Budget air carrier Spirit Airlines free fell into bankruptcy after being hit with notices of default from its largest lessor, AerCap, last week.

According to court filings, AerCap on 25 August unexpectedly sent Spirit a notice of termination of lease agreements covering 36 aircraft scheduled for delivery between 2027 and 2028, and a notice of default with respect to 37 leases covering existing aircraft. Spirit has refuted that any termination right or event of default existed under the leases and disputed the validity of the notices. The debtors are in negotiations with AerCap but also stand ready to pursue litigation if they have to.

Spirit filed its Chapter 11 petition on Friday (29 August) and more substantive documents came in over the weekend. It has not yet filed a motion seeking to use cash collateral but intends to today (2 September) or tomorrow (3 September). Debtors’ counsel said Spirit is not seeking the use of DIP financing at this point, as it does not need it.

At a first day hearing this morning, the company obtained approval of multiple operational motions, including authorizing the company to use its cash management system, continue customer programs, and continue satisfying critical airline obligations. The rest of the company’s first day motions will be taken up at a continued hearing at 3pm ET this afternoon.

Debtwire Dockets: Spirit Aviation Holdings (Spirit Airlines) (Access Required)

The company

Spirit operates a value airline committed to offering an enhanced travel experience with flexible, affordable options, according to the first day declaration of Fred Cromer, the company’s executive vice president and chief financial officer.

Spirit has about 25,000 direct employees and independent contractors, and serves destinations throughout the US, Latin America, and the Caribbean. Cromer said it has one of the youngest, most fuel-efficient fleets in the US.

The company originated in 1964 as Clippert Trucking Company, which was a Michigan corporation. In the 1980s, it operated as a charter airline, becoming a scheduled passenger carrier and adopting the Spirit Airlines moniker in 1992. In 1994, Spirit reincorporated in Delaware. Then in 1999, the company relocated to Florida, where it is currently headquartered.

The debt

As of the petition date, the debtors have about USD 2.8bn in aggregate debt, which includes debt outstanding under a revolving credit facility, secured notes, fixed rate term loans, and aircraft debt. Additionally, the company has unsecured term loans, with its largest unsecured creditor being the US Department of the Treasury.

The descent

According to Cromer’s declaration, last fall—due to large upcoming debt maturities and macroeconomic pressures—Spirit reached a deal with substantially all of its bondholders, who equitized about USD 800m of debt and provided USD 350m of new liquidity through an equity rights offering. The company filed for bankruptcy on 18 November 2024. Spirit implemented a restructuring via pre-negotiated Chapter 11 proceedings “in record time,” Cromer said, emerging on 12 March.

“Unfortunately, the industry-wide headwinds that preceded the Prior Chapter 11 Cases did not abate; rather, they intensified,” Cromer asserted. “In the post-COVID industry environment, the domestic airline industry, and particularly its low-cost/value sector, has suffered from a combination of material excess capacity and slack passenger demand, particularly from the more price-sensitive leisure travelers who are the core customers of low-cost/value carriers.”

Exacerbating the post-COVID trends, this year Southwest Airlines—the largest US carrier in terms of domestic seats—announced a significant transformation of its business model that sought to address its financial performance compared to the three large US network carriers, American, Delta, and United. Cromer said the changes were initially met with some resistance, and Southwest responded by slashing pricing on domestic routes, which affected the entire industry.

Largely because of industry overcapacity, Cromer said, US airlines have experienced weak revenue growth, and most domestic airlines have revised their earnings guidance downwards this year. While international travel demand is still adequate, US business traffic has not recovered to pre-COVID levels. To compensate, he said, domestic “legacy” carriers, like American, Delta, and United, have tried to take market share from the low fare/value carriers by expanding their offerings of “basic economy” service. Cromer noted that those options compete directly with low fare/value carriers like Spirit for their leisure and small-business travelers.

To stay profitable while offering basic economy fares, legacy carriers have expanded their premium-product offerings and grown their loyalty programs to subsidize “rock-bottom” pricing in the domestic market, Cromer said. He added that all large US airlines have continued to report increasing capacity growth despite weak domestic revenue, perpetuating low or negative margins across the industry.

While Spirit is by no means the only airline to have lower-than-expected earnings in recent months, Cromer said, the fact that large airlines have been expanding their focus to its targeted customers has made external pressures worse. He said the other airlines have co-opted Spirit’s “trademarked and industry-disruptive approach” of low-cost and unbundled airfares.

In addition to those struggles, Cromer said, manufacturer defects in a type of aircraft engine installed on many Spirit planes has led to a costly, extended grounding of many aircraft. Because Spirit’s fleet relies heavily on the new generation Pratt & Whitney geared turbofan (GTF) engine, Cromer said, Spirit “suffered disproportionately” compared to other airlines from various early-stage design and manufacturing issues that diminished service availability and required accelerated and specialized engine inspections.

Spirit has 38 GTF-powered aircraft that are grounded and awaiting slots for engine repairs. It could be over two years before all repairs have been completed. Spirit expects that nearly all 79 of its GTF engines will be grounded over the next two years due to these issues. The bankruptcy will allow the company to renegotiate or reject leases on certain of these and other aircraft, allowing Spirit to have a rightsized fleet and reduce operating costs by hundreds of millions of dollars.

Spirit has been actively engaged with some of its largest secured bondholders and other key stakeholders over the past few months and is continuing to work with them, including with respect to financing that may become necessary later.

On 21 August, Spirit drew USD 275m under its revolving credit facility. That available cash provided Spirit with adequate unencumbered liquidity for the initial stages of the Chapter 11 process. Spirit is working with certain secured bondholders on an agreement to use cash collateral and provide adequate protection.

On 25 August, Spirit’s largest lessor—AerCap and its affiliates—unexpectedly sent a notice of termination of lease agreements covering 36 aircraft scheduled for delivery between 2027 and 2028, and a notice of default with respect to 37 leases covering existing aircraft in the fleet. Spirit disagreed that any termination right or event of default existed under any of the leases and disputed the validity of the notices. Cromer noted that Spirit was required to, and did, disclose the notices in a SEC Form 8-K filed on 29 August.

According to Cromer, Spirit was concerned that the disclosure of purported default notices by its biggest lessor could prompt actions from other counterparties, including other aircraft lessors. Therefore, the company decided it had no choice but to seek protection under Chapter 11.

The Chapter 11 case

While Spirit is continuing to negotiate with AerCap during the bankruptcy to resolve the issues between them, it is ready to litigate the validity of the notices and damages Spirit has suffered as a result of AerCap’s actions if necessary.

Spirit intends to use the Chapter 11 process to continue ongoing discussions with all of its lessors, financial creditors, and other parties to implement a “transformation” of the company.

Spirit hopes to realize hundreds of millions of dollars in annual savings and lighten its balance sheet by shedding billions in liabilities during the bankruptcy case. The company is redesigning its network to focus on key markets so it can provide more destinations, frequencies, and enhanced connectivity in certain focus cities, while reducing its presence in other cities.

Spirit also plans to right size its fleet to match capacity with profitable demand. Doing that will shrink Spirit’s overall fleet, which in turn will lower Spirit’s debt and lease obligations.

At the first day hearing this morning, debtor counsel Marshall Huebner of Davis Polk & Wardwell thanked all involved parties for working over the holiday weekend to get the agenda items resolved. In some ways, Huebner said, this will be the company’s first “true” Chapter proceeding, given the speed of the prior case. He said he can guarantee this case will be very different from the last one.

Notably, Huebner said, Spirit’s “problems are almost tailor made to be resolved by the applicable protections” of the Bankruptcy Code.

He confirmed in court that the debtors are not seeking approval of DIP financing now, as they do not need it. They will soon file a motion to use cash collateral. That motion will be heard on an interim basis later this week.

During the hearing this morning, Judge Sean Lane of the US Bankruptcy Court for the Southern District of New York approved multiple typical forms of first day relief, with more to come at the resumed hearing this afternoon.

The advisors

Photo credit: Spirit Airlines