Spirit Airlines (NYSE: SAVE) is a high-risk investment that only the most aggressive investors should be looking at right now. If you pass that screen, then 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 manages the feat it probably won’t be a millionaire-making achievement.
Spirit Airlines is a budget airline and there’s nothing wrong with that. The problem is that airlines are always working with tight margins,so when things aren’t going well the impact on the bottom line can be very bad. In this case, the coronavirus pandemic sent Spirit into a spiral from which it has yet to recover.
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As the chart above highlights, Spirit’s earnings plunged during the pandemic. That makes total sense, given the situation at the time. But earnings have yet to rebound even as the world has learned to live with COVID-19. That’s obviously a big problem for Wall Street, highlighted by Spirit’s steadily declining stock price. The issue 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 putting a bag on to the flight. That has given the airline a bad reputation, as the fees it charges are seen as a nuisance. And, following the pandemic other airlines, with better reputations, have been competing more on price to win back customers. Given the stripped down service offering Spirit is selling, it has had a hard time competing.
In the middle of this dismal financial performance Spirit threw a Hail Mary pass, agreeing to be bought by JetBlue (NASDAQ: JBLU). Basically, the company’s management decided to let someone else deal with the mess as it looked to salvage as much value as it could for shareholders. The problem is that JetBlue is a fairly large airway at this point and it looked like regulators would block the deal, leading JetBlue to call the marriage off.
Financially struggling Spirit Airlines suddenly found itself in an even more precarious position than it had been in before the proposed JetBlue deal. That’s because valuable time had elapsed with, basically, nothing being done to strengthen the underlying business. The risk of bankruptcy is very real here.
That statement is backed up by the company’s actions. That includes cost-cutting and the sale of aircraft. These are the types of moves that deeply troubled companies make as they attempt to keep the doors open long enough for something, perhaps anything, good to happen. At this point, the best opportunity looks like Spirit inking a new deal to sell itself. To that end, it is rumored to be in discussions with Frontier Group, owner of Frontier Airlines.
