To most parts of the world Chapter 11 of the United States bankruptcy code is a strange concept, it allows a company to reorganise its debts, whilst continuing to trade and renegotiate new terms with those debtors. 
The news this week of Spirit Airlines filing for Chapter 11 and its subsequent recovery strategy seems to have been well planned and discussed. Although there are some broader lessons to be learnt from this week’s events, the beginning of what happened goes back all the way to 2010…

The Craving For Growth

Low-cost carriers (LCCs) constantly seek growth as they strive to keep their unit costs as low as possible. Due to the nature of aircraft financing, only by adding more and more capacity can those costs be minimised and productivity maximised. And that is exactly what Spirit have done for many years, as the two charts below show. 

Amongst what we term as the Tier Two scheduled airlines in the United States, Spirit’s continual growth has seen them rise from the twelfth largest carrier (in terms of domestic capacity) to sixth place this year, accepting that Continental and AirTran subsequently merged with others; growth that has seen them rise above carriers such as Alaska Airlines and JetBlue. Such a rise in capacity in a very mature market is quite remarkable but only tells perhaps half of the story. 

In the table below, we have compared the domestic capacity growth for all the major US carriers between 2010 and 2024 and it precisely highlights the problem that Spirit created. By indexing the rates of capacity growth, we can see that Spirit’s capacity increased by a multiple of 7.3 compared to a market average of 1.7; capacity growth in a mature market four times larger than the market average would appear bullish to say the least.

Such higher-than-average capacity growth from LCCs is a common pattern across the world. However, it only works in markets where there is a rapid rate of market growth; where new destinations are almost added daily, the econometrics are more favourable (such as existing propensity to fly), disposable income is growing, and financial/marketing support is forthcoming from destinations eager for new airlift. Sadly, these conditions were not in place for Spirit who ultimately were always seeking to “grab” market share by price, which is never a long-term play for any business. Interestingly, both Allegiant and Frontier are showing some of the same patterns of growth as Spirit - although they would argue their business models have some distinct advantages. 

Hitting Head Winds at The Wrong Moment

Airlines can only control what they can control, and certainly for Spirit the last few years have seen them face a barrage of headwinds and circumstances outside of their control. The pandemic was a disastrous for every airline, draining their cash reserves. On top of this, Spirit had committed to a series of new aircraft deliveries and the pressure to grow in a tightening market further strained the carrier. In turn, this resulted in a lack of cash to repay a series of loans, and the subsequent refinancing of those loans became a further burden on the business. As a result, Spirit had to look for other ways to survive… and then came the JetBlue fiasco.

Experience suggests that airlines do not consider mergers unless they have to, such steps can be admissions of failure. And for the CEOs, whilst a pragmatic decision it can equally be a sign of strategic failure. The proposed Spirt / JetBlue merger was developed to protect both airlines’ operations and allow them both to survive and compete in the wider marketplace. Despite a judge’s decision, who seemed to lack appreciation of the complexities of the aviation industry and its issues, it was not against the consumer’s interest. The subsequent ruling undoubtedly attributed to where Spirit are today, and where JetBlue are in their latest new business strategy. 

Inactivity Can Be Painful

The issue of the Airbus / Pratt & Whitney engine issue has been causing considerable pain for airlines around the world and shows no real signs of disappearing soon. Aircraft only make money when in the sky and in the case of Spirit the latest data shows that they have 43 inactive aircraft out of a fleet of 215.  It’s tough making a profit at the best of times for airlines, but when 20% of your aircraft are grounded with no visibility around when they will operate that is a nightmare scenario. Overlay that inactivity with the need to pay the lease costs for the aircraft and Spirit were facing an almost impossible set of operating conditions. Indeed, if this set of circumstances were set up in a computerised business strategy game, the inevitable conclusion would have happened sooner than reality as aircraft lessors hung on for as long as they possible could. 

Spirit’s Future Looks Sunnier, At Least For Now

Chapter 11 clears a lot of the immediate issues for Spirit, although the trail of destruction to others is another matter. Looking forward the airline will relaunch in a smaller version and perhaps with less immediate ambition and a refocus on their Fort Lauderdale markets. The carrier will be able to restore consumer confidence and rebuild out once again, by which point maybe the Airbus engine issue will have passed. Spirit’s constant urge for growth has resulted in a painful lesson, as a combination of too much growth and market factors conspired against them.

The warning signs from how Spirit sought to grow their market should not be ignored by the wider US market and others who perhaps need to think cautiously about their future strategies. And once again the importance of international networks to balance and offset the pressures of a pure domestic operation should be recognised, just look at the results of United and Delta Air Lines to prove that point!