Spirit Airlines (NYSE: SAVE) is a high-risk investment that only the most aggressive investors should be looking at right now. Once you get past that screen, the next big question is whether the risk is worth the reward. Spirit is in a high-stakes battle to avoid bankruptcy, but even if it succeeds, it likely won’t be a feat that will create millionaires.
Spirit Airlines is a budget airline and there is nothing wrong with that. The problem is that airlines always operate on tight margins, so if things don’t go well, the impact on the bottom line can be very bad. In this case, the coronavirus pandemic has sent Spirit into a spiral from which the company has yet to recover.
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As the chart above shows, Spirit’s revenues fell during the pandemic. That makes perfect sense, given the situation at the time. But profits have yet to recover even as the world has learned to live with COVID-19. That’s clearly a big problem for Wall Street, highlighted by Spirit’s steadily declining stock price. The problem here is that Spirit’s business model is based on selling cheap tickets that require customers to pay extra fees for things like selecting a seat or bringing a suitcase on the flight. This has given the airline a bad reputation, because the fees it charges are perceived as a nuisance. And after the pandemic, other airlines, with better reputations, have started competing more on price to win back customers. Given the stripped-down range of services Spirit sells, it has had a hard time competing.
In the midst of this dismal financial performance, Spirit threw a Hail Mary pass, agreeing to be repurchased JetBlue (NASDAQ: JBLU). In short, the company’s management decided to let someone else handle the mess because it was intent on salvaging as much shareholder value as possible. The problem is that JetBlue has a pretty big airway at this point and it looked like regulators would block the deal, causing JetBlue to call off the wedding.
Financially struggling Spirit Airlines suddenly found itself in an even more precarious position than before the proposed JetBlue deal. That’s because valuable time had passed while nothing was actually done to strengthen the underlying activities. The risk of bankruptcy here is very real.
This statement is supported by the company’s actions. That includes cost savings and aircraft sales. These are the kinds of steps that deeply troubled companies take as they try to keep their doors open long enough for something, perhaps anything, good to happen. Right now, the best chance seems to be that Spirit makes a new deal to sell itself. Rumor has it that there are discussions to this end Border groupowner of Frontier Airlines.
