It has been a busy year for Spirit Airlines (SAVE 4.24%). The discount airliner was forced to give up its plan to merge with JetBlue, and now faces a looming liquidity crisis as its business hemorrhages cash. To stem the bleeding, management has made some desperate decisions such as hiring advisors to help it potentially refinance its large pile of debt. The market has taken these developments poorly -- the stock is trading down by more than 70% so far in 2024.
However, some investors have been contrarians on Spirit Airlines: The stock has become one of the most popular holdings among users of the Robinhood Markets trading application.
Those shareholders got some big news from Spirit this week that sent the stock soaring.
Delaying payments, furloughing pilots
Spirit's largest near-term issue is managing its liquidity -- making sure it has enough cash to pay its liabilities, employees, and any loans coming due. With over $300 million in debt coming due in the next 12 months, $3 billion of total debt, and only $1 billion in cash on the balance sheet, it isn't hard to do the math and see that Spirit Airlines is in a tough spot. It also burned more than $500 million in free cash flow last year. In sum, its financial situation could get rather dire, and quickly.
If management is going to get this business back into cash-generating mode, it will need time to do so. Perhaps multiple years. With this in mind, it isn't surprising to see management announce a contract revision with aircraft supplier Airbus, extending the delivery timeline of new jets that it was supposed to take possession of in 2025 and 2026 out to 2030 and 2031. Over the next two years, these delays will boost Spirit's liquidity by $340 million -- cash it desperately needs to cover its operating expenses and pay its debts.
On top of this Airbus deferral, supplier Pratt & Whitney (a subsidiary of RTX) has agreed to compensate the airline for the issues caused by malfunctioning jet engines; that deal will give Spirit another $150 million to $200 million in liquidity as well. Lastly, Spirit is furloughing 260 pilots starting later this year to cut costs. Add it all together, and Spirit has made some strong moves to extend the time it has to attempt to turn around its operations before it runs out of cash.
Importantly, Spirit noted in its press release that it is still retaining an advisory firm to help it work out ways to refinance its debt obligations. If it can successfully extend or amend the loans on its balance sheet, the company could give itself many more years of breathing room to try and turn things around.
SAVE Free Cash Flow data by YCharts.
Can the company stay afloat?
It's possible that these efforts will help Spirit stave off bankruptcy. The company has generated positive cash flow in the past and may do so again in the future. Counterintuitively, it does better in poor economies than prosperous ones since it is a discount airline. When people are pinching pennies, more of them will trade down to Spirit Airlines flights in order to save a few bucks. With the economy generally booming at the moment, Spirit is having trouble competing on price with the large airlines.
Regardless of how long Spirit extends its liquidity profile, or if it starts to generate profits again as the macroeconomic environment waxes and wanes, investors should avoid buying this stock. It operates in a cyclical industry and has continuously destroyed shareholder value. Its free cash flow has been negative for most of the last 15 years, and it's still burning cash today while most other airlines are doing well. Book value per share is off 69% since the start of the pandemic and has consistently fallen for the last few years.
Even though the stock is down 70% year to date, now is not the time to buy the dip on Spirit Airlines. This is a bad business struggling just to stay afloat. Even if it does keep itself alive, that doesn't mean the stock will do well over the long term.
