Loading summary
Transcript90 lines
- [00:03]
A
I'm John Ostrower at Energy for the Air Current.
- [00:05]
B
I'm Brian Summers, and I write the Airline Observer.
- [00:08]
C
And I'm Brett Snyder, author of Cranky Flyer. You're listening to the Air show, the podcast where we talk about what goes on in the business of the sky. I'm sure none of you will be surprised, but we are going to talk about Spirit this week, since it is the first major airline to have abruptly shut down in the US since Pan Am in 1991.
- [00:28]
B
It is a sad moment, Brett, given Spirits state at the end. I believe, and I think you guys believe, that this had to happen, but it doesn't make things any less difficult for Spirits employees, and we do send our condolences to them. I also want to give a shout out to the Spirit flight attendant, you know who you are, who wrote all of us a sweet note over the weekend and said one of the last things they did on one of their last flights was take a shelf stable cheese on the way off the airplane. And quick, aside, guys. I asked a senior executive at another airline how long this cheese would last. This person said it will outlive me.
- [01:12]
C
But that. That was a great note, and I hope everyone there finds a way to resurface in this industry in a more stable place soon.
- [01:19]
B
Yes, we all hope that. But back to the matter at hand here, Brett. Is this really the first major airline since 1991 to shut down? I know we've seen other carriers go out of business, but perhaps not at this size. Let's still pour one out for Aloha Airlines, which I always thought was a great name, but that doesn't count, right?
- [01:42]
C
I mean, I guess it depends how you look at this, right? So remember, a major airline is defined as having over $1 billion in annual revenue. ATA did reach those heights in the early 2000s, but it was nowhere near that by the time the airline actually shut down. Because remember, he did that partnership with Southwest where it started kind of picking off pieces as it wound down. Anyway, do what you will with that. The point is, it's been a really long time since a big US Airline has just disappeared, though. Kudos to Spirit for not just closing the doors and walking away. At least it's giving refunds and helping crews get back home. Doing an actual orderly wind down here.
- [02:20]
A
Yeah, this is an awful situation, and my heart goes out to all the 8,000 plus employees who lost their jobs, some of whom we know personally. Thank you for all you did for Spirit, your colleagues and your customers. You endured a lot Both around the zeitgeist, around this carrier, but also during the tremendous uncertainty over these last few years as the airline's future was in question.
- [02:42]
C
I'm in. But guys, today I want to take a different look at Spirit's demise. We know there will be postmortems all over the place. There already have been. We're all aware how much of a role the legacy airlines played by adding basic economy and up gauging. But today I want to talk about an angle that doesn't get all that much play. I don't think the government.
- [03:02]
B
Brett, are you sure that you want to do this? Because judging by a couple of quite nasty online podcast reviews over the last few weeks, I think some of our listeners may have had enough talk about politics. Our. Are you sure that you want to go here?
- [03:20]
C
Well, Brian, we don't have to talk about anything. But this, I don't think is about politics. There's plenty to discuss here that happened under both Trump and Biden administrations. So this certainly isn't one sided. Most of this is more distant history and it's not necessarily judgment on any one particular person.
- [03:38]
B
All right, Brett, give it a go. But I do reserve the right to shut this down if it gets too heated.
- [03:45]
A
I think we can safely go back to Obama too, since this big consolidation push was really started on his watch. But where do you want to start this story?
- [03:53]
C
In 1776, a nation was born.
- [03:57]
A
Okay, okay, let's maybe skip ahead just a smidge.
- [03:59]
C
On the beaches of Kitty Hawk.
- [04:02]
A
No, keep scrolling, keep scrolling.
- [04:04]
C
All right, fine, be that way. I think we can start this story in 2019. That was Spirit's last good year before the pandemic, well before ever. And that year it made big money with 13.1% operating margin. Even more impressive, it did that on capacity growth of more than 14%.
- [04:23]
B
Brett, this isn't news. All of us know that Spirit did well before the pandemic. But the thing was, the larger carriers got a lot better at competing with Spirit right after that. That's when we saw basic economy do its best damage. We saw revenge travelers who wanted different things from airlines. They were actually willing for stuff like free very light snacks, wifi, sometimes in seat TVs. And then of course, we had cost convergence too. Right. Spirit was never going back to Those days of sub $0.06 CASM X fuel and it really didn't know what to do after that.
- [05:03]
C
Yeah, very true. And also the big guys hadn't upgaged significantly until the pandemic, so they couldn't take Spirit's customers, even if they had figured out how to effectively wield Basic Economy. I went and pulled up cerium data on this. So in 2019, Americans average seats per departure were at 112. In 2025, it's nearly 124. And Delta was at just shy of 125. It's now over 137. United had the biggest jump of all. It was at 110. It's now at almost 130. So, you know, as much as we've tried to forget the pandemic, a lot happened under the hood while that was going on.
- [05:41]
B
Yeah, it absolutely did, Brett. And this is something that Lucas Johnson told me a few weeks ago on this podcast. You know, Basic Economy was helpful and it was a big deal, but none of that would have worked without up gauging. That's really what hurt LCCs and ULCCs.
- [05:59]
A
Yes, this is hugely underappreciated. The marginal cost of up gauging to the bigger airplanes, of which there were hundreds and hundreds ordered by the big carriers during the pandemic. They had room for more premium seats. That's the big trend right now. But also had room for basic economy seats. So ultimately, the marginal cost of up gauging was less for the legacies than the fully loaded cost of a ULCC configured airplane. Regional jets got swapped out. Big single aisles got swapped in. It is a fundamental change in how the industry is operating, especially in a big hub structure where those airports are now getting full spirit. Did bankruptcy filing in March really spelled this out. They wrote that Basic Economy at the legacy carriers is now quote to the point that their aggregate offering of a ULCC style product is now significantly larger than the entire ULCC segment itself. But coming back to your overall thought here, you said you want to talk about the government, so what does that have to do with all this?
- [07:03]
C
Nothing. Nothing at all. All of those trends are real. That's why everyone's talking about them. But I just wanted to set the stage that it was still a much kinder environment for spirit and the ULCCs back in 2019. But then in 2020, it quickly got unkind.
- [07:18]
B
Brett, you must be talking about the pandemic. We know all airlines suffered during that period. Of course, some more than others. The most important part was that a lot of the traffic, almost all the traffic, disappeared overnight. We saw low fares everywhere and so many empty seats.
- [07:36]
C
Sure, but then the government came to the rescue.
- [07:39]
A
The CARES Act.
- [07:41]
C
Exactly. And specifically the PSP or The payroll support program. You guys, of course, remember Americans and CEO Doug Parker joined forces with the head of the association of Flight Attendants, Sarah Nelson, to get a. I guess I'd call it a unique financial crutch for the airlines.
- [07:57]
B
How could we forget that story? I'm starting to think that Sarah Nelson must have a very top notch corporate communications team that maybe has been reminding every reporter in the country about this anecdote. But to be sure, it was an important deal. The government provided airlines money to pay their employees so long as the airlines agreed not to lay anyone off. Of course, it didn't stop them from offering buyouts in early retirements, which is how we got Ed Bastian to say that great word, juniority.
- [08:30]
C
Yes, that's right. I don't know that many people would agree that that's a great word, but. But yes, the. The big airlines made bank by shrinking through volunteerism here. But what Doug and Sarah built was a program that was good for American and really for any other airline that wasn't trying to grow or hadn't been growing. And American, you know, if you look at the end of 2017, American had 103,000 employees. It had the same at the end of 2018, and in 2019, it had climbed to 104,000. So it didn't really change.
- [09:04]
A
I think I see where you're going with this. The PSP was based on 2019 employment numbers, right? So for an airline that wasn't growing, this really did work great. Are you suggesting that the policy structure of the United States of America is disproportionately favorable to the legacy carriers in this country? No. Say it ain't so.
- [09:22]
C
I know it's hard to believe, but this is the case because think about it this way. The first round of PSP was based on the payroll from April through September 2019. Now, just between those months, Spirit's employee numbers grew by nearly 5%. And then between September and March of 20, it grew an additional 11%. So its payroll was rapidly growing. But the compensation that was being reimbursed by the government was based on much smaller numbers. And remember, if Spirit wanted to take the money, it had to agree not to lay anyone off. So the money it got couldn't even cover its entire payroll from March. So it was left in a tough spot that an airline like American didn't have to face.
- [10:08]
B
Also, let's remember, Brett, Spirit did not have to take the deal. It did. It wanted that money. Of course, in fairness, other airlines took the money, even though some of Those carriers knew the CARES act would disproportionately help some of their competitors.
- [10:24]
C
Yeah, and Spirit took it was just shy of $345 million in the first round in April 2020. But this was a lower percentage of its total payroll than compared to, say, what American had.
- [10:37]
B
So are you saying that this was a bad program?
- [10:40]
C
I don't know that I'd go that far. Look, rounds two and three were unquestionably bad ideas. We didn't even talk about that. But there were three rounds of this, which is nuts to me. Round one, it certainly kept the airlines alive as they were. But without this, maybe they all go bankrupt, restructure, and then come back out in a different form.
- [11:01]
B
Brett, I thought subsidized airlines were only in the Middle East. Are you saying that that is not true?
- [11:06]
C
Yes, I am saying that. I know it's very hard to believe, Brian, but here we are.
- [11:10]
A
Everyone's against protectionism until they need protection. That's right.
- [11:13]
C
But it would look, I mean, if they had let the airlines just play out as they were, it would have absolutely been more painful for the big airlines than it was. But it might have created a more competitive playing field for those smaller, fast growing airlines. Right. So I don't know. There's. There's no way to know how this would have played out in, like, a sliding doors scenario like this one. But what we do know is that the program made it tougher for fast growing airlines, and it is one of the things that pushed them to start accumulating debt, not even for future growth, but just to pay for the growth that existed in the six months before the pandemic struck. And that debt, of course, is what would push Spirit into bankruptcy twice.
- [11:55]
A
This is fascinating, but I know you said that you had other examples of how the government shaped Spirit, so let's get into those after the break. Some people say that the three greatest words in the English language are I love you.
- [12:09]
C
Uh, sure.
- [12:11]
A
But if you travel a lot, I'd argue that you've been upgraded is even better.
- [12:16]
C
Your wife may have something to say about that. Probably.
- [12:19]
A
But a few days before a trip, when you're deep in the usual spiral, timing, logistics, packing, all of it, that you've been upgraded. Email hits differently completely.
- [12:29]
C
Suddenly the whole journey feels more comfortable, more manageable, more like something you're looking forward to than something you need to get through.
- [12:36]
A
And that's why this matters to airlines. It's not just about sending an offer. It's about figuring out the right offer for the right traveler at the right time.
- [12:44]
C
That's what Plus Grade helps airlines do. It gives travelers more choice and control over their journey, while helping airlines make more revenue from upgrades to preferred seating and beyond.
- [12:55]
A
A better journey for the passenger and a more effective way for the airline to grow revenue.
- [12:59]
C
Hard to beat those three words.
- [13:00]
A
I love you, Brad. Plus Grade helps leading brands generate billions in revenue by giving travelers more ways to elevate their travel experience. Learn more@plusgrade.com. And we're back. So the PSP ended up creating problems for Spirit and it started growing debt. We know that the market forces pushed the airline into the red and it never made money again after the pandemic hit. Also, I think notably, every single airline in America re baselined its labor costs. That certainly didn't help anything either. Also, I don't think you can discount the fact that when inflation hit, it also took a big chunk of their customer base with it. And the Fed raising interest rates to combat that rising inflation made it even harder on the capital costs for acquiring the airplanes that were once cheap in a low interest rate world. It was just a perfect storm of bad factors landing on their head.
- [13:59]
C
Yeah, that's a great point. I hadn't even thought of bringing that one up. But I will still argue that pumping cash into the system was the right thing to do, at least at the dawn of the pandemic. The first round was. Even if it did lead to inflation.
- [14:12]
B
Brett, you're getting close to talking about politics there.
- [14:16]
C
All right, moving on.
- [14:19]
A
Okay, but back to cares. The CARES act had something to do with that. But what's the next flashpoint with the government that you'd highlight here?
- [14:25]
C
So I'd skip ahead to early 2022. I think the writing was already on the wall that things were going to be different in the industry by then, and so that's when consolidation plans took hold.
- [14:35]
B
Yeah, I remember this. Maybe we wouldn't be in this position with Spirit going out of business. Do you guys remember February 2022 when Frontier announced its plan to buy Spirit and create a ulcc?
- [14:50]
C
Yeah, and I think most of us thought this was a good idea. After all, at that point, neither airline was doing well at all. The the idea of funding rapid growth was laughable, and instead trying to consolidate and create a true ULCC leader in the space with some heft was probably a good way to rationalize capacity and maybe even unlock some growth at some point.
- [15:13]
A
But of course, this was not to be, thanks to JetBlue, which made a bid so rich that Spirit shareholders had no option but to bail on the front deal and take JetBlue's offer in July of 2022.
- [15:25]
B
What was JetBlue thinking?
- [15:27]
C
That's a great question that you're going to have to get us an interview with Robin Hayes and find out. But it's hard to say no to something that rich. Though Spirit management tried repeatedly, I should note, the problem is the JetBlue thing. The feds did not like this plan. I don't think they actually liked anything. But this one was particularly distasteful since they viewed Spirit as a ul, the champion of the people that was being swallowed up by a higher cost, higher fare airline. That was a very basic evaluation of the situation. I think at that point, the reality was that Spirit's business was already eroding. And this was a great deal for Spirit.
- [16:08]
B
Yeah, it was a great deal for Spirit. It would have been even better had it closed and the shareholders gotten paid. But as you say, the government stepped in and it did not think that that would be a good deal for consumers. I. I just want to say I think that two things are true here about the government and this deal. First, lawyers in the Antitrust division of the Department of Justice probably should have just turned the other way and let this deal go through. But second, I think we, we need to be honest, guys. I mean, this is a nation of laws. Antitrust law is pretty clear and the judge applied the law correctly. Had he not applied the law correctly, I think we would have seen this go through the appeals process.
- [16:53]
C
Sure. I'm not faulting the judge, other than, well, his ridiculous prose in the decision, which has been made fun of by everyone, but. But the government was wrong. This turned out to be very bad for consumers, and Spirit is now gone. Of course, it's hard to have that kind of foresight in 2023 when the government challenged it. But it's pretty easy to look back on that and say this is a real mistake to sue to block the merger.
- [17:16]
A
So I mentioned the Obama administration at the top here. I do find it fascinating how much Biden era policy toward airlines was actually really geared at und doing the perceived mistakes of the Obama era itself. American, US Airways, United and Continental, Southwest and AirTran all happened during Obama's two terms. That was a function of the financial crisis and obviously a need for consolidation. But that regulatory posture created the consolidation that made life for Spirit ultimately impossible. But let's jump back to 2023. You say that blocking the merger between Spirit and JetBlue, but can you actually imagine what kind of shape JetBlue would be in right now if they actually had merged? That may have actually dragged JetBlue down right into the mud with them. High configuration costs for Spirit's fleet, plus their debt, plus all the other integration spending. Oh, man. It. It would have been messy at an airline that had never done a merger of any kind before.
- [18:12]
C
I don't disagree that this would have been terrible for JetBlue, and it was terrible that they even suggested it in the first place. Huge strategic error. But the airline's previous strategy under Robin Hayes was just not good in general. So this. This play right up there at the top of that. But I guess the way I look at this is that if the deal had been done, I imagine it would have been able to garner more support to continue flying. It may very well have been pushed into bankruptcy protection. Probably would have been, but I think it would have at least had a better chance of successfully organizing than what happened with Spirit just disappearing.
- [18:51]
B
Yeah, Brett, I think you're. You're right there. I mean, now industry dogma seems to be, well, jetbl in Spirit would have been okay. Not because the airline itself would have done well in the beginning, but at least they could have filed for bankruptcy and they could have gotten out of bankruptcy, which we know Spirit couldn't do the second time. Still, I think a lot of us think that the best outcome would have been the one that Ted Christie clearly wanted. Frontier and Spirit. Do you remember where Ted Christie went on TV with Robin Hayes and, like, that split screen, and he had to pretend that he was excited?
- [19:30]
C
Oh, the hostage video. Video.
- [19:31]
B
The hostage video. Yeah. But, you know, money talks. And I understand why Spirit's board went for the more lucrative offer. That's what a board is supposed to do.
- [19:40]
C
Yeah. And that's up to Spirit. Right? They. They made that decision to go with it. It didn't turn out well for them. But if you're the government, you just have to deal with what's on the table. And so JetBlue spirit was what was on the table. So as much as I hated this from a business perspective, I don't think it should have been challenged. Of course, the judge ruled in favor of the government, but that wouldn't have happened if DOJ never did anything in the first place.
- [20:07]
B
So there were some options for Spirit after that point. The problem is they were going to be a lot less lucrative. We know that Frontier kept coming back into the picture and offering to acquire Spirit, of course, for a lot less money. But that never happened. Maybe because Spirit was offended by the offers. I don't know.
- [20:30]
C
It's hard to understand what Spirit CEO Ted Christie and the board were thinking pretty much his entire tenure.
- [20:36]
B
But you didn't like the premium angle that they were going for at the end.
- [20:42]
C
Yeah, that wasn't going to work. Frontier's trying it now, too. Do we get to do another podcast on this soon? No. Capacity leaving the market is what will help Frontier right now. But. But look, Spirit, they just kept wanting too much from Frontier. They just. Every time Frontier would come to them, they would balk. So every time, the airline would get into worse and worse shape. First filing for bankruptcy in November 2024 and then not really doing much there, and then again in August 2025 for the double dip. And so every time fear and tear approached, Spirit kept wanting too much, and now it has nothing.
- [21:19]
A
By the way, there was a great clip circulating in the last several days of Ted Christie during that play that JetBlue was making for them, who ineffectively declared, this cannot get regulatory approval. He just declares that it will not pass that. That standard. Obviously, we know how that went. It was a very prescient statement, but.
- [21:36]
C
Yeah.
- [21:37]
A
So what were the other examples you want to talk about?
- [21:39]
C
Well, I think those are the two government actions that harmed Spirit the most. So it's kind of funny that in the end, it came down to the government as the last resort to actually save the airline. Of course, I'm talking about the $500 million rescue package that was pitched in Spirit's dying days after so many years of handicapping Spirit. Now, the government was here to help.
- [22:04]
B
Apparently it was very briefly, but that would have been a very bad move, and I don't think either side wanted it. The government was going to take, what, 90% of the airline? And no matter what the President said, I don't think that the government was going to be selling its stake for a big profit as soon as the cost of fuel went down. And of course, you had the existing debt holders. They didn't really want this deal because they were going to give up so much of the company with the government cutting ahead in the pecking order.
- [22:36]
C
Yeah, I think that's why it failed in the end. The creditors had to realize at this point that this was a sinking ship and it probably wasn't salvageable in the long run. So they had to be thinking about, well, what's the best possible recovery for us in case we can't pull a rabbit out of a hat and letting the feds Jump ahead of you in line is not that. So there was no way that made sense for creditors. But there's a certain irony to the whole situation that by the time the government was actually trying to do something to help Spirit, it was too late to actually help Spirit.
- [23:06]
B
Brett, I want to give you a compliment here. I think you've done a very good job with this government argument. It is somewhat persuasive. Very interesting. That said, I want to go on the record here. I cannot blame the government for putting Spirit out of business. I think this airline had so many issues. Rising costs. They didn't understand passenger desires had changed. They had to deal with increasingly aggressive legacy carriers, which is something that would have happened whether those legacy carriers got a lot of cash or not from the government. The brand, you know, was awful. And then engine issues. So, I don't know, a lot of stuff put this airline out of business.
- [23:49]
C
Well, hold on, hold on. I'm not solely blaming the government by any stretch here. I just wanted to focus on a piece of what happened that I don't think is getting discussed nearly as much as all the other causes out there. We've already seen everyone talking about basic economy, up, gauging fuel, all that. We hadn't even talked about engine troubles because. Because I think by the time that happened, it probably helped Spirit.
- [24:09]
B
We've actually muzzled John on this program.
- [24:13]
C
That's right.
- [24:13]
A
I will not be silenced.
- [24:15]
C
Okay, John, do you want to say something about engines? You have 300 hours go.
- [24:20]
A
That's how long they last for. I mean, it didn't help, right? I mean, just as Spirit was getting, you know, sort of hitting their stride on. On their margin in 2019, that's when this. The issues with the GTF really landed, did in their lap, and it really kind of felled a huge portion of their fleet. And then in 2023, the powder metal recall on top of that, it was just one thing after another. But look, like anything, it's never just one thing. It was a perfect storm of all these different factors that all came together. And I think it speaks to sort of the. The overall future structure of the industry, which is about how the industry adapts to all of these higher costs, greater disruption, inherent capacity restrictions at airports, all of that within the current hub structure. So, yeah, I think, you know, it was not a hospitable environment for Spirit, to say the least. And really, it's going to be tough to see what happens for the remaining carriers also.
- [25:16]
C
Yeah, look, we talk about the engines, but by the time that they had run into these problems. They didn't have a profitable place to put those airplanes anyway. So it held Spirit. But that kind of gets to the point.
- [25:28]
A
Oh, it hurt. It hurt badly. But it really was insult injury at that point. Like, they were already in a position where the competitive dynamics in the market had changed to such an extent that the airplanes that they were, that they were flying head to head were able to effectively take their business model and do it better.
- [25:43]
C
Yeah. And Spirit failed to adapt in every way. They could have made changes throughout this, but they didn't. And that is entirely on Spirit. By the time the pandemic was recovery came around, the best option was to sell. And yes, I think the PSP played a role in that. It certainly wasn't the only issue. But once you realize the only good option is to sell, then you go with the best deal, which financially was JetBlue. And I mean, look, JetBlue is so stupidly confident this deal would get through antitrust review that it even paid a ticking fee to Spirit. Like, you don't do that if you're not feeling good about this. Even if Spirit was not feeling good, confident, it's hard for Spirit to say no to that. Right. So. But once the deal was killed, the writing was on the wall and Spirit apparently couldn't read the government played a real role in Spirit's demise because Spirit then didn't really know what to do. And that's when it just began its downhill path into where it is today, which is gone and not existing as a standalone entity, which is probably where it was going to go anyway. But it could potentially have been a part of another airline or in a different position without the government's interference.
- [27:02]
A
You've been listening to the Air Show. If you have suggestions or questions for us or interested in sponsoring the podcast, go to our website, theairshow podcast.com to get in touch.
- [27:11]
B
Leo Duran produced and executed edited this episode. Our theme music is by Joshua Moser. Thanks for listening and we'll be back soon.