Spirit Airlines Plummets Amid Blocked Acquisition

JetBlue's acquisition of Spirit Airlines was recently blocked by a federal judge, shaking the entire industry and leaving Spirit's future uncertain.

Crash After the Ruling

On Tuesday, a federal judge blocked JetBlue's proposed $3.8 billion acquisition of Spirit Airlines, agreeing with the DOJ's (Department of Justice) assessment that the merger would harm competition. Immediately following the ruling, Spirit's stock price dropped 47% and continued declining in subsequent days, falling almost 65% by Thursday. JetBlue, which initially saw gains after the ruling, later traded lower. Other airlines were also impacted, as the legal victory was seen as providing impetus to challenge the pending acquisition of Hawaiian Airlines by Alaska Airlines. While the airlines have the option to appeal the ruling, neither have yet confirmed whether they will do so. If the deal fails to materialise, Frontier Airlines could make another offer for Spirit, as they had previously proposed a cash-and-stock deal in 2022 superseded by JetBlue's all-cash bid.

However, analysts have increasingly gloomy views on Spirit's prospects, suggesting it likely had no viable path back to profitability and would have to file for bankruptcy. But unlike other airline bankruptcies, Spirit would be liquidated rather than restructured. The company may seek an alternative buyer, yet any such merger could face similar regulatory obstacles that initially caused the JetBlue deal to fail.

Signs for More Trouble

While larger carriers have returned to profitability following the pandemic, smaller carriers targeting the budget market have struggled. According to analysts surveyed, after losing one billion dollars each year in 2020 and 2021, Spirit Airlines is expected to report another $439 million loss for last year and a $310 million loss next year. The company was affected in the previous year by issues with engines manufactured by Pratt & Whitney, which are expected to lead to further aircraft groundings this coming year.

Spirit Airlines may be headed for liquidation instead of restructuring if it cannot find a new buyer because of the high demand for single-aisle jets manufactured by Airbus, which the company operates exclusively. Even more so with the ongoing problems at Boeing, which saw its competing 737 Max grounded after the door blew off an Alaska Airlines plane in mid-flight. The troubled carrier would likely be unable to negotiate with the lessors of the aircraft it operates. The company recently entered into a sale-and-leaseback deal to raise capital.

Management maintains it has sufficient capital to withstand its current situation. However, it also has enough capital to self-finance bankruptcy. Either way, investors may be unwilling to risk keeping their money to find out.

Dead-Cat-Bounce (DCB) Expected?

Spirit Airlines has experienced a significant decline to record lows at $5.75, suggesting a continuous downtrend. However, there could be a V-shaped pullback in the short term towards the channel bottom at $10 if $8.60 gives way, as some traders may still believe the low is in. If such a pullback occurs, it would form a DCB pattern, indicating downward pressure towards the round levels of $5, $4 and subsequent supports. If bulls reclaim double digits, only breaking past $17 would shift the chances of exiting the de

SpreadEx / Spirit Airlines

Key Takeaways

A judge blocked JetBlue's proposed acquisition of Spirit Airlines due to competition concerns, sending the stock down by around 65% since. Analysts have a negative outlook for Spirit, suggesting it likely has no viable path to profitability and may have to declare bankruptcy. Spirit has been reporting losses in recent years and is expected to report losses again in 2023. Issues with its Pratt & Whitney engines are expected to lead to further aircraft groundings, and it may have to liquidate instead of restructure due to high demand for its planes. While management claims it has enough capital to withstand the situation of self-finance bankruptcy, investors may be unwilling to keep their money in.