DALLAS — According to Wall Street Journal sources familiar with the subject, Spirit Airlines (NK) has been in talks with bondholders about the terms of a prospective bankruptcy filing following its failed merger with JetBlue Airways (B6). The WSJ states that the American ULCC has also considered restructuring its balance sheet through an out-of-court transaction. 

If the WSJ report is well-founded, I'm not surprised that discussions on striking an agreement with bondholders and other creditors to support a Chapter 11 filing have occurred. We know it's a smart move, if not for keeping it quiet.

Spirit has been losing money. Combine that with upcoming deadlines in its US$3.3 billion debt load, including more than US$1.1 billion in secured bonds maturing in less than a year, and you can see the carrier's predicament. the ULLC also has a deadline from its credit card processor to refinance or extend those notes by October 21.

In July, the no-frills carrier introduced a new seating product to capitalize on the rising demand for premium travel to seek high-margin income to offset cost challenges and enhance earnings. Was this a Hail Mary move by the ULCC?

Spirit's info page reads "Say Yellow To More Travel Options"—four, to be exact. These include plans for priority check-in, seats with extra legroom, and online streaming access through in-flight Wi-Fi services. The fourth "premium" offer, 'Go Big,' includes intra-European-style business class seats with a guaranteed blocked middle seat.

According to data from Cirium, NK has one of the lowest cancellation rates in the US market, surpassed only by Southwest Airlines (WN) in 2024 to date, at 0.71%, which is half the average of US carriers of 1.35%.

Additionally, the airline's on-time performance (OTP) is a commendable 74.25%, demonstrating a greater emphasis on operational performance compared to previous years. In comparison, Delta Air Lines (DL) is the best-performing airline in the US, with an average on-time performance of over 85% across its network.

Regardless, the WSJ notes that NK has not made an annual profit since before the COVID-19 pandemic. Moreover, in the US domestic market, NK had about 5.25% of the capacity of the US market in 2023, dropping to 4.95% in 2024, as the carrier has reduced a number of routes to cut losses.

As per the Cirium data, NK slashed the number of seats scheduled to fly from August 2024 to September 2024, by 18%, while October 2024 sees approximately 10% fewer seats than those of October 2023.

Both the WSJ report and the Cirium analysis place the blame on the recall of hundreds of Pratt & Whitney-geared Turbofan engines, which has grounded a portion of NK’s fleet and slowed its growth this year to the point of the carrier needing to furlough 186 pilots, a number that would have been 260 if not for other NK pilots accepting voluntary leaves.

Spirit operates an all-Airbus fleet, with 134 A320s, 54 A321s, and seven A319s. Its fleet is quite young, with an average age of six years for A320 aircraft and 4.5 years for A321 aircraft, according to Cirium data. 94 of its aircraft use Pratt & Whitney-geared Turbofan engines, with 21 of them now in storage and not flown in over 30 days.

Despite these setbacks, the WSJ states that nothing is "imminent" regarding any restructuring plan from the airline. I add that nothing from the WSJ report is unexpected or unheard of, at least not to the airline industry.

Filing for Chapter 11 as a Last Resort

Filing for Chapter 11 bankruptcy can provide several key benefits for airlines facing financial distress:

Debt Restructuring, Cost Reduction

Chapter 11 allows airlines to restructure their debts and renegotiate contracts while continuing operations. This enables them to:

• Reduce or eliminate certain debts
• Renegotiate aircraft leases and other contracts on more favorable terms
• Reject unprofitable contracts or leases
• Implement cost-cutting measures across operations

For example, during their Chapter 11 proceedings, Avianca (AV) and Aeroméxico (AM) eliminated billions in debt and renegotiated aircraft leases. Another example is Norwegian Air (DY), which four years ago initiated an examinership process in Ireland for its subsidiaries Norwegian Air International and Arctic Aviation Assets.

The examinership process is Ireland's equivalent of Chapter 11 bankruptcy protection in the U.S.

Continued Operations

Unlike liquidation bankruptcy, Chapter 11 allows airlines to continue flying and generating revenue while restructuring. The automatic stay provision halts collection activities and lawsuits, giving airlines breathing room to reorganize without immediate threats from creditors.

Access to Financing

Chapter 11 provides access to debtor-in-possession (DIP) financing, which gives airlines much-needed liquidity to fund operations during restructuring. DIP lenders receive high priority, making this financing more accessible.

Fleet, Network Optimization

Airlines can use Chapter 11 to:

• Renegotiate aircraft leases
• Return excess aircraft
• Adjust route networks
• Optimize fleet composition

For instance, during Chapter 11, the aforementioned airlines reduced their fleet sizes by almost a quarter, better aligning with their future business plans.

When done right, the financial move allows for an airline to:

1. Focus on rightsizing its operations
2. Reduce its debt burden
3. Secure new capital
4. Emerge as a financially stronger and more secure airline

International Recognition

Chapter 11 is widely recognized internationally, allowing foreign airlines with minimal U.S. ties to take advantage of its provisions. This provides a unified restructuring process across jurisdictions.

Using these tools, airlines can emerge from Chapter 11 with healthier balance sheets, optimized operations, and improved long-term viability. However, because the process is complex and costly, it is usually employed as a last resort after all other options have been exhausted.

Talking about it does not indicate NK is at that point just yet, but the WSJ piece does not bode well for the budget airline.