Dave Portnoy had the sympathies of stock traders around the world yesterday after he Tweeted that he “bought a ton of Spirit Airlines stock” 1 minute before the company announced that it was exploring restructuring options due to mounting debt, potentially leading to bankruptcy. The stock fell over 25% less than a minute after his announcement and his losses accelerated above 32% at one point. The trade seemed to be more than doomed because the low-cost carrier Spirit Airlines ($SAVE) faces mounting existential threats after a federal judge blocked its proposed $3.8 billion sale to JetBlue on antitrust grounds earlier this week.

Portnoy was heavily ridiculed for the incredibly risky trade on X after the account Unusual Whales pointed out his incredibly unlucky timing.

However, Portnoy proved all of his critics wrong today when Spirit Airlines opened up 25%, significantly above his entry price, reportedly netting him $600k in unrealized profits. His luck certainly turned around but Spirit Airlines is in a much direr situation.

On Tuesday, Judge William Young sided with the Justice Department and ruled that the merger would illegally reduce competition and raise airfares by eliminating Spirit’s competitive pressure in the market. Ironically, analysts have pointed out that the decision may cause Spirit’s demise, which would likely cause airfares to rise even more than under the acquisition.

The budget airline has struggled financially since 2019, racking up over $1.6 billion in losses amidst the pandemic and operational issues. With few attractive options remaining, analysts warn that bankruptcy and even a potential liquidation of the airline now loom if Spirit cannot find an alternative buyer or drastically improve its bleak profitability outlook.

Years of Red Ink and a Severe Cash Burn Weigh on Spirit

A notorious lack of frills helps Spirit offer lower fares than competitors. However, the airline relies heavily on ancillary fees from add-ons like seat assignments, bags, snacks, and other similar items to generate additional revenue. This leaves the carrier vulnerable to economic downturns and changes in customer preferences.

The last time Spirit earned an annual profit was in 2019. However, the firm lost over a billion dollars in 2020 and 2021 as COVID-19 ravaged air travel. With the balance sheet now saddled with $1.1 billion in debt approaching maturity in 2025, analysts fear that Spirit lacks the financial fortitude to weather an increasingly uncertain environment.

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The airline recently raised $419 million by mortgaging aircraft to bolster its liquidity. Cowen analyst Helane Becker asserted that there are a limited number of scenarios where Spirit can emerge unscathed and profitable. She warned that “a more likely scenario is a Chapter 11 [bankruptcy] filing, followed by a liquidation.”

Frontier Deal Unlikely, Few Options Remain Without Merger

After JetBlue initially swooped in, Frontier Airlines tried acquiring Spirit but they lacked resources to prevail in the bidding war. With both ultra-low-cost carriers still struggling, analysts see a low probability of Frontier renewing merger talks.

In the absence of a deal, Spirit must independently transform its operations and business model in the midst of fierce competition, aircraft maintenance issues, and a cloudy demand backdrop. JPMorgan’s Jamie Baker said: “we cannot reasonably identify a viable return to profitability any time soon.”

Although Baker abstained from predicting that the airline would go bankrupt, one can easily read between the lines that there could be no other alternative at the time.

The court ruling specifically cited how removing Spirit’s competitive influence would enable an increase in airfares industry-wide. This underscores the value created by the airline, which effectively forces rivals to lower prices.

Analyst: Liquidation More Likely Than Restructuring

Should its outlook darken further, even a Chapter 11 bankruptcy reorganization may not save Spirit, Cowen’s Becker highlights. She argues that aircraft lessors could simply repossess its Airbus single-aisle jets rather than renegotiate the lease at lower rates.

JetBlue could then lease the jets “during the company’s likely restructuring”, Becker contended. She ultimately sees outright liquidation as the endgame saying that “there are limited scenarios that enable Spirit to restructure”.

Fitch Ratings also warned of a potential downgrade given the substantial risk that Spirit cannot address its heavy refinancing burden. The agency said that Spirit must “clearly articulate a near-term plan to preserve and generate liquidity, address its refinancing risk, and improve profitability”.

Mixed Reactions from JetBlue’s Management and Investors

JetBlue shares rallied over 5% Wednesday on investor relief as some market participants perceived that they ‘dodged’ the Spirit deal rather than considering the court’s ruling a setback. Analysts critiqued the merger’s strategic fit and lofty $3.8 billion price tag. However, JetBlue may still appeal the antitrust ruling in hopes of reviving the transaction.

Meanwhile, Spirit stock cratered 47% on Tuesday and another 22% on Wednesday as bankruptcy alarms sounded on Wall Street. Shares now trade more than 60% below their pre-ruling levels.

The two airlines issued a joint statement disagreeing with the judge’s decision to stop the deal and are considering their next steps. Losing Spirit leaves JetBlue without the invaluable aircraft and pilots that the deal would have provided.

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The fallout from the ruling also introduces uncertainty around Alaska Airlines’ pending $2.6 billion proposal to acquire Hawaiian Airlines this year. If approved, the two carriers would control nearly 70% of traffic between Hawaii and the U.S. West Coast.

However, after the Justice Department convinced Judge Young to oppose both the JetBlue/Spirit merger and a previous American Airlines/JetBlue Northeast partnership, some analysts believe that the Hawaiian deal could face similar antitrust scrutiny.

Is Dave Portnoy a Trading Genius or Just a Lucky Gambler?

Despite the importance of Spirit Airlines in the airline industry, Dave Portnoy’s hilariously unlucky (at first) trade seemed to capture the spotlight instead. The buy shouldn’t have been much of a surprise as he has a long history of trading Spirit stock.

Known for live-streaming his frenetic day trading antics, Portnoy recalled his profitable experience trading Spirit stock in 2020 in his blog post announcing the buy. He decided to go all-in on Spirit right after famed investor Warren Buffet dumped the rest of his shares in the company and was ridiculed for the risky decision. He even said that after the trade, “it quickly became a Mano y Mano battle for the hearts and minds of investors everywhere.”

Within a few months, Spirit stock was up 4-5x since his buy, making him many thousands if not millions of dollars.

His second incredibly risky $SAVE buy seems to have worked just as well if not better. Despite the initial crash following his buy, he didn’t fret (publicly at least) and Tweeted about how he thought the stock would rebound soon. He maintained his typical bravado in refusing to sell despite the steep losses and that decision turned out to be ludicrously profitable.

Remarkably, Spirit rallied fiercely from its early lows yesterday and another 25% today after the company refuted rumors of bankruptcy preparations. The airline stated that it “has been taking, and will continue to take, prudent steps to ensure the strength of its balance sheet and ongoing operations”.

It’s difficult to tell whether Portnoy’s many rallying calls to retail investors or Spirit’s denials of imminent restructuring were the main impetus behind the spike, but his suggestive Tweets may still land him in hot water with the Securities and Exchange Commission nonetheless.

Even though analysts are sounding the alarm on imminent bankruptcy, Portnoy may use his hard-earned social media popularity and connection to retail investors to pull another GameStop-like market event in 2024. Will history repeat?