Smaller Spirit network could be solution to cash burn, Barclays says

Investing.com — Spirit Airlines Inc (NYSE:SAVE). is facing financial challenges, driven by ongoing cash burn, negative operating margins, and a high debt burden. 

As per analysts at Barclays in a note dated Tuesday, one potential solution for the low-cost carrier may lie in a substantial reduction of its network. 

The airline, which has long operated on an aggressive growth model, might need to shift to a smaller, more focused network to stabilize its finances and eventually return to profitability.

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

The cash drain is aggravated by double-digit negative operating margins, rising interest costs, and higher aircraft rental expenses due to recent sale-leaseback deals.

The financial situation is compounded by limited unencumbered assets, leaving Spirit with fewer options for negotiating with loyalty-backed bondholders or restructuring debt obligations.

Additionally, Spirit’s liabilities have swelled, with a total debt load of $7.5 billion by mid-2024, consisting of both secured and unsecured debt and operating lease liabilities​. 

This debt burden further constrains the company’s ability to invest in growth or significant operational changes, limiting its financial flexibility.

“From a top down perspective, a Spirit network reduction of 25-30% would likely help support improved unit revenue outcomes that support sustainable profitability,” the analysts said.

This is based on Spirit’s weak unit revenue compared to its unit costs. As per Barclays, reducing the network size would likely boost unit revenue, which is essential for the airline to reach sustainable profitability.

One of the contributing factors to this recommendation is the competitive landscape. Spirit’s current network significantly overlaps with other low-cost carriers, including Frontier and JetBlue, as well as Southwest Airlines (NYSE:LUV). 

A smaller, more focused network would not only reduce operating costs but also limit competition on key routes, allowing Spirit to better optimize its fare structures and improve profitability.

While network reductions could help Spirit in the long run, the airline has already initiated several commercial changes to mitigate losses. These include removing cancellation fees, adding bundled travel packages, and improving customer service. 

However, these initiatives have had mixed short-term effects. The removal of cancellation fees, for example, led to an immediate loss of revenue, while the upfront costs of employee training and system adjustments have compounded operational losses​.

Furthermore, Barclays points out that Spirit has already scaled back its capacity in loss-making markets and is planning limited growth for 2025. 

However, the company will face additional operational headwinds, such as a larger number of aircraft grounded for Pratt & Whitney GTF engine inspections in 2025​. This will further pressure Spirit’s available capacity, reinforcing the argument for a smaller network.

However, Barclays maintains that Spirit can still stabilize its business with the right shifts. 

If the company opts for a 25-30% reduction in network capacity, it could drive the necessary improvements in unit revenue, which would be critical to its financial recovery.

With this move, Spirit may also find it easier to negotiate with bondholders and extend the maturities of its debt obligations.

Barclays maintains an “underweight” rating for Spirit, citing its continued struggles with operational margins, high debt, and competitive pressures from low-cost carriers.

However, they suggest that with appropriate capacity reductions and financial restructuring, Spirit could eventually see an improvement in profitability.