Secured and unsecured creditors will get paid first, leaving nothing for shareholders.
This week, Spirit Aviation Holdings, parent company of Spirit Airlines, began winding down operations.
(Because the company has filed for bankruptcy, it now trades as FLYYQ, with the Q added as a warning to investors.)
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The biggest cause of the company’s demise is the rising cost of jet fuel. Due to the Middle East war and the oil supply shock that followed, the price of airline fuel has essentially doubled since the war began in late February, from $85-$90 to $150-$200.
Of course, Spirit was already in bankruptcy, its second in two years. But it was attempting to turn the business around and emerge from Chapter 11. Rising fuel prices put an end to those efforts.
The question now is, what’s next for Spirit investors?
When a company is liquidated, its assets are sold to pay its debts. And there’s a hierarchy of creditors.
At the top of that list are secured creditors, because they have claims on specific collateral (in this case, aircraft, which are real assets that can be sold and flown to their new owners). Then, administrative expenses such as court costs must be paid. Then come the unsecured creditors, like vendors and suppliers, to whom the bankrupt company owes money. These creditors won’t get all they’re owed if there’s not enough left after paying secured creditors.
Unfortunately for Spirit shareholders, they will be last in line to get paid. And in this case, they’re likely to get nothing for their shares.
Before the spike in fuel prices, the company was expecting to exit its latest bankruptcy by summer, having restructured billions of dollars in debt with creditors.
The airline also attempted to engineer several mergers with other airlines to save itself. The latest potential deal was with JetBlue Airways (NASDAQ: JBLU), but the Biden administration opposed it on antitrust grounds, and a federal judge agreed, preventing the merger from going forward.
Image source: Getty Images.
So, Spirit was struggling for years, and its stock dwindled from more than $7 a share a year ago to about $0.28 a share in April.
Yet when the White House in late April floated the idea of lending Spirit $500 million to help it survive, shares of the airline jumped to more than $1.80. The White House backed away from a bailout, and Spirit’s shares have since fallen back to about $0.27 each.
In the end, however, current shareholders won’t even get that for their shares. There are very likely too many secured and unsecured creditors ahead of them.
Other airlines are also struggling with elevated fuel prices. Some have been able to pass on the higher fuel costs to passengers. Indeed, the average airfare for an international flight out of the U.S. has climbed 37% since the war on Iran began. Some carriers have also canceled flights to save on fuel.
Low-cost carriers suffer the most when fuel costs rise, as their margins are already razor-thin. But big carriers are also reporting damage from the spike in jet fuel. American Airlines Group (NASDAQ: AAL) said it could lose money this year due to fuel costs, and United Airlines Holdings (NASDAQ: UAL) slashed its profit outlook.
All in all, the immediate future does not look rosy for airlines or their shareholders.
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