Spirit Airlines Stock Plummets After Merger with JetBlue Blocked

Shares of ultra-low-cost carrier Spirit Airlines fell 17% in morning trade on Wednesday following a ruling by a U.S. judge that blocked the airline’s planned $3.8 billion merger with rival JetBlue Airways. This decision comes after Spirit’s stock lost nearly half of its market value on Tuesday when the judge agreed with the U.S. Department of Justice that the merger would harm consumers.

The ruling has left Spirit Airlines uncertain about its future, with analysts suggesting that the company could explore alternative buyers or consider a bankruptcy filing. Spiraling expenses and ongoing supply chain problems have hindered Spirit’s profitability, raising concerns about its ability to repay its outstanding debt due next year.

Some industry experts speculate that Spirit might opt for a bankruptcy filing to restructure its finances and emerge as a stronger airline. According to TD Cowen analyst Helane Becker, the best-case scenario would be a Chapter 11 filing followed by a liquidation (Chapter 7). Citi analyst Stephen Trent highlights the critical strategic and financial decisions now facing both Spirit Airlines and JetBlue Airways, as their merger plans have been disrupted.

Spirit Airlines has faced multiple challenges, including issues with RTX’s Pratt & Whitney Geared Turbofan (GTF) engines, grounding several of its jets. These challenges are expected to persist in 2024. Excess capacity in some key markets has also impacted Spirit’s pricing power, leading to significant seat discounting.

JetBlue shares, which initially rose 5% following the announcement of the merger, also faced a decline of 6.2% in morning trade. Deutsche Bank analysts predict a minimal likelihood of the merger being completed, citing regulatory hurdles, even if the airlines decide to appeal the ruling.

The absence of the merger has left Spirit Airlines with little valuation support, as indicated by J.P. Morgan equity analyst Jamie Baker. Spirit currently has an enterprise value to sales ratio of 1.3 for the next 12 months, compared to suitor JetBlue’s ratio of 0.6, implying a more attractive investment opportunity for JetBlue.

The airlines have the option to appeal the ruling, but for now, Spirit Airlines and JetBlue Airways are evaluating next steps within the legal process to determine their future course of action.