The embattled ultra-low-cost carrier Spirit Airlines has filed for Chapter 11 bankruptcy protection for the second time in less than a year, but the airline is trying to reassure worried passengers that their travel plans remain intact and that flights aren’t about to be grounded.
The news that Spirit was once again voluntarily petitioning for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York comes less than a year after the airline announced its first Chapter 11 process and just five months after it exited that process.
The first Chapter 11 process was a pre-packaged deal in which Spirit secured extra funding from investors to address its mounting debts. This Chapter 11 process, however, will be a lot more involved and will allow Spirit to completely restructure its business.
Let’s take a look at what this means for passengers:
What is Chapter 11 bankruptcy protection?
Think of Chapter 11 as a process that allows a business to hit the pause button while it carries out a restructuring process. The business continues to operate without interruption, but behind the scenes, the company is protected from creditors while it draws up a plan to slash costs and renegotiate contracts with the eventual aim of returning to profit.
Chapter 11 is a legal process that has been used by countless companies in the United States, and many well-known airlines have used the protection of Chapter 11 in the past.
Why did Spirit file for Chapter 11 again so quickly?
Spirit has been losing money for some time and, as a result, has racked up some pretty significant debts. Last November, the airline entered Chapter 11 bankruptcy in a pre-packaged deal to secure additional funding from investors, but this didn’t address the root cause.
Spirit exited the first Chapter 11 process earlier this year, but the extra funding it secured didn’t stop it from hemorrhaging money.
Earlier this month, Spirit issued an alarming investor update, which warned there was “substantial doubt” the airline could continue as a going concern within the next 12 months unless radical changes were made.
Spirit blamed overcapacity and weakened consumer demand for domestic travel for its financial woes and said it would have to slash costs in order to survive.
How is this Chapter 11 process different from the first?
The first Chapter 11 process was all about raising additional funds, whereas this latest round of bankruptcy protection will focus on what Spirit chief executive Dave Davis describes as a “comprehensive restructuring.”
What does this mean in practice?
- Slashing unprofitable routes and focusing on key high-yield markets.
- Selling aircraft that it no longer needs as it attempts to shrink back to profitability.
- An aggressive cost-cutting program that will see the airline sell real estate and potentially make sweeping redundancies.
Essentially, the Chapter 11 process gives time for Spirit to make cuts and renegotiate contracts, without creditors knocking at its doors and making its financial position even more precarious.
What does this mean for passengers?
Spirit is at pains to point out that passengers can continue to book and travel with confidence while the Chapter 11 process is in motion. The airline isn’t going to suddenly shutter tomorrow, and the aim is to exit bankruptcy protection with the airline in a far stronger position than where it started.
“As we move forward, Guests can continue to rely on Spirit to provide high-value travel options and connect them with the people and places that matter most,” Davis commented after the court documents were filed on Friday.
What about employees?
For now, there is no change for employees. The airline has promised to pay employees, as well as contractors, as normal
Employees are being told to report for work as normal, although workers are being warned that furloughs or even redundancies could come in the near future.
Will Spirit Airlines survive this bankruptcy?
Chief executive Dave Davis seems hopeful that Spirit can emerge from this Chapter 11 process as a stronger and more resilient airline, although, in the past, airlines have used the process to put a pause on creditors while they open up discussions on a possible merger with a rival airline.
In Spirit’s case, the most likely suitor would be rival ultra-low-cost carrier Frontier, which has previously had advanced talks on a possible merger.
Spirit previously rejected a takeover bid from Frontier during its first Chapter 11 process, and it remains to be seen whether Frontier would consider yet another offer for the embattled carrier.
Didn’t a judge reject a merger between Spirit and JetBlue so that ultra-low-cost fares would remain available?
Perhaps the strangest part of Spirit’s recent history is the story of how the Department of Justice successfully blocked the airline from being merged into JetBlue so that ultra-low-cost fares would remain available for tens of thousands of American travelers.
At the time, it was obvious that Spirit was struggling financially and going it alone as an independent airline might not be feasible in the long term. Those fears appear to have materialized, and the DOJ’s attempt to secure low-cost travel may have spectacularly backfired.
Ultra-low-cost airlines like Spirit drive down airfares across the board in markets where they operate, so if the airline doesn’t emerge from the Chapter 11 process unscathed, airfares could soar.
