‘Substantial Doubt’ About Immediate Prospects

Spirit Airlines issued a dire "going concern" warning to its investors concerning its immediate prospects amid strong concerns the airline is rapidly burning through cash. The warning was contained in parent company Spirit Aviation Holdings latest SEC Form 10-Q quarterly report on August 11.

The warning comes just months after the company re-emerged from Chapter 11 bankruptcy proceedings with a fresh strategy to compete in the competitive U.S. air travel market. The airline’s stock cratered 40% to $2.10 on the news.

Spirit said in its filing that unless it can build up the cash reserves necessary to continue operating, the airline could run out of cash “within the next 12 months” and may not be able to continue operating “as a going concern.”

The 10-Q stated, “Because of the uncertainty of successfully completing the initiatives to comply with the minimum liquidity covenants and of the outcome of discussions with our stakeholders, management has concluded there is substantial doubt as to our ability to continue as a going concern within 12 months from the date these financial statements are issued.”

The warning is clear: Spirit Airlines is not raising enough revenue to cover its daily operating costs, and together with a challenging market, is running out of liquidity.

If the airline fails to maintain adequate cash reserves, its creditors could declare the airline in breach of its debt agreements and trigger a series of loan defaults that potentially would jeopardize the future of the airline.

To be sure, the airline has taken several cost-cutting steps since the re-emergence including furloughing pilots, cutting back operations, and selling airplanes. However, its ultra-low cost business model has lost a part of the market to other airlines offering frills and benefits.

The lack of a credible loyalty program is also hurting its draw for many travelers who like them. In addition, a decline in air travel demand has affected the industry in general since tariffs went into effect earlier this year. As a result, most other airlines have pulled back their full-year guidance on financial performance.

FMI:  www.spirit.com/