Cost pressures: Spirit Airlines jets at the Las Vegas International Airport in Nevada. A sluggish return of business travellers after the pandemic also hurt as it sent carriers chasing vacationers, causing a glut of seats in markets such as Florida and Las Vegas. — Reuters
CHICAGO: Spirit Airlines was expected to be one of the big travel industry winners after the pandemic. But the no-frills pioneer never found its wings in a changed business and operating landscape.
On Monday, the Florida-based carrier filed for bankruptcy protection. While speculation about Spirit’s future began swirling immediately after a federal judge blocked its US$3.8-bil merger deal with JetBlue Airways in January, analysts said its Chapter 11 filing was longer in the making.
Before the pandemic, Spirit was outpacing the market, luring price-sensitive travellers and forcing larger carriers to introduce their own versions of budget offerings.
The airline’s business model of an integrated fleet, keeping planes flying more hours in the day and putting more seats on every aircraft, helped optimise its resources and kept costs down.
Its high fleet utilisation produced double-digit operating margins for nine straight years until 2020.
But the global health crisis changed the operating environment and travel patterns, and Spirit struggled to adapt.
Spirit’s average daily aircraft utilisation is down 16% this year versus 2019, fuelling cost pressures.
Consumer demand has shifted in favour of full-service airlines in the past two years as middle and upper-income households were vacationing extensively, while inflation hurt lower-income spenders.
Spirit, like many other airlines, chased growth, but did so by adding more than US$2bil in debt between 2020 and 2023.
Sticking to its pre-pandemic playbook, it grew capacity on average by 27% in the past three years in a bid to grab a bigger slice of the leisure travel market.
Analysts urged Spirit and its no-frills peers to slow expansion plans.
Higher labour rates and a snag with RTX’s Pratt & Whitney geared 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 on Monday inflationary pressures have “disproportionately” affected margins for low-fare carriers.
Full-service airlines Delta and United have leaned on booming demand for high-margin premium cabins and long-haul international flights to mitigate inflation.
United said its bookings to European destinations are up almost 10% versus last year and are nearly 30% higher compared to 2019.
In June, Spirit announced a foray into the high-end travel market, and has said rebranding itself as a higher-value carrier could generate 13% more revenue per passenger.
But Hooman Yazhari, a partner and aviation bankruptcy expert at law firm Michelman & Robinson, said the airline lacked “the muscle and the balance-sheet power” to compete in that market.
“There are so many reasons why this just didn’t go right,” Yazhari said.
A sluggish return of business travellers after the pandemic also hurt as it sent all American carriers chasing vacationers, causing a glut of airline seats in markets such as Florida and Las Vegas.
Ticket prices sank. Spirit’s average fare per passenger was down 19% in the first six months from a year ago.
Other budget carriers, such as JetBlue and Frontier Airlines, have also been in a tailspin.
In April, Frontier’s chief executive officer Barry Biffle likened the competition in Florida to “Costco, Sam’s Club, Walmart and Target all opening up on the same block”.
The effects were easy to see. Delta shares are up 87% over the last two years, while Frontier and JetBlue have lost 23% and 58%, respectively.
Spirit shares lost nearly all of their value before filing for Chapter 11.
Sandeep Dahiya, a professor at Georgetown University, said the company’s debt became difficult to service as it has not reported a full-year profit since 2019.
“The writing was pretty much on the wall,” Dahiya said. — Reuters
