What happened

Shares of Spirit Airlines (SAVE -0.46%) fell 21% at the open on Monday, and were down 11% at noon, after the discount airline adopted a so-called poison pill to ward off unsolicited takeover interest. Airline shares have been beaten down by the COVID-19 pandemic, and Spirit's board is trying to ensure that it remains in control of the company's future.

So what

Spirit Airlines has joined the rush by airlines to bring down capacity and freeze capital expenditures as demand for travel has plunged.

Spirit is a small player relative to Delta Air Lines, Southwest Airlines, or American Airlines Group, and its debt load is about four times EBITDA, making it among the most vulnerable carriers. And its stock has been among the hardest hit, down nearly 70% year to date.

A Spirit A319 coming in for a landing.

Image source: Spirit Airlines.

That sort of plunge could invite an unsolicited takeover attempt, so the company adopted a shareholder rights agreement that would be triggered if any individual or group acquires ownership of 10% or more of the stock in transactions not approved by the board. These poison-pill plans are designed to flood the market with additional shares in the event of a hostile buy-in, diluting the would-be acquirer's stake and making it more expensive to accomplish a takeover.

In a statement announcing the plan, CEO Ted Christie said that "we are confident in our ability to weather the current environment," adding that "we are adopting the rights agreement to protect against parties seeking to take advantage of the current market environment to the detriment of Spirit and its shareholders."

Now what

This is an interesting moment for Spirit investors. The airline is just the sort of fringe player that often takes it on the chin during a downturn, and there is real risk that if the pandemic continues to rage into the summer months, the company could be forced into bankruptcy. However, Spirit is also arguably one of the airlines best positioned to rebound quickly when activities begin to return to normal, even if we are in a recession.

Spirit is a so-called ultra-low-cost carrier, which means it offers lower prices but also fewer frills. In previous recessions, leisure travel came back well ahead of business travel, in part because it is easier to use low fares to stimulate leisure demand. Due to its structure, Spirit can make money at a price point lower than most of its competition.

All that assumes the airline is able to navigate through the current storm. Spirit Airlines stock for now is a high-risk investment and should be limited to a small slice of an overall portfolio. But for those who can tolerate the risk, there is the potential for significant upside from current levels assuming Spirit remains airborne.