Spirit Airlines’ shares experienced a significant decline of 17% during morning trade on Wednesday, following a U.S. judge’s decision to block the airline’s planned $3.8 billion merger with JetBlue Airways.
This ruling came after the U.S. Department of Justice expressed concerns that the merger would negatively impact ticket buyers.
Consequently, Spirit Airlines now finds itself in a state of uncertainty, with analysts suggesting that the company may explore alternative buyers or even consider filing for bankruptcy.
The airline has been grappling with profitability challenges due to rising operating expenses and ongoing supply chain issues, which have raised doubts about its ability to repay its outstanding debt, set to mature next year.
Some analysts propose that a bankruptcy filing could potentially help Spirit Airlines streamline its balance sheet and restructure into a financially resilient airline.
JetBlue Merger Potentially a Missed Opportunity for Spirit
TD Cowen analyst Helane Becker suggests that the most favorable outcome for Spirit Airlines would involve filing for Chapter 11 bankruptcy, followed by a liquidation under Chapter 7.
Citi analyst Stephen Trent stated in a note that every airline is currently facing critical strategic and financial decisions, while maintaining neutral ratings on both stocks.
If the deal with JetBlue had gone through, it would have resulted in the creation of the fifth-largest carrier in the U.S. and would have greatly benefited Spirit. However, JetBlue shares closed 5% higher on Tuesday but were down 6.2% in morning trade.
Deutsche Bank analysts wrote in a note that they now see a very low probability of the merger being completed due to regulatory hurdles, even if the carriers decide to appeal.
Spirit has been severely affected by issues with RTX’s Pratt & Whitney Geared Turbofan (GTF) engines, resulting in the grounding of several of its jets.
This problem is expected to worsen by 2024. Additionally, excess capacity in some of its key markets has impacted Spirit’s pricing power, leading to steep discounting to sell enough seats and making the path to recovery challenging.
Valuation Challenges for Spirit Airlines Highlighted by J.P. Morgan Equity Analyst
J.P.Morgan equity analyst Jamie Baker mentioned that without a merger, there is little valuation support for Spirit.
According to LSEG data, Spirit’s ratio of enterprise value to sales for the next 12 months is 1.3, compared to 0.6 for JetBlue, indicating a more attractive investment opportunity for JetBlue.
Both airlines have the option to appeal the ruling. In a joint statement, JetBlue and Spirit stated that they are evaluating the “next steps as part of the legal process.”