Spirit Airlines (NK, Fort Lauderdale International) is preparing to file for Chapter 11 bankruptcy protection after renewed merger talks with Frontier Airlines (F9, Denver International) broke down, people familiar with the matter have told the Wall Street Journal.

Grappling with mounting losses and looming debt maturities, the carrier is in advanced discussions with bondholders to devise a bankruptcy plan that would have the support of most creditors. According to the sources, a bankruptcy filing is expected within weeks. This comes after Frontier Airlines decided not to rekindle earlier merger plans as part of a broader restructuring.

Last month, the same newspaper reported that Frontier was considering making a renewed bid for Spirit but that discussions were at an early stage. In 2022, a proposed merger between the two fell through after JetBlue Airways (B6, New York JFK) won the bidding war. But in January 2024, a US court blocked the proposed USD3.8 billion JetBlue-Spirit merger.

Both airlines declined to comment when approached by ch-aviation.

In a Security Exchange Commission (SEC) filing on November 12, Spirit Airlines said it was in "constructive discussions" with holders of its senior secured notes (due 2025) and convertible senior notes (due 2026) to restructure its debt obligations and explore "strategic alternatives and other ways to improve the company's liquidity". While these talks have been "productive and materially advanced", they also consumed significant management time and resources, which delayed the company's ability to finalise and file its financial statements for the third quarter of 2024.

The carrier disclosed that if a restructuring deal is finalised, it could significantly change the company's ownership structure, potentially cancelling existing equity, meaning shareholders might lose their investments. However, if no deal is reached, Spirit said it would look for other options to stabilise its finances.

"If a definitive agreement with such noteholders is reached and documented, it would be effectuated through a statutory restructuring that is not expected to impair general unsecured creditors, employees, customers, vendors, suppliers, aircraft lessors or holders of secured aircraft indebtedness, but, if effectuated, is expected to lead to the cancellation of the company's existing equity. If a definitive agreement with the noteholders is not reached, the company will consider all alternatives," Spirit said.

A preliminary estimate of its expected third-quarter performance provided in the SEC filing indicates a worsening financial performance year on year. The airline's operating margin and adjusted operating margin are expected to be 12 percentage points lower than for the same quarter last year. Operating revenues are estimated to have decreased by USD61 million, mainly due to lower average yields and the company's decision to no longer charge for change or cancellation fees, which further harmed revenue. Operating expenses are expected to have risen by USD46 million, adjusted operating expenses by USD52 million. The increase is due to higher costs in several areas including aircraft leases and other operating expenses, salaries, wages, and benefits, landing fees, and other rents. A decrease in fuel costs partially offset the increase in expenses.