By Rajesh Kumar Singh
NEW YORK (Reuters) – Ultra-low-cost airline Spirit Airlines has its work cut out as it plots a future after the collapse of its $3.8 billion merger deal with JetBlue Airways.
The airline has lost money for the past six quarters despite booming travel demand, and expects operating margins to drop as much as 15% in the current quarter. Analysts and industry officials say the airline will have to make drastic changes to become profitable, which is still not likely to happen this year.
“Strategically, the company is challenged,” said Jonathan Root, senior vice president at Moody’s. “They have to lower their costs.”
That would mean cutting flights and exiting some markets, which would reduce its landing fees and airport charges, as well as lower fuel costs.
Spirit is already taking some of these steps. The company has said it is adjusting its growth profile and has pulled flights out of markets like Denver and New Hampshire.
The JetBlue merger would have created the fifth-largest U.S. carrier and potentially ensured the survival of Spirit. But the two carriers concluded there was no path forward after a U.S. judge blocked the deal in January on anticompetition concerns.
After calling off the merger on Monday, Spirit said it is confident in its strengths and is focused on returning to profitability.
Industry experts say Spirit needs to do more. Excess capacity in key markets is hurting Spirit’s pricing power, forcing the airline to discount heavily to fill planes. Average fare per passenger was down 25% in the fourth quarter from a year earlier.
In addition, competitors are expanding their capacity in Spirit’s core markets like Florida. One industry source said Spirit needs to review its footprint in about a quarter of its markets which are highly competitive.
“They have to do it to change the trajectory of their financials,” the source said.
Reduced flying, however, will leave the company with surplus labor. The airline had to ground a number of Airbus planes due to a snag with RTX’s Pratt & Whitney geared turbofan (GTF) engines last year, which left it carrying more pilots than required into the fourth quarter and early 2024.
Last month, Spirit said it was “right-sizing” labor costs, but the company declined to clarify if it was looking to reduce its headcount through layoffs or other measures.
“The two largest costs of any airline are fuel and labor,” Root said. “If they’re going to look to reduce costs, it has to come from the labor line.”
That may be a challenge as well. On Monday, Spirit’s pilot union said it plans to reopen contract negotiations, seeking better wages, among other demands.
Spirit reached an agreement with its pilots in 2022, but the deal included a provision to reopen negotiations should the merger agreement with JetBlue be terminated.
Some analysts have voiced grave doubt over Spirit’s future if it cannot shore up its finances, but CEO Ted Christie has dismissed such speculation as a “misguided narrative.”
The company has said it is trying to strengthen its balance sheet, including possibly refinancing debt. Spirit has said it has enough liquidity to survive until operating cash flow turns positive in the second quarter.
The company is also seeking compensation from Pratt & Whitney due to its inability to operate GTF-powered aircraft currently, but the timing is unclear.
Spirit shares were down 4.3% at $5.50 on Tuesday afternoon. The shares have fallen 66% so far this year.
(Reporting by Rajesh Kumar Singh in Chicago; Editing by Matthew Lewis)
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