Is Spirit Airlines Worth the Risk Amid Fears of Bankruptcy?

Spirit Airlines (SAVE 2.92%) looked like it was destined to merge after it agreed to be acquired JetBlue (JBLU 1.23%). Now that the deal has been scrapped, Spirit Airlines is struggling to stay afloat, and it could still end in termination—and perhaps not in a positive way. This is a high-risk stock that investors should approach with extreme caution.

What went wrong with Spirit and JetBlue?

Wall Street drama has left Spirit Airlines in the red after the coronavirus pandemic. He failed to change this trend even after the world got used to living with COVID. With looming debt maturities weighing on his balance sheetthe airline began looking for a contender who could effectively solve its financial problems.

Image source: Getty Images.

There were rumors that the Spirit was talking to Border Group (ULKK -1.81%)but then JetBlue stepped in and won Spirit’s hand. The problem is that JetBlue, once a tiny startup, is now a fairly large company. airline at this moment. The addition of Spirit to that company raised concerns among regulators that the merger would harm consumers. Ultimately the deal was cancelled.

Essentially, the spirit is back where it started, but in a worse position. This is because the company has lost time, and when a company is facing debt repayments, time is of the essence. There are rumors that the company has resumed merger talks with Frontier. At this point, it is abundantly clear that the Spirit is operating from a position of weakness.

Investors love stories

As you might have guessed, Spirit’s share price has been quite volatile during this difficult period, with each twist and turn in this sad story resulting in significant share price fluctuations, on a percentage basis, up and down. Investors bet on what will happen next with each story update. It’s a risky endeavor that’s more like gambling than investing. Most investors probably shouldn’t get involved. The reason is quite simple – it looks like Spirit is flirting with bankruptcy. This means there is a very real potential for investors to lose out entirely.

SAVE data on YCharts

The latest step taken by the company is further evidence of the problem. The company recently announced it was cutting staff and selling aircraft to improve its liquidity. These are new planes that were expected to be delivered to the company soon, which is a worrying development, although investors sent shares higher on the news. Essentially, Spirit is sticking with an aging fleet to be able to collect money, a move that will ultimately make Spirit a less desirable airline for consumers to fly. This shows how worried the company is today.

Moreover, such decisions are made when the company has few good options. These are the decisions that are made when a company is trying to prevent bankruptcy. These are decisions that should concern investors, not make them excited about buying shares.

This is not SAVING; it’s a Hail Mary

For now, it looks like Spirit is doing everything it can to survive and sell itself to another company. If these negotiations fail, there is a high probability that the company will end up in bankruptcy court. Every potential buyer knows this, and it is a big deal-breaker. Working with weaknesses is not the best outcome for Spirit and its shareholders. From a cynical point of view, a potential buyer could simply wait until bankruptcy occurs and buy the company’s assets at a discount. It’s true that Spirit could pull off a Hail Mary, but the risks of failure are so high that most investors should avoid what has become a big gamble.