According to the financial news app Zhitong Finance, on November 18th, Eastern Time, the American low-cost airline Spirit Airlines (SAVE.US) has filed for bankruptcy protection and will attempt to reorganize. With the busiest travel period of the year in the United States approaching, Spirit Airlines' move has raised concerns among travelers about whether they will be able to reach their destinations before the Thanksgiving holiday. Fortunately for passengers, under Spirit Airlines' so-called Chapter 11 bankruptcy proceedings, the airline is not shutting down but reorganizing to maintain business operations. Spirit Airlines has informed passengers that flights will continue to operate normally at the 84 airports where the company provides services, and passengers can use all tickets, points, and miles as if nothing has happened.

Spirit Airlines has applied for a so-called pre-arranged bankruptcy, which means the company has reached agreements with most creditors to restructure its $1.6 billion debt, with existing bondholders receiving the company's stocks and new bonds. At the same time, shareholders will get nothing - a common occurrence in almost all major corporate bankruptcies, as part of the restructuring, its common stock is expected to be canceled without any value.

Why did Spirit Airlines go bankrupt?

It is reported that since the beginning of 2020, Spirit Airlines has incurred losses exceeding $2.5 billion, and will face total debts exceeding $1 billion next year. After the pandemic, the U.S. aviation industry has been gradually recovering, but Spirit Airlines has not been able to turn losses into profits like several other major U.S. full-service carriers. In the first half of 2024, Spirit Airlines' revenue dropped by 8.48% year-on-year to $2.546 billion, with a loss of $0.336 billion, and the debt-to-asset ratio also reached 91.5%.

Some analysts point out that after the pandemic, business travel in the United States and many other countries recovered quickly, while full-service airlines with amenities like business class and multiple seat options recovered faster, compared to budget airlines mainly catering to leisure travelers, which had a slower recovery.

Some of the issues faced by Spirit Airlines are unique to its class of airlines - namely, those focused on low-cost domestic services. Due to billions of dollars in government aid, larger competitors had a better financial position during the pandemic than during previous economic downturns. Subsequently, major airlines poached thousands of pilots from airlines like Spirit Airlines to fill vacancies left by a record number of pilots opting for early retirement or leaving the aviation industry. The new round of labor contracts after the pandemic raised pilots' wages by 34% over the course of two years, making staffing issues at Spirit Airlines even more complex.

At the same time, several of the largest airlines in the US aviation industry are now selling basic economy class tickets designed to attract price-sensitive travelers by offering more flights and destinations, presenting intense competition for low-cost airlines such as Spirit Airlines.

Furthermore, as the demand for travel in the US surged in 2022 and 2023, airlines significantly increased their capacity. However, the excessive expansion has led to an oversupply of capacity in the US market, dragging the entire US aviation industry into a ticket price war, posing an additional challenge for low-cost airlines like Spirit Airlines.

Spirit Airlines is also facing the dilemma of being grounded due to the recall of defective engines manufactured by RTX Corp.'s Pratt & Whitney. Before applying for bankruptcy reorganization, Spirit Airlines attempted mergers with other airlines. In February 2022, Frontier Airlines proposed to acquire Spirit Airlines for $2.9 billion in cash and stock. Subsequently, another US airline, JetBlue Airways, offered a higher price of $3.8 billion to acquire Spirit Airlines; however, this deal was ultimately rejected by US regulatory authorities due to antitrust issues.

What is the future of Spirit Airlines?

The US aviation industry has a long history of bankruptcy, allowing airlines to restructure debt and make a comeback without ceasing operations. Some of the largest US airlines, including American Airlines, Delta Air Lines, United Airlines, have filed for bankruptcy protection under Chapter 11 of the bankruptcy law. Some airlines were acquired during bankruptcy, while others (mostly smaller airlines) went out of business.

The advantage of the pre-arranged bankruptcy reorganization for Spirit Airlines is that this low-cost airline may emerge from bankruptcy protection as early as the first quarter of next year. However, its restructuring plan must still be approved by the bankruptcy court judge and is likely to face opposition from shareholders.

After bankruptcy, Spirit Airlines may become a smaller-scale airline. The company has agreed to sell 23 Airbus SE planes, place nearly 500 pilots on leave, and cut unprofitable routes. It has also hired a "globally recognized" advertising agency and branding consultant to help improve its reputation as one of the least liked airlines in the USA. The company is also adding premium options to its products in response to the growing preference for premium options among American travelers, especially young ones.