Will Spirit Airlines Go Under?

Two things happened to Spirit Airlines (NYSE: SAVE) recently. Each pushed its stock in different directions. U.S. District Judge William Young blocked a merger with Jetblue (NASDAQ: JBLU), saying, “The elimination of Spirit would harm cost-conscious travelers who rely on Spirit’s low fares.” The stock plunged 64%. Almost immediately, Jetblue said it would appeal the decision. Spirit’s shares soared.

Between these two decisions, Spirit said it could negotiate its burdensome debt and disclosed that its revenue was healthy. Spirits filed a document with the SEC stating it “..continues to believe that a combination with JetBlue is the best opportunity to increase much needed competition and choice.” No one can guess what another visit to the courthouse for an appeal will bring. Management also said fourth-quarter revenue was $1.32 billion, down 12% from the previous year. Analysts expected worse, but a sharp drop is a sharp drop.

Despite what Spirit said were promising financial results, there was deep concern that its debt would push it into bankruptcy. Bloomberg reported, “Spirit Airlines’ Broken Finances Sow Narrow Path to Survival.” Spirit’s 8% notes due 2025 posted a yield of 40%. It would be harder for Wall St. to signal huge doubt that Spirit can survive in its current structure. A JP Morgan analyst said that Spirit was in such deep trouble that JetBlue would be better off if the deal were blocked.

Spirit has valuable aircraft, but most of these assets can be taken by bondholders if Spirit goes under. Vulture investors might refinance debt, but they would expect extremely high-interest levels.

The problem Spirit has is that its deeply discounted tickets make strong margins hard to attain. Another blow to the carrier is that oil and jet fuel prices could rise if trouble increases in the Middle East. And, of course, other airlines want to get the passengers Spirit has in a cutthroat industry.

So, there are two sets of opinions about Spirit. One is that a judge will eventually approve the Jetblue merger or that Spirit will refinance its debt. Another is that Spirit will go under. Can it win a case in federal court or get investors to take on distressed debt? Those are tough roads to survival.