Spirit Airlines (SAVE, Financial), a struggling ultra-low-cost carrier, has announced a crucial financing move to stave off bankruptcy. The company reached an agreement with U.S. Bank National Association to extend a debt refinancing program until December 23, 2023. This is the second extension, originally set for September 20, which was later pushed to today.
Key Points:
- In May 2009, Spirit Airlines partnered with U.S. Bank National Association (USBNA) to process payments via Visa (V, Financial) and Mastercard (MA, Financial). Should Spirit default on its debt, this agreement would be at risk. With approximately $1.1 billion in secured debt maturing within a year and rapid cash burn, extending the refinancing deadline was critical.
- Ultra-low-cost carriers like Spirit have been hit hard by increased capacity in recent quarters. Major carriers such as Delta Air Lines (DAL, Financial), United Airlines (UAL, Financial), American Airlines (AAL, Financial), and Southwest Airlines (LUV, Financial) have mitigated supply-demand challenges by leveraging premium products and international business. Spirit lacks this flexibility.
- Spirit's financial struggles are evident in Q2 results, showing an operating loss of $152.5 million and negative cash flow from operations of $270.0 million, compared to $130.7 million positive cash flow in the previous year.
- The situation worsened when JetBlue (JBLU, Financial) and Spirit ended their merger agreement in March, originally set for July 2022. Regulatory hurdles made it unlikely to complete by the merger deadline of July 24, 2024. The merger could have helped Spirit manage its debt issues.
The main takeaway is that while the debt refinancing extension provides temporary relief for Spirit Airlines, it merely delays the inevitable. The airline still faces significant going concern risks and must secure substantial refinancing agreements to avoid bankruptcy.
