounting made a $500M error? And that’s only 4 months; as we enter the winter, that’s only going to get worse.
Anthony – They had to have been pretty clear with their plans, and the creditors bought into it. They didn’t have to. Yes, the execs have now lost their jobs, but jail? I think it’s just stupidity all the way around.
I suppose ignorance is one explanation, but that’s not the 3-4% RASM swing that we see in normal earnings adjustments. That’s an exorbitant sum of money that makes up the difference between a healthy, recovering airline and an airline on the brink. The company has a fiduciary responsibility to its shareholders and a legal obligation to the SEC to provide an honest outlook, so I can’t bring myself to believe they saw data that allowed them to make projections that are likely to miss by nearly $1B. I’m surprised the shareholders aren’t demanding an investigation–there’s no way investors would have put money into a company losing a quarter of a billion dollars in just 3 months.