RIP Spirit Airlines

0:01Noel King:Spirit Airlines had many detractors. They're the hidden fees airline. They're the number one in complaints. Like, they literally just left people stranded. Suck it on your extra fees. Spirit also had many defenders. Spirit Airlines doesn't have customer service. You don't pay for customer service. Spirit always got me to where I needed to be. I'd give them their gas money and they'd drop me off in Cabo. And then over the weekend, it shut down. Stranding passengers. I just woke up to the text message that spirit has literally shut down. So now I have to figure out a way to get home. I hope the people who have created this inconvenience for people like myself, they should ask God for forgiveness.

0:45Noel King:Breaking pilots' hearts mid-flight. I don't remember any of the bad times. Just the good ones. Coming up on Today Explained from Fox, lessons from the life and death of America's most beloved, most hated, most bootleg budget airline. Recommendations can be great. Maybe someone recommended this podcast, and here you are. But home projects are a little different. If the podcast isn't your thing, you might lose a few minutes from your day. But if you hire your cousin's neighbor to mount your TV, you might end up with a lopsided screen and wall damage. I Know a Guy isn't a good strategy for your home.

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2:26This is Today Explained.

2:28Noel King:John Ostrower, editor-in-chief of Air Current. Spirit Airlines, RIP, what happened? Well, Spirit reached the end of this long road on the early hours of May 2nd. So this is an airline that used to be a regular-style carrier, and it transitioned itself into an ultra-low-cost carrier. Look, it kind of adjusts the seat pricing, bare bones, very austere. We've been able to be profitable, and we've been able to make money because we keep our costs very low, because we do things in ways that help that happen. People may grumble about the extra fees or the sardine-style seating. They are buying almost every available ticket on a growing number of flights.

3:09And that's what makes spirit soar. And actually, they rode a really healthy wave of growth right up until the pre-pandemic period. And then things really went south. I think it happened fairly steadily through these troubles. But look, how do you go bankrupt? It kind of happened slowly and then all at once. And certainly the spike in fuel did not help that at all. So here we are. And they went bankrupt a few years back. Spirit Airlines filed for bankruptcy with a plan to hand over control to bondholders after failing to agree on a merger with rivals. Spirit has entered into an agreement with its bondholders expected to reduce total debt and provide increased financial flexibility.

3:51Together with available cash, that is expected to support the airline through the Chapter 11 process. They went bankrupt again last year. Spirit Airlines announced today it's voluntarily filed for bankruptcy, Marking the second time that the airline has done this in a year Right now Spirit Airlines is warning shareholders that it may not survive if it can't come up with enough cash to pay its upcoming debt obligations They look to reorganize themselves in a more comprehensive way They got to a point where they were really running out of options with their lenders and their creditors And look, they went to the White House and said, hey, can you help us?

4:27And the White House said, well, we'll see what we can do USA first, America first, that's my fight, including with airlines But like, here we are on the opposite side of the end of operations and now they're liquidation. And obviously the answer was that the deal did not come together.

4:46Noel King:How did things go so wrong for Spirit? What happened? So the short answer is, or I should say the long answer is, the pandemic changed the world. And it allowed the major U.S. airlines to more rapidly adapt and absorb the parts of their model that were most successful. And so a few things happened. Number one, I think you have to start with sort of how did Spirit grow as quickly as they did? And the big answer is cheap money, low interest rates, right? They were able to get their planes for low capital costs, and that allowed them to build capacity quickly. And the airline business is a scale game, especially in the U.S., where you've got huge carriers that you have to go up against.

5:33And so when the pandemic happens and inflation skyrockets after the pandemic and interest rates go up, airplanes become a lot more expensive. Capital becomes a lot more expensive. and oh, by the way, with inflation, you have really taken a hit to the bottom 30 % of the market. Most price-sensitive travelers really need cheap tickets. That's how they travel. That's how they want to travel. And whether it's for vacation or for business, price-sensitive makes sense, right? There is still a big portion of the industry that does pick on ticket price. Okay, we know that part of it. Here's the wrinkle here that I think is not well appreciated.

6:12During from like the period of like 2012 to 2020, the major airlines tried to take their business model, Spiro's business model, which was these basic economy tickets. By the end of last decade, they were pretty well adopted. Get ready for middle seats. No space at your feet. But hey, at least it's cheap. This is basic economy on Delta, American and United. So know the downsides, which include no advanced seat assignment, last aboard the plane, only one carry-on bag, and you may not be allowed to use the overhead bin. And no earning Delta SkyMiles, belay advantage, or United Mileage Plus points.

6:50That you would walk up to an airline and say, OK, I just want to get from point A to point B. I don't want to pay for bags. I don't want to pay for early boarding. All the things that come along that you can get charged for at an airline. But again, just the seat, point A to point B, with a ton of restrictions. They could match their pricing or get close, but also be able to offer more frequency because they're bigger, better networks because they're bigger, better amenities because they're bigger. Again, this is very much the big airlines using their scale against the small carriers. So what has in aggregate happened, the big airlines actually have now a larger ultra low cost basic economy footprint than the entire basic economy ultra low cost footprint airlines do in America.

7:36Noel King:I remember Spirit trying to merge with another low-cost carrier a few years back. It seemed like kind of a bid to save itself. What happened there? Yeah. So there was a bidding war for Spirit because I think there was a clear picture that Spirit was on a trajectory that was unsustainable. And at first, Frontier Airlines stepped in to try and merge with Spirit. That is probably the closest analog in terms of business model in America, and that would have created a much larger combined carrier. JetBlue swooped in for a bidding war. Frontier and Spirit joining forces. The two largest low-cost airlines in the U.S.

8:15Noel King:are hoping to merge. JetBlue, according to the New York Times, has made a bid to buy Spirit Airways for a deal that would be the purchase price would be$3.6 billion. And JetBlue ultimately won the bidding war because when you've got shareholders, they want the best deal. Regardless of whether or not that deal makes sense, they want the best deal that serves their interests. And so JetBlue won. Well, the U.S. government and the Biden administration sued to block the merger. If not blocked, the merger of JetBlue and Spirit would result in higher fares and fewer choices for tens of millions of travelers across the country.

8:50It is so important to make sure that passengers have choices, that they have access to low fares, that they had access to competition. They won. And that ultimately sent Spirit on this trajectory. There was really a sense that Spirit was not going to be a sustainable business going forward. So it's been sort of a process to that point.

9:14Noel King:Let me ask you about something that we've talked about on the show quite a bit. There are a lot of industries that have been hit by the war in Iran, including industries that I think are not immediately obvious. We all know that gas prices have gone up, et cetera, et cetera. But I wonder whether or not ripple effects from the war affected Spirit Airlines at all. Oh, absolutely. So the pre-exit from bankruptcy plan, which I think landed just before the war began, if I recall correctly, called for them to move away from flying with the latest generation technology engine airplanes, which burn about 15 percent less fuel than the airplanes that they replace.

9:51So they're an entirely Airbus operator. they were going to put the same Airbus airplane, but just a newer generation of engines. That was the plan for a while. Well, that newer generation of engines turned out to be really expensive. And actually the maintenance costs for these very exquisite engines to deliver the fuel burn performance, they weren't as reliable, they weren't as durable. There was a big recall, which is affecting a lot of airlines around the world, hit Spirit probably disproportionately because of how they bet on this technology. So their plan was, okay, we're going to come bankruptcy.

10:24We're going to shut off airplane leases. We're going to really scale down our fleet to about 75, 80 airplanes, and we're going to really refocus how we're going to grow here. But here's the problem. The fleet that they chose was the older generation because it was more reliable. But that older generation also burns 15 % more fuel per seat. Well, when fuel prices spike and the war in Iran starts, the Strait of Hormuz is closed. We are looking at a situation where they were doubly disadvantaged based on a plan that assumed effectively what is now considered to be cheap fuel. That wasn't the case anymore.

11:01This is, you know, unprofitable at any size given where their ability to absorb the fuel cost was. You can't do it.

11:11Noel King:Everything you're saying here about the economic circumstances and the headwinds makes complete sense. Like, this is not an unfamiliar story that you're telling. And yet, President Trump floated this idea of a rescue deal. $500 million, the government would get a 90 % stake in spirit. Why? Why bother doing that? Well, look, Donald Trump is an aviation lover. He is an avgeek. He's America's first avgeek president. And he loves things that fly, whether it's Air Force One. It's your new Air Force One. And I'm doing that for other presidents, not for me. Is the frame still a 747? It's a 747. But you know, it's a much bigger plane.

11:51Whether it's fighter jets. I'm thrilled to announce that at my direction, the United States Air Force is moving forward with the world's first sixth generation fighter jet. Number six, sixth generation. He's always had a keen interest in aviation. In fact, he was the owner of an airline in the late 80s and 90s, which went bankrupt. Tonight, the Eastern Shuttle is no more. Tomorrow morning, it will be the Trump shuttle that services air commuters between Boston, New York and Washington. You had other people wanting this very much, as we all know, and it was just really a nice victory. It was a very sweet victory.

12:25And so it's something that's always been near and dear to his heart. So I think that, you know, whether it's support for Boeing or or other other different strategies, you just see it play out in terms of his intense interest in this. I think there is also a dynamic ways of reporting that we've done. Florida airline, Florida president. And I think that these go hand in hand with the discussion. You know, heading into the midterm elections, there's also the affordability question, which is very much in the forefront of voters' minds around, you know, what will make life in America more affordable.

12:59And low-cost carriers are an important part of that because they do hold down the affordability and fares, profitable or not, for the rest of the industry. So Spirit right now is under 2 % of US airline capacity. It's not a big piece. This is not a large carrier by any stretch of the imagination. However, in the markets that they operate, their ability to offer low fares forces competitors to move their fares lower so they can grab customers, right? And naturally, the fares will rise along with the declining supply. This is, it's a very predictable market in that regard. It's very, very sensitive to the amount of capacity that exists.

13:49Noel King:All right. So do you think that we have seen the end of the deep, deep, deep budget airline? In America, for the time being, yes. I mean, look, there are structural things happening in U.S. aviation that are going to make this really, really, really challenging. And the cost for a low-cost carrier, ultra-low-cost carrier to operate approaches the cost for a legacy airline to operate. And as those get closer and closer, it makes it virtually impossible for a budget carrier to deliver enough revenue to cover your costs and support your growth and whatever business goals you have. The trajectory that the US airline industry is on right now points to higher fares.

14:47You look at all the economic inputs, you look at all the big picture, small picture. Yes, flying in America is going to get more expensive.

14:59Noel King:John Ostrower is the editor-in-chief of Air Current. Coming up in the final hours of Spirit in the Sky, President Trump was asked about a bailout and he said this. If we could do it, would do it, but only if it's a good deal. Turned out not to be, I guess. What makes a good bailout deal? We're going to ask an expert.

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18:39Today, today explained.

18:43Noel King:Deborah Lucas teaches finance at MIT Sloan School. She used to work for the Congressional Budget Office and she helped create a division for bailouts. Debra, is there an ideal government bailout of a private company? I'd say an ideal government bailout is a bit of an oxymoron. It's ideal if governments don't bail out companies. You know, part of what makes a market economy productive is that unprofitable enterprises are allowed to fail. That makes space for new or other existing ones to better deploy its labor and capital. But of course, sometimes there is a situation where the government has no choice.

19:25And then what's ideal is to intervene really as cheaply as you can, using a minimum amount of public resources, taxpayer dollars, do what you need to accomplish the goal of getting past the stress period. And then after that, there needs to be an orderly and usually quick exit of the government.

19:48Noel King:OK, so do it cheap, do it effectively, do it quick. Any other criteria, anything else you would say makes a successful intervention versus a failed intervention? Only do it if you really have to. Hmm. Fair. Fair. All right. So you and I both remember the great financial crisis, the government bailing out companies, bailing out entire industries. On the second try, the House passes a sprawling$700 billion government rescue of the financial industry. With the clock ticking on GM, Ford and Chrysler, Congress reconvened today to consider an immediate cash infusion of$25 billion. It will help you in the sense that the ability to get a car loan, the ability to get a mortgage will continue and not freeze up as it threatened to do a few days ago.

20:34Noel King:At the time, I remember the government's argument being, we have to get this done. If we don't do this, the American economy will fail. We had allowed the meltdown of the financial system. Unemployment might be double what it is today. More businesses would certainly have closed. More homes would have surely been lost. If we are to look back and talk about what went right and what went wrong there, let's start with what went right. Yeah, so the logic behind the bailouts of the TARP period was that we were falling into a severe financial crisis, which ultimately led to the Great Recession. And there was the sense that because of the crash in housing prices, mortgages were failing.

21:30Those losses were hitting banks. They were hitting the mortgage giants, Fannie Mae and Freddie Mac. Had those key institutions in the financial system failed, had they been able to keep on providing credit? In the case of Fannie and Freddie, you know, could they keep on making mortgages? Well, if they couldn't, that downward spiral would continue. And there could be, you know, not just a great recession, but a great depression or worse. So there was the sense that it was just extremely important to make sure that those large financial institutions stayed solvent.

22:14Noel King:I think I hear you saying that in the case of TARP, bailing out the big financial institutions was worth it. What wasn't worth it? Well, in the case of the 2008 crisis, it was clear that allowing those large financial institutions to fail could really be devastating for the entire economy. What happened, as is often the case, is that Congress provided$700 billion and didn't really put a lot of restrictions about what would be done with it beyond saying that it was designed to keep the financial system afloat. So it wasn't very specific. And as is often the case with kind of vague rules, it's the tendency of the government to spend the money that's available to try to help people.