--:-- [Theme music fades out]
--:-- Ryan Knutson: Welcome to The Journal. I'm Ryan Knutson.
--:-- Jessica Mendoza: And I'm Jessica Mendoza.
--:-- Ryan Knutson: Today, we're talking about Spirit Airlines, the low-cost carrier that's been a thorn in the side of the big airlines for years. But this week, Spirit filed for Chapter 11 bankruptcy. Our colleague Allison Sider has covered airlines for six years. And in that time, she's heard a lot of impassioned takes about people's favorite and least favorite airlines. But there's one carrier that seems to inspire especially strong feelings. I think probably Spirit Airlines is the one that people generally have the strongest opinions about.
--:-- Allison Sider: That's right. Spirit, the low-cost, no-frills airline. Okay, so what do Spirit lovers love about Spirit? People who love Spirit, and maybe love is a strong word, but people who tolerate Spirit, it's just the fares are cheap. And that is really meaningful. I mean, that allows people to travel, take trips that they ordinarily wouldn't be able to.
--:-- Jessica Mendoza: That's right. And I've spoken to people who are in a long distance relationship. And, you know, if you're visiting someone once a month. Right. It makes a huge difference to pay $100 or less for a round trip ticket. And you're willing to put up with a lot to make that happen.
--:-- Allison Sider: People hate Spirit Airlines way too much. I fly them all the time and it's a fine experience. I fly them so much I got their credit card. And what do the haters say? It just isn't the most luxurious or the most comfortable airline.
--:-- Jessica Mendoza: But I just needed to come on here to share with you all how much I hate Spirit Airlines. And it's like, I know. I know I did this to myself. I'm a cheap a**. I chose to fly Spirit. I know that, like, this is the kind of flight where I only get to bring, like, a small purse.
--:-- Allison Sider: But I'm still angry. Love it or hate it, though, there's one thing you can't deny about Spirit. It changed air travel in America. Spirit brought to the airline industry the idea that everything is a la carte and customers pick the options they want and pay extra for them. You know, that was kind of an innovation.
--:-- Jessica Mendoza: That's not how airline tickets were sold, you know, 20 plus years ago. And now it's increasingly how all airline tickets are sold, even at the upper end of the market. For years, that innovative business model worked for Spirit. It was one of the country's fastest-growing carriers with eye-watering profit margins.
--:-- Allison Sider: Which is why what's happened with Spirit represents such a reversal. This week, the company filed for Chapter 11 bankruptcy. Would it be fair to say that Spirit was a victim of its own success?
--:-- Jessica Mendoza: Yeah. I mean, I think in some ways Spirit was a victim of its own success or like the success of its business model. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, November 20th.
--:-- Ryan Knutson: Coming up on the show, how Spirit Airlines landed in bankruptcy. We last checked in with Allison about Spirit in 2022. And back then, things looked a lot different for the company. It was trying to grow bigger.
--:-- Allison Sider: The U.S. airline industry, it's really dominated by four huge airlines. United, American, Delta, and Southwest. They came to their current form after a bunch of bankruptcies and mergers, and they dominate about 80% of the domestic travel market.
--:-- Ryan Knutson: And it's really hard for smaller airlines to kind of get the scale that they need to really be relevant. Smaller airlines need to compete with the big carriers for pretty much everything.
--:-- Allison Sider: For space at airports, for gates, and for customers. You know because if you are picking what flight you want to take and picking what airline you want to take you know if Spirit only has one flight a day in your airport and American has 10 you know that just makes them a lot more interesting to you.
--:-- Ryan Knutson: So smaller airlines all kind of are facing this challenge of like, how do we get bigger? How do we actually take on the bigger airlines? Spirit's answer to that question was to merge, specifically with another small, low-cost carrier, Frontier Airlines.
--:-- Allison Sider: The friendly skies are about to get more competitive. Low-cost airlines Frontier and Spirit have agreed to a multi-billion dollar merger. That move creates the fifth largest U.S. carrier.
--:-- Ryan Knutson: For Spirit, was merging a matter of survival at that point? No. I mean, I think at the time when Spirit was talking about merging with Frontier, the conversation was really about, you know, we're going to create this nationwide low fare competitor that's really going to challenge the big airlines.
--:-- Allison Sider: Spirit is kind of a little more focused in the East, and Frontier is kind of a little more focused in the West, and they were going to bring it together and just be this big budget presence that was just going to have a lot more scale and a lot more reach.
--:-- Ryan Knutson: In February of 2022, Spirit and Frontier struck a deal. And that's when things started to get interesting. JetBlue today made a surprise bid of more than $3.5 billion to buy Spirit Airlines. That's about 40 percent more than Frontier offered to buy Spirit less than two months ago.
--:-- Allison Sider: JetBlue kind of swooped in with a competing offer for a lot more money. And it set off this very fierce bidding war.
--:-- Ryan Knutson: Drama, drama, drama. CBS News Transportation Correspondent. What did JetBlue want with Spirit? You know, they sort of wanted the same thing that Frontier did. They really wanted to grow and they wanted especially Spirit's planes and its pilots.
--:-- Allison Sider: Spirit and JetBlue, they have the same type of fleets. At the time, there was a pretty significant pilot shortage developing in the U.S. So they really just saw this opportunity to, like in one fell swoop, just become a lot bigger, that it would be JetBlue that's going to become kind of the national challenger to the bigger airlines.
--:-- Ryan Knutson: Frontier and JetBlue duked it out. Each company sweetened its deal to try to convince Spirit shareholders to merge with them. In the end, Spirit's investors opted for JetBlue. And Spirit and JetBlue negotiated a deal that they agreed to in July of 2022, a $3.8 billion deal.
--:-- Allison Sider: Spirit and JetBlue were seated, buckled in, and ready for takeoff. And then, regulators grounded them indefinitely. And the Biden administration is suing to block JetBlue's acquisition of South Florida-based Spirit Airlines.
--:-- Ryan Knutson: The White House says that... Biden's Justice Department did not like the idea of a JetBlue-Spirit merger. They were concerned that losing a low-cost airline would make the industry less competitive.
--:-- Allison Sider: And they pointed to what JetBlue was planning to do with Spirit. JetBlue had announced plans to retrofit some of Spirit's planes, to take Spirit's super cramped seats and replace them with roomier seats.
--:-- Ryan Knutson: So that sounds great for flyers, but, you know, antitrust enforcers are concerned when they hear that because it means you're taking away a lot of cheap seats from the market. You're also taking away this kind of maverick airline in spirit that goes into markets with bargain basement fares and forces all the other airlines to lower their fares.
--:-- Allison Sider: So the Justice Department is very concerned that this merger is going to result in higher fares and it's going to be bad for consumers. JetBlue and Spirit disagreed. They argued that combining would make them an even more formidable challenger to the big airlines.
--:-- Ryan Knutson: But in January, the judge on the case ruled against them. A judge blocked the Spirit JetBlue merger, said it's bad for consumers. And he said kind of famous last words he said in his ruling you know Spirit is a small airline but there are people who love it And you know Spirit fans this one for you Spirit would remain unmerged It would stay an independent maverick forcing the entire industry to lower its prices
--:-- Allison Sider: That was the idea. But there was a problem. As the government argued why Spirit was so important, the airline's financial picture was getting worse.
--:-- Ryan Knutson: This ultra-low-cost carrier business model kind of just fell apart, like really pretty rapidly. That's next.
--:-- Allison Sider: Throughout the JetBlue trial, Spirit executives maintained that the company had a plan. Spirit didn't need a merger to survive. But its business was experiencing some serious turbulence.
--:-- Ryan Knutson: One of the main problems was that the big airlines were moving in on Spirit's turf. During the pandemic, business travel dropped off and was slow to recover. So to make up the loss, big airlines started adding new routes.
--:-- Allison Sider: You know, business travel wasn't fully back. So the bigger airlines were flying a lot more on the kind of Florida, Vegas, these domestic leisure routes that are sort of the bread and butter for the discount airlines. And that weighed on airfare.
--:-- Ryan Knutson: With more airlines offering more flights, fares dropped. That hurt Spirit's bottom line. And the big airlines were moving in on Spirit's business in other ways, too.
--:-- Allison Sider: You may have noticed that if you want to buy a cheap seat these days, Spirit is no longer your only option. The large legacy airlines over the years started kind of picking up at least parts of what Spirit was doing.
--:-- Ryan Knutson: So, I mean, for example, the bigger airlines started adopting their own kind of no-frills tickets called Basic Economy. And it's kind of their answer to Spirit where you get only a ticket or, you know, it varies a little bit exactly what you get, but it's pretty bare-boned.
--:-- Allison Sider: In United's case, you can't even bring a carry-on. Spirit used to be unique. But nowadays, if you want the no-frills experience, you can get that on a big airline too.
--:-- Ryan Knutson: And that's been a problem for Spirit. There's so much more competition. And it is not winning. You know, bigger airlines are just have gotten so much more effective, you know, going up against it.
--:-- Allison Sider: And it hasn't really had kind of as much of a compelling offering as it once did. There were other challenges that helped push Spirit from struggling to bankrupt. It had accumulated debt during the pandemic.
--:-- Ryan Knutson: It's also had equipment issues, which have grounded parts of its fleet for months. And it's struggled with high labor costs.
--:-- Allison Sider: I mean, they're called ultra-low-cost carriers, and the whole point is that they have the lowest costs and that allows them to charge the lowest fares. But now, you know, there are labor shortages coming out of the pandemic.
--:-- Ryan Knutson: All the airlines have to raise wages for everyone. So, you know, they don't really have as much of an advantage anymore on costs.
--:-- Allison Sider: Facing looming deadlines on some of its debt, Spirit filed for bankruptcy on Monday.
--:-- Ryan Knutson: And the fact that Spirit is in bankruptcy doesn't necessarily mean, like, that's it for the company, right? What's happening now?
--:-- Allison Sider: Spirit being in Chapter 11 does not mean that's it for the company at all. In fact, like, most major airlines have gone through bankruptcy at some point in their history.
--:-- Ryan Knutson: It's been a while. The last really big one was American Airlines in 2011. But it's kind of a rite of passage for an airline, to be honest. And like a lot of them come out of it.
--:-- Allison Sider: Often there's like a merger that results, but they do come out of it most of the time. They keep flying. So Spirit is telling all its customers, like, you can still book us for the holidays. Like your flight's going to be OK.
--:-- Ryan Knutson: There is a good chance that Spirit is not going away. Spirit says its bankruptcy is aimed at restructuring debt and that it emerge in a few months with fresh capital ready to get back on track.
--:-- Allison Sider: What could a revamp Spirit look like? So Spirit is saying, you know, part of its revamp is going to be sort of an altered business model. Like it wants to appeal to more flyers.
--:-- Ryan Knutson: And that means going after some of the more upscale flyers that have been choosing bigger airlines because there are more premium options.
--:-- Allison Sider: So they rolled out a couple of months ago a bunch of new kind of bundles called like Go Big, Go Comfy, Go Savvy, I think is one of them. And they're just like new upselling seating options.
--:-- Ryan Knutson: Like they've always had the big front seat, which is actually kind of a great deal. Now the big front seat, if you book it, it's going to come with drinks and snacks and like priority boarding.
--:-- Allison Sider: Familiar things. And yeah, you know, it's interesting kind of as the bigger airlines are embracing this kind of a la carte menu, Spirit is going after more of a bundled ticket that now includes a bunch of extras and amenities, you know, to kind of buy up.
--:-- Ryan Knutson: Yeah, it's funny. It's almost like Spirit and the bigger airlines kind of like met in the middle somewhere and are now offering kind of more of what the other one used to offer.
--:-- Allison Sider: Yeah, exactly. They're kind of converging on very similar business models.
--:-- Ryan Knutson: You mentioned that a merger could be a possibility. Like, after all this, could we see a Spirit Frontier or a Spirit JetBlue merger in the end?
--:-- Allison Sider: So JetBlue has said they've been asked and they're kind of working on their own turnarounds plan because they're facing a lot of similar issues.
--:-- Ryan Knutson: So they've said, like, they're not interested in revisiting the Spirit deal. You know, Frontier, I mean, I think a lot of people think it's still possible that they could reemerge.
--:-- Allison Sider: Or there might be another airline that kind of has interest in, at least in Spirit's assets, like its planes.
--:-- Ryan Knutson: So we'll see. As you were saying earlier, regulators opposed the JetBlue Spirit merger because they wanted Spirit to stay this sort of like low budget, low cost, independent kind of maverick that would pressure all the other airlines to keep prices low.
--:-- Allison Sider: Did that backfire? Well, I think it's fair to say it did not go as hoped. You know, Spirit, it's going to be smaller this quarter than it was a year ago. and it said its flying capacity is going to be like sharply lower throughout next year.
--:-- Ryan Knutson: I just cannot imagine that this outcome, spirit and bankruptcy, spirit, you know, readjusting its business model to focus more on high-end consumers, that this is what they had in mind.
--:-- Allison Sider: Representatives from the Justice Department declined to comment on spirit's bankruptcy.
--:-- Ryan Knutson: What does this bankruptcy, this moment, kind of tell us about the winners and losers in the airline industry right now? I mean, I think it tells us that the big airlines are really the big winners of the last several years.
--:-- Allison Sider: They figured out how to compete with the smaller airlines and kind of neutralize the competitive threat. And they figured out how to get us all to pay more, you know, for all of these add-ons for premium flying.
--:-- Ryan Knutson: The coach experience, the economy experience is not as much as included as it once was. It's not as expensive, but it's also you don't get as much. And so you're going to have to pay for everything if you want. Extra legroom, if you want to board earlier, if you want to pick your seats. You know, it's all going to cost you.
--:-- Allison Sider: It sounds like whatever happens to Spirit from this point forward, it's kind of mark on the airline industry is pretty lasting. We're all riding Spirit now.
--:-- Ryan Knutson: Yeah. In some ways, in spirit. That's all for today, Wednesday, November 20th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode from Alexander Gladstone. Thanks for listening. See you tomorrow.
