A smaller Spirit network could be the solution to cash loss, says Barclays By Investing.com

Investing.com — Spirit Airlines Inc (NYSE:). is facing financial challenges, driven by continued cash burn, negative operating margins and a high debt load.

One possible solution for the budget carrier could be a substantial reduction in its network, Barclays analysts said in a note dated Tuesday.

The airline, which has long operated on an aggressive growth model, may need to shift to a smaller, more focused network to stabilize its finances and eventually return to profitability.

“Based on our previous third quarter guidance, we suspect Spirit will have operating cash burn of nearly $700 million in 2024, with modest improvement expected in 2025,” the analysts said.

The cash drain is compounded by double-digit negative operating margins, rising interest costs and higher aircraft rental expenses due to recent sale and leaseback agreements.

The financial situation is compounded by limited unencumbered assets, leaving Spirit with fewer options to negotiate with loyalty-backed bondholders or restructure debt obligations.

Additionally, Spirit's liabilities have increased, with a total debt load of $7.5 billion as of mid-2024, comprised of both secured and unsecured debt and operating lease liabilities.

This debt burden further limits the company's ability to invest in growth or significant operational changes, limiting its financial flexibility.

“From a top-down perspective, a 25-30% Spirit network reduction would likely help support improved unit revenue results that support sustainable profitability,” the analysts said.

This is based on Spirit’s low unit revenues compared to its unit costs. According to Barclays, reducing the size of the network would likely increase unit revenues, which is essential for the airline to achieve sustainable profitability.

One of the factors contributing to this recommendation is the competitive landscape. Spirit's current network overlaps significantly with that of other low-cost carriers, including Frontier and JetBlue, as well as Southwest Airlines (NYSE:).

A smaller, more focused network would not only reduce operating costs but also limit competition on key routes, allowing Spirit to better optimize its fare structures and improve profitability.

While network reductions could help Spirit in the long run, the airline has already implemented several business changes to mitigate losses, including eliminating cancellation fees, introducing package travel and improving customer service.

However, these initiatives have had mixed short-term effects. The elimination of cancellation fees, for example, led to an immediate loss of revenue, while the upfront costs of employee training and system adjustments have compounded operational losses.

Barclays also notes that Spirit has already cut capacity in loss-making markets and is planning limited growth through 2025.

However, the company will face additional operational hurdles, such as a larger number of aircraft grounded for Pratt & Whitney GTF engine inspections in 2025. This will put further pressure on Spirit’s available capacity, reinforcing the argument for a smaller network.

However, Barclays maintains that Spirit can still stabilise its business with the right changes.

If the company opts for a 25-30% reduction in network capacity, it could drive the necessary improvements in unit revenue, which would be critical to its financial recovery.

The move could also make it easier for Spirit to negotiate with bondholders and extend the maturities of its debt obligations.

Barclays maintains an “underweight” rating on Spirit, citing its ongoing issues with operating margins, high debt and competitive pressures from low-cost airlines.

However, they suggest that with appropriate capacity reductions and financial restructuring, Spirit could eventually see an improvement in profitability.