Spirit Airlines is working from a position of weakness, and the risk is very high for investors that put money into the stock.
Spirit Airlines (SAVE 2.92%) looked like it was destined to be merged away after it agreed to be acquired by JetBlue (JBLU 1.23%). Now that the deal has been called off, Spirit Airlines is struggling to stay afloat, and it still may end up going away — and perhaps not in a positive fashion. This is a high-risk story stock around which investors need to tread very carefully.
What went wrong with Spirit and JetBlue?
In a bit of a Wall Street drama, Spirit Airlines fell into red ink following the coronavirus pandemic. It didn’t have any success changing that trend even after the world got used to living with COVID. With looming debt maturities bearing down on its balance sheet, the airline went looking for a suitor to, effectively, solve its financial problems.
Image source: Getty Images.
Spirit was rumored to be talking to Frontier Group (ULCC -1.81%), but then JetBlue got involved and won Spirit’s hand. The problem is that JetBlue, while once a tiny start-up, is a fairly large airline at this point. Adding Spirit into the mix led to concerns among regulators that the merger would hurt consumers. The deal was eventually called off.
Spirit is, effectively, back where it started, but in a worse position. That’s because it has lost time, and when a company has debt coming due, time is of the essence. The rumor is that it has revived merger talks with Frontier. It is pretty clear at this point that Spirit is working from a position of weakness.
Investors love a story
As you might guess, Spirit’s stock price has been pretty volatile through this difficult period, with every twist and turn of this sorry tale leading to large stock price moves, percentage wise, up and down. Investors are betting on what happens next with each update to the story. This is a risky endeavor that looks more like gambling than investing. Most investors probably shouldn’t get involved. The reason is pretty simple — it looks like Spirit is flirting with bankruptcy. And that means there is a very real potential for a total loss for investors.
SAVE data by YCharts
The most recent move the company has made is further evidence of the problem. It recently announced that it was cutting staff and selling aircraft to help improve its liquidity. These are new aircraft that were scheduled to be delivered to the company soon, which is a troubling development even though investors boosted the stock on the news. Effectively, Spirit is sticking with an aging fleet of aircraft so it can raise cash, a move that will ultimately make Spirit a less desirable airline for consumers to fly on. That speaks to how troubled the company is today.
More to the point, these are the types of decisions that get made when a company has few good options. They are the types of decisions that get made when a company is struggling to stave off bankruptcy. They are the types of decisions that should worry investors, not get them excited about buying a stock.
This isn’t a SAVE; it’s a Hail Mary
At this point, it looks like Spirit is doing everything it can to survive so it can sell itself to another company. If those talks fail, there appears to be a high probability that the company will end up in bankruptcy court. Every potential suitor knows that, which is a big problem for getting a deal done. Working from a place of weakness isn’t a good outcome for Spirit or its shareholders. From a cynical point of view, a potential buyer could just wait for bankruptcy to arrive and buy the company’s assets at a discount. It is true that Spirit could pull off a Hail Mary pass, but the risks that would come from a fumble are so high that most investors should avoid what has become a big gamble.