Airline sector jolted by Spirit Airlines' bankruptcy
Nov. 18, 2024 12:09 PM ET Frontier Group Holdings, Inc. (ULCC) Stock, SAVE Stock JBLU, LUV, ALK, ALGT, DAL, UAL, AAL, JETSBy: Amy Thielen, SA News Editor
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The long-anticipated bankruptcy of ultra-low-cost carrier Spirit Airlines (NYSE: SAVE) is reverberating through the airline sector, with rival Frontier Group Holdings (NASDAQ: ULCC) also suffering a double-digit loss in sympathy with an 18% drop in Spirit ( SAVE).
After years of losses, months of speculation and unsuccessful attempts to remain afloat with several cash infusions, Spirit Airlines ( SAVE) declared bankruptcy on Sunday, having already hammering out a debt restructuring agreement with a majority of its bondholders. The Chapter 11 reorganization, with commitments for a $350M equity investment and $300M debtor-in-possession financing arrangement from current bondholders, is expected to be complete in Q1 2025.
Although the last major airline bankruptcy was 13 years ago, the budget airline industry has been plagued recently by competition from legacy carriers, rising labor costs, reduced aircraft capacity, and overcapacity in coveted routes along the east coast and Caribbean.
Spirit’s ( SAVE) low-cost business model was predicated on travelers’ preference for à la carte booking, which typically translates into increased revenue for ancillary charges. However, in the most recently reported quarter, Spirit’s ( SAVE) non-ticket revenue fell 9.6% while fare revenue was down 22.2%, resulting in total revenue per passenger flight segment dropping 15.3%. At the same time, the adjusted cost per available seat mile (“CASM”) increased 2.9%, largely blamed on Spirit’s reduced aircraft utilization.
By comparison, Frontier ( ULCC) uses a similar business model as Spirit ( SAVE), but with a “bundled” approach to add-on costs. So, while both carriers realized a decline in non-ticket revenue, Frontier’s ( ULCC) fare revenue was down just 1% while costs, or CASM, were also down 6%.
Frontier's ( ULCC) cost efficiency is supported by its use of larger aircraft. Spirit ( SAVE) uses smaller Airbus aircraft like the A319NEO while Frontier ( ULCC) relies on the larger A321NEO, making it more difficult for Spirit ( SAVE) to achieve the same cost savings as Frontier.
To compete with carriers like JetBlue ( JBLU) and Southwest ( LUV), and to address the decline in ancillary revenue, Spirit recently launched tiered ticket pricing enabling passengers to pay a bundled fare for tickets, seat assignment, and baggage.
These measures are designed to redefine Spirit ( SAVE) as "high value low-cost carrier," CEO Ted Christie said on the company's latest earnings call.
"We are not abandoning our low-cost position, but rather we are leveraging it," Christie added.
Unfortunately, the bankruptcy filing proceeded any data whether this new strategy resonates with customers.
Shares across the airline sector are in the red with Frontier Group ( ULCC) down 13%, JetBlue ( JBLU) -7%, Allegiant Travel ( ALGT) -2.4%, Alaska Air Group ( ALK) -2.3%, Southwest ( LUV) -0.7%, Delta Air Lines ( DAL) -0.8%, United Airlines ( UAL) -0.4%, American Airlines ( AAL) -0.6%. The U.S. Global Jets ETF ( JETS) is down 1.4%. |
