The Journal. - How Spirit Airlines Landed in Bankruptcy

Episode Date: November 20, 2024

For years, Spirit Airlines soared with a low-cost, no-frills business model. This week, it came in for a bumpy landing. WSJ's Alison Sider explains how the big airlines learned to compete with Spirit���–and helped put the carrier in bankruptcy. Further Listening: -The Love Triangle Over Spirit Airlines  -Frontier, Spirit and the Future of Low-Cost Airlines  Further Reading: -How Spirit Airlines Went From Industry Maverick to Chapter 11 Bankruptcy  -Discount Airline Spirit Files for Bankruptcy  Learn more about your ad choices. Visit megaphone.fm/adchoices

Our colleague, Alison Sider, has covered airlines for six years. And in that time, she's heard a lot of impassioned takes about people's favorite and least favorite airlines. But there's one carrier that seems to inspire especially strong feelings. I think probably Spirit Airlines is the one that people generally have the strongest opinions about. Spirit. The low cost, no frills airline. Okay, so what do spirit lovers love about spirit? People who love spirit, and maybe love is a strong word, but people who tolerate Spirit, you know, it's just the

fares are cheap. And that is really meaningful. I mean, that allows people to travel, take trips that they ordinarily wouldn't be able to, you know, spoken to people who are in a long distance relationship. And you know, if you're visiting someone once a month, right, it makes a huge difference to pay $100 or less for a round trip ticket and you're willing to put up with a lot to make that happen. People hate on Spirit Airlines way too much. I fly them all the time and it's a fine experience. I fly them so much I got their credit

card. And what do the haters say? It just isn't the most luxurious or the most comfortable airline. But I just needed to come on here to share with you all how much I hate Spirit Airlines. And it's like, I know. I know I did this to myself. I'm a cheap b----. I chose to fly Spirit. I know that, like, this is the kind of flight where I only get to bring, like, a small purse, but I'm still angry. This little...

Love it or hate it, though, there's one thing you can't deny about Spirit. It changed air travel in America. Love it or hate it though, that's not how airline tickets were sold 20 plus years ago. And now it's increasingly how all airline tickets are sold, even at the upper end of the market. That's why what's happened with Spirit represents such a reversal. This week, the company filed for Chapter 11 bankruptcy. Would it be fair to say that Spirit was a victim of its own success? Yeah. I mean, I think in some ways Spirit was a victim of its own success, or the success of its business model.

Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, November 20th. Coming up on the show, how Spirit Airlines landed in bankruptcy. and make your home safer at nfamilyfire.org. Brought to you by N Family Fire, Brady, NEI Council. We last checked in with Allison about Spirit in 2022. And back then, things looked a lot different for the company. It was trying to grow bigger. I mean, the US airline industry,

it's really dominated by four huge airlines, United, American, Delta and Southwest. They came to their current form after a bunch of bankruptcies and mergers and they dominate about 80% of the domestic travel market. And it's really hard for smaller airlines to kind of get the scale that they need to really be relevant. Smaller airlines need to compete with the big carriers for pretty much everything. For space at airports, for gates, and for customers. a day in your airport and American has 10,

with another small, low-cost carrier, Frontier Airlines. The friendly skies are about to get more competitive. Low-cost airlines, Frontier and Spirit, have agreed to a multi-billion dollar merger. That move creates the fifth largest U.S. carrier. For Spirit, was merging a matter of survival at that point? No. I mean, I think at the time when Spirit was talking about merging with Frontier, the conversation was really about, you know, we're going to create this nationwide low fare competitor that's really going to challenge the big airlines. Spirit is kind of a little more focused in the East and Frontier is kind of a little

more focused in the West and they were going to bring it together and just be this big budget presence that was just going to have a lot more scale and a lot more reach. In February of 2022, Spirit and Frontier struck a deal. And that's when things started to get interesting. JetBlue today made a surprise bid of more than three and a half billion dollars to buy Spirit Airlines. That's about 40 percent more than Frontier offered to buy Spirit less than two months ago. JetBlue kind of swooped in with a competing offer for a lot more money. And it set off

this very fierce bidding war. Drama, drama, drama. CBS News transportation correspondent. What did JetBlue want with Spirit? You know, they sort of wanted the same thing that Frontier did. They really wanted to grow, and they wanted especially Spirit's planes and its pilots. Spirit and JetBlue, they have the same type of fleets. At the time, there was a pretty significant pilot shortage developing in the U.S. So they really just saw this opportunity to, like in one fell swoop, just become a lot bigger that it would be JetBlue that's gonna become

kind of the national challenger to the bigger airlines. Frontier and JetBlue duked it out. Each company sweetened its deal to try to convince Spirit shareholders to merge with them. In the end, Spirit's investors opted for JetBlue. And Spirit and JetBlue negotiated a of South Florida-based Spirit Airlines. Biden's Justice Department did not like the idea of a JetBlue Spirit. The Biden administration is suing to block JetBlue's acquisition of South Florida-based Spirit Airlines.

Biden's Justice Department did not like the idea of a JetBlue Spirit. The Biden administration is suing to block JetBlue's acquisition of South Florida-based Spirit Airlines. Biden's Justice Department did not like the idea of a JetBlue-Spirit merger. They were concerned that losing a low-cost airline would make the industry less competitive. And they pointed to what JetBlue was planning to do with Spirit. JetBlue had announced plans to retrofit some of Spirit's planes, to take Spirit's super cramped seats and replace them with roomier seats. So that sounds great for flyers, but, you know, antitrust enforcers are concerned when

they hear that because it means you're taking away a lot of cheap seats from the market. You're also taking away this kind of maverick airline in Spirit that goes into markets with bargain basement fares and forces all the other airlines to lower their fares. So the Justice Department is very concerned that this merger is going to result in higher fares and it's going to be bad for consumers. JetBlue and Spirit disagreed. They argued that combining would make them an even more formidable challenger to the big airlines. But in January, the judge on the case ruled against them. A judge blocked the Spirit JetBlue merger, said it's bad for consumers, and he said kind

of famous last words he said in his ruling, you know, Spirit is a small airline, but there are people who love it and, you know, Spirit fans, this one's for you. Spirit would remain unmerged. It would stay an independent maverick, forcing the entire industry to lower its prices. That was the idea. But there was a problem. As the government argued why Spirit was so important,

the airline's financial picture was getting worse. This ultra low cost carrier business model kind of just fell apart, like really pretty rapidly. That's next. Throughout the JetBlue trial, Spirit executives maintained that the company had a plan. Spirit didn't need a merger to survive. But its business was experiencing some serious turbulence. One of the main problems was that the big airlines were moving in on spirits turf. During the pandemic, business travel dropped off and was slow to recover.

So to make up the loss, big airlines started adding new routes. Business travel wasn't fully back, so the bigger airlines were flying a lot more on the kind of Florida, Vegas, these domestic leisure routes that are sort of the bread and butter for the discount airlines. And that weighed on airfare. With more airlines offering more flights, fares dropped. That hurt Spirit's bottom line. And the big airlines were moving in on Spirit's business

in other ways too. You may have noticed that if you wanna buy a cheap seat these days, Spirit is no longer your only option. The large legacy airlines over the years in other ways too. You may have noticed that if you want to buy a cheap seat these days, Spirit is no longer your only option. The large legacy airlines over the years started kind of picking up at least parts of what Spirit was doing. So I mean, for example, the bigger airlines started adopting their own kind of no-frills tickets called Basic Economy. And it's kind of their answer to

Spirit where you get only a ticket or, you know, it varies a little bit exactly what you get, but it's pretty bare-bones. In United's case, you can't even bring a carry-on. Spirit used to be unique, but nowadays, if you want the no-frills experience, you can get that on a big airline, too. And that's been a problem for Spirit.

There's so much more competition competition and it is not winning. You know, bigger airlines are just have gotten so much more effective, you know, going up against it and it hasn't really had kind of as much of a compelling offering as it once did. There were other challenges that helped push Spirit from struggling to bankrupt. It had accumulated debt during the pandemic. It's also had equipment issues, which have grounded parts of its fleet for months. And it struggled with high labor costs. I mean, they're called ultra low cost carriers.

And the whole point is that they have the lowest costs and that allows them to charge the lowest fares. But now, you know, there are labor shortages coming out of the pandemic. All the airlines have to raise wages for everyone. So, you know, they don't really have as much of an advantage anymore on costs. Facing looming deadlines on some of its debt, Spirit filed for bankruptcy on Monday. And the fact that Spirit is in bankruptcy doesn't necessarily mean like that's it for the company, right? What's happening now? Spirit being in Chapter 11 does not mean that's it for the company at all. In fact, like most major airlines

have gone through bankruptcy at some point in their history. It's been a while. The last really big one was American Airlines in 2011. But it's kind of a rite of passage for an airline to be honest. And like a lot of them come out of it. in 2011. that Spirit is not going away. Spirit says its bankruptcy is aimed at restructuring debt and that it'll emerge in a few months with fresh capital ready to get back on track. What could a revamp Spirit look like? So Spirit is saying, you know, part of its revamp

is going to be sort of an altered business model. Like it wants to appeal to more flyers and that means going after some of the more upscale flyers that have been choosing bigger airlines because there are more premium options. business model. one of them. menu, Spirit is going after more of a bundled ticket that now includes a bunch of extras and amenities, you know, to kind of buy up. Yeah, it's funny. It's almost like the Spirit and like the bigger airlines kind of like met in the middle somewhere and are now offering kind of more of what the other one used to offer. Yeah, exactly. They're kind of converging on very similar business models. You mentioned that a merger could be a possibility.

Like, after all this, could we see a Spirit Frontier or a Spirit JetBlue merger in the end? So JetBlue has said they've been asked and they're kind of working on their own turnaround plan because they're facing a lot of similar issues. So they've said, like, they're not interested in revisiting the Spirit deal. You know, Frontier, I mean, I think a lot of people think it's still possible that they could reemerge. Or there might be another airline that kind of has interest in, at least in Spirit's assets, like its planes. So we'll see. As you were saying earlier, regulators opposed the JetBlue Spirit merger because they wanted Spirit to stay this sort

of like low budget, low cost, independent kind of maverick that would pressure all the other airlines to keep prices low. Did that backfire? Well, I think it's fair to say it did not go as hoped. You know, Spirit, it's going to be smaller this quarter than it was a year ago. And it said its flying capacity is going to be like this quarter than it was a year ago. And it said its buying capacity is going to be sharply lower throughout next year. I just cannot imagine that this outcome, spirit and bankruptcy, spirit readjusting its business model to focus more on high-end consumers,

that this is what they had in mind. Representatives from the Justice Department declined to comment on Spirits' bankruptcy. What does this bankruptcy, this moment, kind of tell us about the winners and losers in the airline industry right now? I mean, I think it tells us that the big airlines are really the big winners of the last several years. They figured out how to compete with the smaller airlines and kind of neutralize the competitive threat. And they figured out how to get with the smaller airlines But it's also, you don't get as much. And so you're going to have to pay for everything if you want. Extra leg room, if you want a board earlier, if you want to pick your seats. You know, it's all going to cost you.

It sounds like whatever happens to Spirit from this point forward, it's kind of mark on the airline industry is pretty lasting. We're all riding Spirit now. Yeah. In some ways, in spirit. That's all for today, Wednesday, November 20th. The Journal is a co-production of Spotify and the Wall Street Journal. Additional reporting in this episode from Alexander Gladstone. Thanks for listening. See you tomorrow.