By Rajesh Kumar Singh
CHICAGO (Reuters) – Spirit Airlines (NYSE:) is expected to be one of the big winners in the travel industry post-pandemic. But the no-nonsense pioneer never found his wings in a changed business and operational landscape.
On Monday, the Florida-based airline filed for bankruptcy protection. While speculation about Spirit’s future began circulating immediately after a federal judge blocked its $3.8 billion merger deal with JetBlue Airways (NASDAQ:) in January, analysts say the Chapter 11 filing has been in the works for some time. .
Before the pandemic, Spirit had outpaced the market, luring price-sensitive travelers and forcing larger airlines to introduce their own versions of budget offerings.
The airline’s business model of an integrated fleet, allowing planes to fly more hours per day and more seats on each plane, helped optimize its resources and keep costs down. High fleet utilization delivered double-digit operating margins for nine consecutive years through 2020.
But the global health crisis changed work environments and travel patterns, and Spirit struggled to adapt.
Spirit’s average daily aircraft usage is down 16% this year compared to 2019, adding to cost pressures.
Consumer demand has shifted in favor of full-service airlines over the past two years as middle- and upper-income households vacationed heavily while inflation hurt lower-income spending.
Spirit, like many other airlines, aimed for growth, but did so by adding more than $2 billion in debt between 2020 and 2023. Sticking to the pre-pandemic playbook, capacity grew an average of 27% over the past three years in an effort to capture a larger share of the leisure travel market.
Analysts urged Spirit and its no-nonsense peers to slow expansion plans.
Higher labor costs and a problem with RTX’s Pratt & Whitney turbofan engines made the situation worse.
Spirit spent 82% of its revenue on non-fuel operating costs in the first half of this year, up about 22 percentage points from 2019. The company said Monday that inflationary pressures have “disproportionately” eroded low-cost carriers’ margins.
ON the hunt for holidaymakers
Full-service airlines Delta and United have leaned on growing demand for high-margin premium cabins and long-haul international flights to ease inflation. United said Tuesday that bookings to European destinations were up nearly 10% from last year and nearly 30% higher than in 2019.
In June, Spirit announced a foray into the luxury travel market, saying that rebranding itself as a higher value airline could generate 13% more revenue per passenger.
But Hooman Yazhari, partner and aviation bankruptcy expert at law firm Michelman & Robinson, said the airline lacked “the muscle and the balance sheet strength” to compete in that market.
“There are so many reasons why this just didn’t go well,” Yazhari said.
A slow return of business travelers after the pandemic also hurt as all U.S. airlines chased leisure travelers, creating a glut of airline seats in markets like Florida and Las Vegas.
Ticket prices fell. Spirit’s average fare per passenger in the first six months was 19% lower than a year ago. Other budget airlines, such as JetBlue and Frontier Airlines, were also in a tailspin.
In April, Frontier CEO Barry Biffle compared Florida’s competition to “Costco (NASDAQ:), Sam’s Club, Walmart (NYSE:) and Goal (NYSE:) all opening on the same block.”
The effects were easy to see. Shares of Delta are up 87% over the past two years, while Frontier and JetBlue have lost 23% and 58%, respectively. Spirit stock lost almost all its value before filing for Chapter 11.
Sandeep Dahiya, a professor at Georgetown University, said the company’s debt is difficult to pay off as it has not reported a full-year profit since 2019.
“The writing was pretty much on the wall,” Dahiya said.
