A Barclays analyst recently reinstated coverage of Spirit Airlines (SAVE) and slapped a $4 price target on it with an "underweight" rating. To put that figure into perspective, it was more than 17% lower than the share price at the time of writing.
Spirit Airlines faces challenges
The analyst referred to the company's headwinds in 2024, and it's hard to disagree. Now that the merger with JetBlue is off the table, Spirit must deal with its issues alone. They are not insubstantial.
The airline is one of many that have racked up debt due to pandemic-related pressures that have severely damaged the travel sector and airline industry. Its history of cash outflows and weak profitability means investors aren't confident that Spirit will cut its debt burden in due course.
SAVE Free Cash Flow data by YCharts
Engine issues don't help
A slowing economy and rising costs put pressure on budget airlines, and Spirit also has an issue with its all-Airbus fleet. The need to ground Airbus planes using some Pratt & Whitney geared turbofan (GTF) engines hit Spirit operationally and financially, leading it to an even more precarious debt profile.
Unfortunately, the airline industry's history is littered with bankruptcies and companies that failed to deliver returns to shareholders. At the same time, bondholders benefited from their investment being backed by the security of the planes themselves. If it all goes wrong, the aircraft can be sold, and debtholders usually take precedence over equity investors in a bankruptcy.
Spirit Airlines may well recover, but it's a high-risk/high-return investment that won't suit most investors. As such, it's hard to disagree with an underweight rating rating on the stock, which is effectively a "sell" recommendation, in my view.
