Rising fuel costs put budget airlines under pressure as Spirit faces bankruptcy

Geoff Bennett:

The war with Iran is driving energy costs to levels not seen in years, and that surge is now rippling through global air travel.

Several U.S. budget airlines are asking the federal government for a $2.5 billion lifeline, warning that soaring jet fuel prices are putting pressure on their business models and threatening thousands of jobs along with the affordable fares that millions of travelers depend on.

The appeal comes as Spirit Airlines faces a potential bankruptcy and is negotiating separately for a $500 million government bailout, one that could leave the Trump administration with a significant ownership stake.

We're joined now by David Shepardson, an aviation, transportation and technology correspondent at Reuters.

Thanks for being here.

David Shepardson, Reuters:

Thanks, Geoff.

Geoff Bennett:

So, as we mentioned, these low-cost carriers are asking for $2.5 billion, a bailout. What does that really signal about the health of the sector? Is this just about the cost of fuel or is this an issue about the deeper business model, deeper problems?

David Shepardson:

I really do think it's about the fuel, right? So, as you mentioned, jet fuel prices have doubled. Everybody is suffering, not just the budget guys, but the mainline carriers, American, Delta, United, Southwest. They're all struggling. They're all being forced to raise prices, raise baggage fees and deal with this.

But the budget guys are in a tougher spot, in part because they have got less room to raise prices. Their consumers are much more price-sensitive, so it's harder to raise fares and keep those planes filled.

And they're also asking Congress to waive the fuel taxes, the surcharge that you pay on your airline ticket. So between that and $2.5 billion, it's a big ask. And, right now, it doesn't appear Congress, the administration, are going to do it now.

But depending how long these fuel prices go on, if we see some of these budget guys get in trouble or file for bankruptcy, then I do think Congress might take a more realistic look.

Geoff Bennett:

How unusual is a request like this? The airlines got a $25 billion bailout back in 2020. Of course, it was a once-in-a-generation pandemic. We hope once-in-a-generation. I mean, how does this compare?

David Shepardson:

So I do think the rationale is somewhat similar, although you're right, the COVID pandemic was much different, right? Because demand fell 90 percent overnight. And they actually got three rounds of bailouts, and they got $54 billion in funding in 202-2021.

So the structure that the budget guys are talking about is similar, in that the government would get warrants in exchange for that money that they could exchange for stock, because, remember, in the COVID bailout, those warrants were basically worthless on the day that they gave them the bailouts.

And then the government got the appreciation. So the government only got $500, $600 million in exchange for a very large bailout. So I do think it's similar. Obviously, things aren't nearly as bad, but it really depends how long this goes on.

Geoff Bennett:

And Spirit Airlines is asking for a $500 million lifeline. If that funding falls through, what options remain?

David Shepardson:

Really, it doesn't look like much. If you listen to Spirit and their lawyers, they're basically facing liquidation.

So they do have some money on hand, but they're restricted from using it. There are negotiations with their creditors and the government to try to reach a deal. It was supposed to be done by today. The talks are continuing. And Spirit has really struggled.

So, since 2019, they haven't made a profit. They have filed for bankruptcy twice in the last two years. And they made some mistakes. They have made a big expansion bet before COVID. It didn't pay off. And a lot of the market has moved toward the premium segment, right?

People want the fancier seats, the United, American, Deltas of the world. And so Spirit has struggled to keep those seats filled. And that business plan they have depends on much cheaper fuel and questions. How can they exit bankruptcy of the plan to survive with much higher fuel prices?

Geoff Bennett:

Why should we care if Spirit collapses? To your point, they have been struggling for seven years. If they can't get it together, it's just a free market at play.

David Shepardson:

No, you hear that argument from a lot of people on both sides.

However, even if you don't fly Spirit, you do benefit if you're a flier. They are about 5 percent of the market. And studies show that the markets where Spirit competes with a Delta or American, those fares are lower. And we have seen certainly in the past that when budget carriers go out of business or stop flying, the legacy carriers can raise prices.

So they do act as a downward pressure on airfares. And, also, if you're a college kid or you just can't afford to travel, I mean, Spirit, Frontier, the low -- the smaller guys, they do provide airline travel options for people who really can't afford to fly the mainline carriers.

Geoff Bennett:

Well, what is the bigger picture for the major airlines? Because, as you point out, first-class seats are really driving profits in airlines like Delta and United.

David Shepardson:

Right, and credit cards too, right?

Geoff Bennett:

Yes.

David Shepardson:

Between the credit cards and -- that's billions of dollars in profits.

Now, there's still a big demand. They're all trying to fill those other seats. And that's why you see the other airlines have these basic economy no-frills fares, because they're trying to compete with the Spirits and the Frontiers of the world to have a lower-cost fare.

But they're really trying to upsell you to all the fancier seats and the premium food or whatever they have in the front of the cabin. So -- but the Spirits of the world, right, they just don't have the run room to raise the prices, because their consumer base, if you raise prices $20, $50, $75 dollars, they're much less likely to stick with that airfare.

And, also, they're less likely to be business travelers because they have fewer options. With fewer flights, if your flight gets canceled, you might get stuck for a day on a small carrier, unlike the bigger guys with lots more flights.

Geoff Bennett:

Yes.

And let's leave our viewers with some news they can use. If they have summer travel plans, now is the time to buy their tickets?

David Shepardson:

Yes, it sounds like a salesman, but you really should buy, right? The airlines all say they have only been able to pass on 30 percent to 40 percent of the higher cost of fuel.

As the year goes on, they plan to increase that. United wants to do all of it. So, really, my advice is, look for airfares now because prices are only going to go up, assuming the war on these high prices continue for months to come. So don't wait. Get your airfares now before it's too late.

Geoff Bennett:

OK, David Shepardson of Reuters, always great to speak with you. Thanks for coming in.

David Shepardson:

Thanks, Geoff.