There is a lot of financial turbulence for the largest airline based in Florida.
Spirit Airlines has been struggling for four years and is facing an imminent deadline or it may declare bankruptcy. The company’s stock has lost 90% of its value this year. Spirit’s market value is less than $200 million and it has more than $3 billion in debt.
Monday is the deadline for Spirit to renegotiate about $1 billion of debt. Even if it’s successful in refinancing the borrowing, its outlook is uncertain as it tries to expand its business model away from relying on budget-conscious passengers.
Monday’s debt deadline is not from its lenders. It is from the company that processes credit cards payments to Spirit.
“The credit card processor is vitally important to the airline because that's how almost all of the transactions are done,” said Joe Rohlena, an analyst at bond ratings agency Fitch Ratings. “It's vital for Spirit to maintain that.”
If the company is unable to refinance this debt, it's credit card processing agreement will expire at the end of this year, putting further pressure on the airline.
Spirit Airlines did not respond to an email requesting comment.
"The Spirit management team is focused on returning to profitability, and we believe the transformation plan we recently announced places us on the path to improved financial performance," Fred Cromer, Spirit’s Chief Financial Officer, said in an Aug. 1 statement announcing that the airline lost almost $200 million in the second quarter.
COVID Borrowing
Spirit’s challenges can be traced back to the first few months of the COVID-19 pandemic.
The virus essentially shutdown the airline industry. Many passenger airlines received financial support from the federal government, including Spirit which received hundreds of millions of dollars in aid. But it wasn’t enough in the months before vaccines were available. The airline needed more money so it turned to a novel way to raise cash.
Spirit was the second airline to use what are mostly intangible assets as collateral to borrow money. It issued bonds backed by its frequent flier program, intellectual property and brand.
Spirit started new, separate companies in the Cayman Islands as special purpose vehicles, a financial tool used to isolate financial risk, named Spirit IP Cayman Ltd and Spirit Loyalty Cayman Ltd. It transferred its customer loyalty program, intellectual property and its brand to these new companies.
The airline back in South Florida pays a licensing fee to use its loyalty program and brand to the special purpose vehicles.
Four years ago, this new Cayman Islands-based entity sold bonds, eventually raising more than $1 billion in IOUs backed by those license payments by the parent company back in Broward County. Spirit then used the money for general corporate purposes.
These bonds are referred to as loyalty bonds because they’re backed in part by the airline’s passenger loyalty program. They were five year bonds and are due in one year. But this is where the credit card processing deal comes into play.
When Spirit agreed this summer to a new deal with the company that processes credit card payments, it also agreed it would renegotiate its loyalty bonds by Monday.
It is currently paying 8% interest on the bonds, which is the highest interest rate for any of Spirit's borrowing. The airline spends about $23 million every three months on interest payments for its loyalty bonds. Any refinancing would likely be at a higher interest rate since borrowing rates have risen.
"It is going to be a very painful rate for (Spirit) to swallow," said Fitch bond analyst Rohlena. He noted the airline's loyalty bonds were trading recently at less than 50 cents on the dollar — a clear sign bond investors are leery of the company's ability to repay most of what it borrowed.
A higher interest rate would cost the company more money at a time when it has recorded a quarterly profit only once since 2019.
READ MORE: Buyout or bankruptcy: Are those the only options for Broward-based Spirit Airlines?
“In terms of how much did the pandemic contribute to spirits current troubles? I would say that it was the start of a series of items that kind of all went wrong for Spirit,” said Rohlena.
It isn't just the pandemic that happened to Spirit. The virus saw the industry raise pilot pay and Spirit pilots left for other airlines. That left Spirit short of people who could fly its planes. It continues to experience issues with jet engines made by Pratt Whitney. Fixing the engine keeps some of Spirit’s fleet on the ground, reducing the number of seats it has to sell.
And then there was the failed two-year effort to merge with JetBlue. The deal was declared dead by a federal court judge who ruled it was anti-competitive. The judge wrote, "Consumers that rely on Spirit's unique, low-price model would likely be harmed."
“All of these things contributed to Spirit's current situation,” Rohlena said.
Home base in Broward
It all adds up to a very bumpy time and a time of uncertainty for the airline’s almost 4,000 employees in South Florida.
“It's unusual for South Florida to have a headquarters for an airline because most airlines are based around hubs in the central U.S.,” said Joe Schwieterman, transportation professor at DePaul University.
“Spirit really has a strong relationship with Florida, particularly, the Fort Lauderdale area. It’s a massive pleasure market that they serve,” he said.
Spirit is the dominant carrier at Fort Lauderdale-Hollywood International Airport. One out of every three commercial passengers are flying on a Spirit plane, according to data from Broward County, the operator of the airport.
Spirit has remained committed to the region. It broke ground on it just two months before COVID-19 would bring air travel to a virtual halt. The new $250 million dollar headquarters and training center in Dania Beach officially opened in April.
Ultra low fares and a-la-carte prices for people on vacation has been Spirit’s key market. It calls them value-conscious travelers who pay for their own travel. But they have not been enough to run a profitable business.
“It's not clear that you can make money in this business with just hyper-discounted fares,” said Schwieterman. “You need to also sell up. It could be that there's shortages of seats and you can raise your prices. There could be business traffic,” he said.
This summer, Spirit acknowledged that. The airline made a huge change to its flying business model. It introduced its “Go Big” fares. It doesn’t call it a business class airfare, but that’s what it essentially is. For one price a passenger can get a bigger seat, more legroom, snacks, drinks — including booze — a checked bag, priority boarding and on-board WiFi. It would be considered a business-class fare for the legacy airlines.
“Prior to the pandemic, Spirit was one of the most profitable airlines in the U.S.,” said Rohlena. “They're not today, but they have a turnaround plan in place.”
It remains to be seen if bankruptcy is part of Spirit’s itinerary.
