© Reuters. FILE PHOTO: A Spirit airliner prepares to land at San Diego International Airport in San Diego, California, U.S., January 18, 2024. REUTERS/Mike Blake/File Photo
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By Rajesh Kumar Singh
NEW YORK (Reuters) – Ultra-low-cost airline Spiritual airlines (NYSE:) has its work cut out for it as it charts a future after the collapse of its $3.8 billion merger deal with JetBlue Airways (NASDAQ:).
The airline has lost money for the past six quarters despite booming travel demand and expects operating margins to fall as much as 15% in the current quarter. Analysts and industry officials say the airline will have to make drastic changes to become profitable, which is still unlikely to happen this year.
“Strategically, the company faces a challenge,” said Jonathan Root, senior vice president at Moody's (NYSE:). “They have to reduce their costs.”
That would mean cutting flights and exiting some markets, which would reduce their landing fees and airport charges, as well as lower fuel costs.
Spirit is already taking some of these measures. The company has said it is adjusting its growth profile and has withdrawn flights from markets such as Denver and New Hampshire.
The JetBlue merger would have created the fifth-largest airline in the United States and potentially ensured Spirit's survival. But the two airlines concluded there was no way forward after a US judge blocked the deal in January over anti-competitive concerns.
After calling off the merger on Monday, Spirit said it is confident in its strengths and focused on returning to profitability.
Industry experts say Spirit needs to do more. Overcapacity in key markets is hurting Spirit's pricing power, forcing the airline to deeply discount to fill planes. The average fare per passenger fell 25% in the fourth quarter compared to the previous year.
Additionally, competitors are expanding capacity in Spirit's core markets like Florida. An industry source said Spirit needs to review its presence in about a quarter of its markets that are highly competitive.
“They have to do it to change the trajectory of their finances,” the source said.
However, the reduction in flights will leave the company with a surplus of labor. The airline had to ground several Airbus aircraft due to an issue with RTX's Pratt & Whitney geared turbofan (GTF) engines last year, leaving it with more pilots than needed in the fourth quarter and early 2024. .
Last month, Spirit said it was “right-sizing” labor costs, but the company declined to clarify whether it was looking to reduce its workforce through layoffs or other measures.
“The two biggest costs for any airline are fuel and labor,” Root said. “If they want to reduce costs, it has to come from the labor sector.”
That can be a challenge too. On Monday, the Spirit pilots union said it plans to reopen contract negotiations, seeking better pay, among other demands.
Spirit reached an agreement with its pilots in 2022, but the agreement included a provision to reopen negotiations if the merger agreement with JetBlue was terminated.
Some analysts have expressed serious doubts about Spirit's future if it cannot shore up its finances, but CEO Ted Christie has dismissed such speculation as a “misguided narrative.”
The company has said it is trying to strengthen its balance sheet, including possibly refinancing debt. Spirit has said it has enough liquidity to survive until operating cash flow turns positive in the second quarter.
The company is also seeking compensation from Pratt & Whitney due to its inability to currently operate GTF-powered aircraft, but the timing is unclear.
Spirit shares fell 4.3% to $5.50 on Tuesday afternoon. Shares have fallen 66% so far this year.
