Airlines are historically terrible businesses to invest in. Famous investor Warren Buffett has repeatedly discussed this topic, speculating that from the time the Wright brothers flew at Kitty Hawk, North Carolina, over 120 years ago until now, the industry has -- on a net basis -- likely lost money.
We are seeing this money-losing dynamic play out yet again with Spirit Airlines (SAVE). The budget airliner saw its proposed merger with JetBlue scrapped by the government, collapsing its stock price by over 60% so far in 2024.
The stock is still popular among retail investors, though. It is currently one of the top 100 stocks held by users of the trading platform on Robinhood Markets. But these retail traders have likely not taken a close look at the dire situation facing Spirit Airlines right now.
After taking a closer look at Spirit, I found at least three good reasons to avoid Spirit Airlines' stock, even if some traders are touting it as a bargain stock buy right now.
1. Major cash burn
Spirit Airlines has rarely generated positive free cash flow. With rising labor costs and heavy competition across the airline industry, Spirit's financial state has gotten even worse in the last two years. The company burned $524 million in cash last year, even though revenue is significantly higher than levels before the pandemic.
Spirit's salary expenses rose to $1.6 billion in 2023 compared to $1.25 billion in 2022 and will likely rise again in 2024 due to new labor negotiations with unions. These growing expenses kept Spirit from generating positive cash flow. The next few years will be no different unless the company can magically start raising ticket prices. This is unlikely given that Spirit's whole brand is being a discount airline for cost-conscious passengers.
If you exclude one quarter right before the pandemic shutdowns, Spirit has never generated positive free cash flow over a 12-month period in the last 10 years. For obvious reasons, this is not a sustainable way to run a business and should be a huge red flag for Spirit Airlines stock investors.
2. An unlikely merger approval
Many of those Robinhood investors were probably betting on Spirit Airlines due to its proposed merger with JetBlue. But back in January, a U.S. federal judge blocked the merger over competition concerns. This ruling sent Spirit share prices down more than 50% in just a few short trading days. While a debate may be justified on the merits of blocking a company from buying a highly unprofitable business such as Spirit and whether it truly was anti-competitive, the fact of the matter is this deal now has little chance of getting approved.
There is still a small chance the companies can appeal and get this deal through. But this is looking less and less likely. Wall Street has figured this out, which is why Spirit Airlines stock has collapsed so quickly in 2024.
SAVE Free Cash Flow data by YCharts
3. A wobbly balance sheet
Heavy cash burn and no acquisition lifeline should have Spirit Airlines investors worried. But what should seal the deal and make this stock uninvestable is its horrendous-looking balance sheet. The company has just $1 billion in cash but $500 million in short-term debt and lease liabilities, $3 billion in long-term debt, and $3.3 billion in long-term lease liabilities.
Spirit will face major liquidity concerns soon. It is already refinancing debt, which is not a good sign. If push comes to shove, management might file for bankruptcy at some point in 2024 and 2025. This would likely make Spirit Airlines' stock worth zero.
The worst thing you can do as an investor is buy a stock that goes to zero. Avoid Spirit Airlines stock like the plague, since there is no value for retail investors here.
