Down 98%, Is It Time to Buy Spirit Airlines Shares?

Just like airplanes take off and land, shares of Spirit Airlines (SAVE -18.18%) has taken the shareholders on a trip. Only in this case has there been ridiculous amounts of turbulence on the journey.

The company has made a terrible investment. This airline stock is currently trading at a 98% discount to its all-time high, a milestone achieved nearly 10 years ago. At this depressed level, is it time to buy Spirit Airlines?

Up and down

Things took a short turn recently. From October 18 to November 11, shares of the troubled airline soared 131% higher. The company initially gave shareholders a sigh of relief when it said it was able to secure an extension with bondholders to refinance its debt.

Earlier this year, Spirit Airlines’ planned merger was included JetBlue Airways was canceled by a federal judge over concerns that it would have lowered competition at the lower end of the airline industry. The stock tanked sharply after the announcement.

There was hope for a new agreement in progressadding to Spirit shares’ recent short-lived bounce-back. The business was recently in negotiations with Border group about a possible merger. But the discussions fell through.

This puts Spirit Airlines in a precarious position. The company is expected to apply for bankruptcy protection in the not too distant future. It has also disclosed that it will not be able to file its Q3 2024 10-Q on time.

Value trap

Investors might have been encouraged by the market’s renewed sense of optimism about Spirit Airlines, but that has evaporated. I think it is still extremely difficult to be bullish on the business or the stock, even if the stock is trading cheap price-to-sale multiple of 0.03. In my opinion, this is one classic value trap. But that valuation shows how much the market has buzzed about Spirit’s prospects.

The challenges are hard to ignore. First, the company is struggling to increase its revenue. Sales were less than $1.3 billion in Q2 (ended June 30), down 10.6% year over year. This was the fourth consecutive quarter of a year-over-year decline in revenue.

“Significant industry capacity increases along with associated price changes” were cited by the management team as key factors pushing the top line. Spirit’s strategy centers on charging travelers for various non-fare items such as seat selection, baggage or food and beverage. But the competitive nature of the industry has forced the company to lower prices here.

In the past six months, Spirit Airlines posted $359.8 million in cumulative operating losses. This is not a new development. In fact, the company has not reported positively operating income for a full year since 2019. It is a very worrying trend that clearly highlights the company’s financial problems.

Spirit’s sales decline and operating loss stand out in the airline industry. The top four airlines, Participate, American, Unitedand Southwestall reported a revenue gain and positive operating income in their most recent respective quarters.

The balance also leaves a lot to be desired. Per As of June 30, Spirit Airlines had $3.3 billion in long-term debt, which is more than 20 times its current market value. Given the company’s problems achieving profitability, debtors are rightly concerned about Spirit’s ability to pay its obligations.

Perhaps a partnership with Frontier, if successful and gone through, would have created a new and improved airline with a much better financial situation and growth trajectory. But this is no longer on the table. And any future merger discussions with other suitors are difficult to predict in advance. As a result, investors should stay far away from this troubled stock, no matter how cheap it is right now.