Spirit Airlines upgraded to ’CCC+’ at S&P following bankruptcy emergence

Investing.com -- S&P Global Ratings has upgraded Spirit Airlines (OTC:SAVEQ) LLC to ’CCC+’ from ’D’ on its emergence from bankruptcy on March 12, 2025. The parent company, Spirit Aviation Holdings, Inc., filed for Chapter 11 protection in November 2024. The upgrade reflects the company’s revised capital structure and reduced balance sheet debt by approximately $1.4 billion.

The stable outlook from S&P Global Ratings is based on the expectation that Spirit’s revised capital structure will provide enough liquidity to cover an estimated free cash flow deficit for at least the next 12 months. This will support the company as it implements its transformation plan.

Following the emergence from bankruptcy, Spirit’s debt levels have decreased, and its liquidity position has improved. The new capital structure includes a $275 million revolver, $840 million exit senior secured notes, $136 million of existing U.S. Treasury-issued payroll support loans, and around $1.6 billion of various existing aircraft debt. The total funded debt at emergence was lower by $1.4 billion, including repayment of the debtor-in-possession (DIP) financing, with maturities extended out from 2025.

Despite the improved financial position, the company remains vulnerable to market and macroeconomic conditions. Spirit’s operating performance had been deteriorating, marked by operating losses and steep free cash flow deficits in 2023 and 2024. Factors such as engine issues limiting capacity growth and utilization, overcapacity in key domestic markets, and high labor costs contributed to this deterioration.

Spirit’s turnaround initiatives include network reconfiguration, differentiating product options with a focus on new premium offerings, and improving brand sentiment through marketing. However, these efforts are expected to take more than a year to translate into significant improvement. The company also faces competitive pressures, with an estimated 40% route overlap with Frontier and 25% with Southwest.

In 2025, Spirit’s capacity is projected to decline in the mid-teens percentage area due to aircraft on ground (AOGs) and the sale and removal of aircraft from service. This is expected to benefit unit revenues, but will also increase unit costs due to lower fleet utilization and increased aircraft rent from 2024 and 2025 deliveries. The company expects the number of AOGs to double this year and does not anticipate improvement until 2027 at the earliest.

Increasing macroeconomic uncertainty could affect consumer spending, thereby affecting domestic travel demand. Several airlines have revised guidance for Q1 2025 earnings due to softer-than-expected demand. While S&P Global Ratings currently forecasts further operational improvement in 2026, a recessionary environment could lead to a significant reduction in customer demand, particularly within the domestic leisure market.

S&P Global Ratings could lower the rating on Spirit if it believes the company is likely to default within the next 12 months without unforeseen positive developments. This could occur if current operating trends do not improve or if the company pursues a debt repurchase or exchange transaction viewed as tantamount to a default.

The rating could be raised if Spirit significantly improves its operating performance, with stable revenues and consistent margin improvement, leading to funds from operations/debt in the low- to mid-single-digit percent area on a sustained basis. This would also require adequate liquidity supported by sustained positive free cash flow generation, as well as EBITDA interest coverage firmly above 1x.

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