Here’s Why Spirit Has Declared Bankruptcy Twice In One Year

What? They couldn’t get it right the first time? That was the understandable snap reaction to no-frills carrier Spirit Airlines declaring bankruptcy for the second time in a year, after coming out of a Chapter 11 restructuring in March. But before you throw up your arms in exasperation, consider that bankruptcy is just a tool, and a useful one at that if you’re an airline that has liabilities reportedly topping as much as $10 billion. Bloomberg has the breakdown of what’s really going on, and the bottom line is that Spirit has too many planes and is facing too much competition at the level of its core business, which is dirt-cheap yet wildly available aviation. From Bloomberg:

[Spirit’s] second bankruptcy filing in a year signals that the low-cost carrier is finally facing up to the painful steps needed to ensure its survival.

But its board faces daunting challenges on the path ahead, including how to downsize its fleet of leased aircraft while managing the roller coaster market conditions for US air travel that complicate the prospects for a long-term recovery.

Strategic bankruptcies in the airline business are nothing new; American Airlines entered Chapter 11 in 2011, for instance, merged with US Airways, and the new company was far mightier than either former company had been on its own. Spirit’s latest insolvency, however, seems more like a desperate signal that it intends to get very, very serious about its long-term viability.

The airlines went into the red on an annual basis in 2020 and never recovered. In its prior bankruptcy, it restructured $1.6 billion in debt, but what it really needed to do was merge with JetBlue – a deal that was blocked by the government last year. A key issue is that Spirit’s business model, which combined extremely low fares with a you-pay-for-anything-extra mojo, thrived before the pandemic but ran smack into better-capitalized competition when passengers resumed flying. Tariffs haven’t helped, given that the airline flies made-in-Europe Airbuses.

The big domestic carriers invaded the no-frills space with their own offerings, to the point that Spirit’s approach seemed less like a savvy way to fly and more like questionable masochism. But Spirit continued to operate a fleet that was too large and, according to Bloomberg’s reporting, might attempt to get out of 150 leases through the Chapter 11 process. Bloomberg also identified an acquisition threat to Spirit in the second bankruptcy, but that could actually be a blessing. Spirit was flirting with a potential tie-up with Frontier, a competitor that had already tried to buy Spirit with a lowball offer before bankruptcy number one.

It might be more useful to think of Spirit’s return to bankruptcy as more of a continuation than a reset: the Chapter 11 that concluded in March has been sort of resumed, but this time with a more serious focus on Spirit’s problems. For all the negatives, this is actually what the bankruptcy process is for; if companies aren’t able to take on debt to grow, then innovation would grind to a halt.

And for all the complaints about its service over the years, Spirit did offer a central innovation. The pitch was that if the experience of flying basically sucked across the board, then why should passengers be paying big-carrier fares? The company essentially repriced the ordeal of sitting in a crummy little seat for several hours, and plenty of customers were happy to go along for the unpleasant ride. That approach wasn’t going to put the major players out of business, however. And their adaptations presented Spirit with effectively one option for continuing to compete: cut fares even more to retain customers. That game grinds down revenue and ultimately makes it impossible to operate at the scale required to keep up. Spirit might not survive, but we should thank the lurid yellow airline for introducing yet another merciless market efficiency to the capitalist skies.