SPIRIT AIRLINES, INC. 
Fitch Ratings has downgraded
The Rating Outlook remains Negative. Fitch has downgraded
The downgrade reflects Fitch's updated rating case forecasting structurally weaker operating profits. Credit metrics affected include EBITDAR fixed-charged coverage sustained below 1.5x ,inconsistent with a 'B' rating. The Negative Outlook reflects Fitch's view that Spirit faces increased turnaround risk following a judge's decision to block Spirit's merger with
Fitch believes Spirit needs to articulate a near-term plan to preserve liquidity. The company must also address its
Concerns are partly tempered by Spirit's adequate liquidity balance and limited options to raise further capital. The ratings also reflect the potential for market conditions to ease and refinancing options to expand, should Spirit exhibit an ability to improve profitability.
Key Rating Drivers
Diminishing Financial Flexibility: Fitch believes Spirit's financial flexibility has diminished as profit recovery remains elusive and operating losses continue. The company needs to address the
Spirit also had
Fitch expects the company to focus on shoring up liquidity in the near term. The company recently entered into sale-leaseback transactions for 25 aircraft, which netted roughly
Near-term Profit Headwinds: Spirit faces headwinds toward improving its profitability including engine availability issues, overcapacity in certain leisure markets, and intense competition. Overall, Fitch expects some limited margin improvement this year as Spirit prioritizes its most profitable flying with its limited fleet base, and benefits from a likely return of some domestic leisure demand that shifted heavily towards international travel in 2023.
Fitch currently forecasts limited profit improvement in 2024.
Spirit's profitability underperformed throughout 2023, with the carrier reporting a negative operating margin of -15% in the third quarter, with guidance towards further losses, albeit narrower than initial expectations, in the fourth quarter. The company was last profitable prior to the pandemic. Unlike other carriers, Spirit has not rebounded, due to a confluence of issues, including pilot availability, engine outages, softness/overcapacity in certain domestic markets and heavy exposure to areas impacted by air traffic control challenges.
Modestly Negative Near-Term FCF: Fitch expects cash burn to improve from 2023 levels but remain modestly negative in 2024, as operating margins remain well below historical levels. Spirit plans to use sale-leaseback financing or direct operating leases for the bulk of its aircraft deliveries, limiting its upfront capex. However, weaker than expected results may keep FCF negative into 2024, before potentially turning positive in 2025. In addition, aircraft lease expenditures are expected to increase through the forecast as the proportion of leased aircraft grows, keeping pressure on Spirit's lease-adjusted leverage.
Weaker Leverage, Coverage Metrics: Spirit's leverage and fixed charge coverage metrics are expected to remain weaker than previously expected throughout 2024. Fitch's base case anticipates that EBITDAR leverage may remain above 10x through 2024, with potential to improve thereafter assuming improvement off of current trough levels of profitability. EBITDAR interest coverage may end 2024 around 1x.
EETC Ratings:
2017-1 Class AA and Class A Certificates: Although the class AA certificate ratings are primarily driven by the top-down approach, the downgrade of Spirit's IDR to 'B-' led to the downgrade of the class AA certificates to 'A+', given senior tranches are typically precluded from reaching the 'AA' category under Fitch's EETC criteria if the underlying airline is rated 'B-' or lower.
The class A certificates are derived through Fitch's top-down approach, while the class B certificates are notched off of the underlying airline rating. The class A certificates remain supported by healthy levels of overcollateralization. Loan-to-values for both the 2017-1 and 2015-1 transactions remain steady since Fitch's last review, and base values for the A321s and A320s in these portfolios have performed in line with Fitch's standard depreciation assumptions over the last year. Meanwhile, the debt has continued to amortize, leading to slightly improved collateral coverage.
Class
The downgrade of the class B certificates is driven by Fitch's downgrade of Spirit's IDR to 'B-' from 'B'. These ratings could be revised downward further if the Negative Outlook leads to an additional downgrade of Spirit's IDR.
Fitch notches subordinated tranche EETC ratings from the airline's IDR based on the following three primary variables: 1) the affirmation factor (0-3 notches) 2) the presence of a liquidity facility, (0-1 notch) and 3) recovery prospects (0-1 notch). The four-notch uplift from Spirit's 'B' IDR reflects a moderate-to-high affirmation factor (+2 notches), the benefit of a liquidity facility (+1 notch), and solid recovery prospects in a stress scenario (+1).
Affirmation Factor: Fitch has not assigned the maximum +3 notch affirmation factor uplift for these two transactions. While Fitch views the likelihood of an affirmation in a distress scenario to be substantial, the uplift is limited by the shrinking proportion of Spirit's total fleet represented by the two transactions as Spirit continues to grow. The collateral aircraft are also becoming marginally less attractive as Spirit takes delivery of more A320 and A321 NEOs, which are more fuel efficient.
Although Spirit's fleet is growing, the two EETCs still make up a sizeable proportion of Spirit's assets, supporting the +2-notch uplift. The Spirit 2015-1 pool contains 15 aircraft, which makes up around 8% of the company's current fleet. The 2017-1 pool contains 12 aircraft, or around 7% of Spirit's fleet. The two pools also contain 17 A321s, which represents more than half of Spirit's owned A321s as of
Derivation Summary
Spirit's 'B-' rating is two notches below competitors such as
Key Assumptions
Fitch's base case incorporates flat capacity growth in 2024 followed by 10% annual growth thereafter;
Fitch expects modestly higher unit revenues in 2024 driven by Spirit's lack of capacity growth and prioritization of higher margin flying;
Jet fuel is assumed at
Recovery Analysis
Fitch's recovery analysis assumes Spirit would be reorganized as a going concern (GC) in bankruptcy rather than liquidated. The analysis incorporates a going-concern EBITDA estimate of
Fitch's GC EBITDA estimate of
The choice of this multiple considered the following factors:
Historical bankruptcy case study exit multiples for peer companies ranged from 3.1x to 6.8x.
Spirit's 5x multiple is at the mid-point of the range which is by the company's potential growth over time, offset by profitability and competitive headwinds.
The value available to holders of the loyalty program assets is dependent upon the size of Spirit's loyalty member base and associated cash flows. Actions that cause loyalty cash flows to decline, including a shrinking footprint, asset sales, etc. may cause the value available to the loyalty program debt to decrease which could impact the recovery rating over time.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Successful refinancing of Spirit's 2025 bonds;
EBITDAR leverage around 4.5x;
EBITDAR fixed-charge coverage sustained above 1.5x;
Improving operational stability leading to EBITDAR margins trending towards the double digits.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Near-term failure to articulate refinancing plans for the 2025 maturities, or an increasing likelihood that Spirit may pursue a DDE;
EBITDAR fixed-charged coverage below 1.0x;
Cash and revolver availability declining towards
EETC Sensitivities:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Class AA and A Certificates: The class AA and A certificate ratings are primarily based on a top-down analysis based on the value of the collateral. Ratings upgrades may be driven by stable or increasing values for the A321 and A320 along with continued principal amortization leading to improved collateral coverage. An upgrade to the class AA's are unlikely, given Spirit's IDR is at 'B-'/Outlook Negative.
Underlying airline credit quality is a secondary consideration. Positive rating actions could be driven by an upgrade of Spirit's corporate credit rating.
Class
The class B certificates are linked to Spirit's corporate rating. Therefore, if Spirit were upgraded to 'B' the class B certificates would be upgraded as well.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Class AA and A Certificates:
Negative rating actions could be driven by an unexpected decline in collateral values. Senior tranche ratings could also be affected by a perceived change in the affirmation factor or deterioration in the underlying airline credit. The transaction ratings may be impacted in the future by pressures on A320 CEO family values or changes in value stress rates utilized in Fitch's models as the A320 NEO family becomes a more dominant presence in the global aircraft market.
Class
The class B certificates are linked to Spirit's corporate rating. Therefore, if Spirit were downgraded to 'CCC+' the class B certificates would be downgraded as well. Fitch currently views the Affirmation Factor for each Spirit EETC as moderate to high. This could weaken over time as the collateral aircraft age and become a smaller portion of Spirit's total fleet. Negative actions could be driven by lower recovery prospects driven by weaker aircraft values.
Liquidity and Debt Structure
Declining Liquidity: As of
Spirit's total liquidity (cash plus short-term investments) has come down through the course of 2023 driven by operating cash outflows and debt repayment. In prior forecasts, Fitch considered Spirit's liquidity adequate assuming improving operating cash flows over the course of 2024. However, continued cash burn absent other capital injections could drive liquidity concerns over the course of the next year.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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