Low Cost Carrier Facing Headwinds on All Fronts After Losing Acquisition Bid

Standard & Poor's Global Ratings is not too impressed with Spirit Airlines' prospects now that their anticipated JetBlue merger has gone to dust.

The financial grader dropped Spirit's rating to CCC+, citing a vulnerable capital structure dependent on favorable market conditions. The firm notes that "Spirit's revenue generation in the second half of 2023 was hurt by lower ticket prices", which have "moderated from the highs of 2022". They expect the trend to continue throughout this year "due to excess industry capacity on its key routes amid normalizing domestic leisure travel demand." Spirit Airlines also has "limited exposure to premium products offerings and long-haul international travel, both of which have supported strong earnings generation for other U.S. airlines in 2023, particularly the network airlines."

Spirit is also hampered by continued engine downtime with its fleet, estimating that its number of grounded aircraft will nearly quadruble near year's end. Thanks to planned inspections, the company expects to have 41 aircraft out of operation next December, up from 13. That's a sizable proportion of a fleet of 226 aircraft, particularly for a carrier that makes its money in low-cost volume ticket sales. Pratt & Whitney have promised to compensate airlines for the operational impact of the engine issue, but so far the exact form and timing of such compensation remains unknown.

On top of all that, S&P says staffing across the board will hamper Spirit operations. "We also expect the company's ability to improve its fleet utilization to remain constrained by various issues, including staffing challenges at air traffic control centers and other operating issues (including weather). Therefore, we expect limited improvement in Spirit's financial performance in 2024 due to its inability to expand capacity (and gain associated efficiencies), elevated costs (particularly labor), and normalizing industry demand and ticket prices. As a result, we forecast the company will continue to report sizable net losses and negative FOCF through 2024."

FMI: www.spglobal.com/ratings