Barclays analysts sound alarm about big Spirit Airlines problem

Thursday, 19 September 2024

Barclays analysts sound alarm about big Spirit Airlines problem

by BD Banks

While beloved by many, Spirit Airlines (SAVE) has been struggling to turn its finances around this year.

The first bankruptcy rumors started to swirl when a federal judge blocked JetBlue (JBLU) ‘s plan to acquire it for $3.6 billion back in January, but the trend of poor financial quarters goes back many more months. On July 16, the airline announced that it was cutting its revenue outlook for the third quarter of 2024 to $1.28 billion from the $1.32 to $1.34 billion forecast earlier.

In a note sent to his investors on Sept. 17, Barclays (BCLYF) analysts said that the airline would need a “reduction of 25-30%” to “help support improved unit revenue outcomes that support sustainable profitability.”

‘We suspect Spirit will have operating cash burn of nearly $700 million’

“Based on prior third quarter guidance, we suspect Spirit will have operating cash burn of nearly $700 million in 2024, with modest improvement forecast for 2025,” the memo reads further.

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The note suggests investors watch whether Spirit will reduce its network capacity by making drastic cuts to unprofitable flights in order to focus on those that bring in the most traffic; according to the analysts, reducing network capacity in this way will be key to getting Spirit on the path toward profitability.

Another problem that has plagued Spirit through the year has been the recall of the Pratt & Whitney engines used in the Airbus A321neo (EADSF) planes. The airline had to cancel a much-anticipated flight to the popular Mexican resort town of Tulum because the plane it had planned to use to run the flight was now out of service.

Many have opinions on Spirit’s future but airline keeps on

“As the company progresses on its transformation strategy, it anticipates that over time it will be able to drive improvement in total revenue per passenger segment,” Spirit said, after submitting a Securities And Exchange Commission (SEC) filing on the adjusted forecast outlook.

Also in July, Spirit reworked its fare classes to a four-tier system. This starts at a basic “Go” fare which has no room for even a single carry-on, and ends with the “Go Big” fare that looks increasingly like a mainstream airline’s business class — with an assigned seat, a carry-on item and checked bag, extra legroom and priority boarding at the accompanying higher price.

The Barclays note also draws attention to the more than $7.5 billion in debt that Spirit has accrued and on which it will need to make headwinds if its investment outlook and faith among analysts is to improve.

At $2.56 USD, Spirit shares are down by more than 84% both since the start of 2024 and year to date. The debt, according to Barclays, is the significant setback that is preventing Spirit from investing in new planes and routes or making other changes that would help fuel necessary growth.

“What we’ve seen over time is that less people are actually flying on Spirit,” Spirit Airlines Chief Commercial Officer Matt Klein said in a CBS interview on the fare class changes last summer. “So we believe the changes we’re making are about attracting new customers.”