Spirit Airlines (SAVE 6.21%) stock has become wildly popular among some groups of retail investors in 2024. Small investors are buying the stock hand over fist despite its plunge below $5 this year, and it's now among the most widely held stocks in the portfolios on the Robinhood trading app. Spirit's stock price collapsed after a judge agreed with federal regulators suing to block its proposed merger with JetBlue on antitrust issues. Under that deal, JetBlue would have bought out Spirit Airlines stockholders at a price of $33.50 per share.
Now, shares of Spirit Airlines are trading 95% below their all-time high. Is this the perfect time to hop in and buy the dip on the troubled airline?
A botched merger with JetBlue
In 2022, JetBlue announced its intent to buy Spirit Airlines and merge the entities into the fifth-largest U.S. airline. In the years that followed, the two companies had to argue in court and to regulators that the deal was not anticompetitive and would not lead to higher prices for travelers. They made a compelling case, too, as the combined company would still be significantly smaller than big players like American Airlines or Delta.
The courts and the Justice Department didn't see it that way. In January, a judge ruled that JetBlue could not merge with Spirit Airlines on the grounds that it would reduce competition and lead to higher fares overall by taking the ultra-cheap tickets that Spirit offers out of the travel market. Spirit stock subsequently collapsed. It's now down a whopping 70% year-to-date, even as the broad market indexes have gained altitude.
It has been a tough few years for Spirit Airlines stockholders. The company weathered the COVID-19 pandemic's disruptions, then focused on getting its merger across the finish line, and now has been left to fend for itself.
Where are the profits?
Investors buying the dip on Spirit Airlines are likely betting the operator will stay afloat on its own. In the wake of the huge travel boom that occurred after the pandemic receded as a threat, most airlines are profitable now. But Spirit Airlines is not.
For example, in 2022 and 2023, both Delta Airlines and Alaska Airlines had positive operating margins. Over the last 12 months, Alaska Airlines has posted an 8% operating margin, while Delta's was 9.2%. Spirit Airlines hasn't been profitable at any point since the pandemic began, and posted an operating margin of negative 7.3% in 2023. It continues to burn cash, and lost more than $500 million in free cash flow last year alone.
This will make it extremely difficult for the company to pay off its hefty debts. At the end of 2023, it had over $300 million in current debt maturities and $3 billion in long-term debt on the balance sheet, against less than $1 billion in cash. Management is in discussions with its creditors to try and restructure that debt, $1 billion of which will come due in 2025. Maneuvers like these are not usually performed by healthy companies.
SAVE Operating Margin (TTM) data by YCharts.
Don't get misled by a low stock price
Many investors may be flocking to Spirit Airlines because of its low stock price. But just because a stock has a low dollar value doesn't make it cheap. Far from it. It also is meaningless that Spirit's stock has fallen 95% from all-time highs. A stock that has fallen by 90% from its peak can still fall by another 90% -- that would just make it down 99% from its all-time high. And it can fall another 90% from there, too.
Spirit Airlines looks like it is headed much lower. The company has a cash crunch coming and will need to turn around its business quickly or risk having to file for bankruptcy. A bankruptcy restructuring would likely mean shareholders getting completely wiped out. To be clear, this means anyone buying shares at $5 would see all of their value wiped out with minimal hope of recovery.
The stock may be a popular buy-the-dip candidate among some retail traders. But given its huge debt problem, its terrible cash flow, and the loss of its acquisition hopes, this is a troubled business. Avoid Spirit Airlines stock in 2024.
