Inquisition: Could Spirit Airlines Transform Investors into Millionaires?
Inquisition: Could Spirit Airlines Transform Investors into Millionaires?
Spirit Airlines (SAVEQ, up by 8.48%) is a high-risk investment that only the most daring investors should consider at this moment. If you manage to meet the initial criteria, the next major question is whether the potential risks justify the potential rewards. Spirit Airlines is currently engaged in a high-stakes game to stave off bankruptcy, but even if it triumphs in this endeavor, it's unlikely to result in anyone becoming a millionaire.
A multitude of issues have befallen Spirit Airlines
Spirit Airlines operates as a budget airline, and there's no issue with that. However, airlines typically operate on thin profit margins. Hence, when things take a turn for the worse, the impact on the financials can be quite significant. In this case, the coronavirus pandemic thrust Spirit Airlines into a downward spiral from which it has yet to emerge.
As the chart demonstrates, Spirit Airlines' earnings plummeted during the pandemic. It's understandable given the circumstances, but what's puzzling is that its earnings have yet to rebound even as the world has adapted to living with COVID-19. This stagnation has triggered concerns in Wall Street, reflected in Spirit Airlines' declining stock price. The predicament here is that Spirit Airlines' business model relies on selling discount tickets with additional fees for services like seat selection and checked baggage. This strategy has tarnished the airline's reputation, with its fees viewed as annoying by customers. Furthermore, other airlines with improved reputations have been intensifying their price competition to regain market share. Given Spirit Airlines' limited service offerings, it has been struggling considerably.
In the midst of this financial turmoil, Spirit Airlines attempted a bold move by agreeing to be acquired by JetBlue (JBLU, up by 2.06%). Essentially, the airline's management decided to pass the buck to another entity, hoping to salvage as much value as possible for shareholders. However, the proposed acquisition faced regulatory scrutiny, leading JetBlue to terminate the deal.
Spirit Airlines tries another route
With its financial situation turning increasingly precarious, Spirit Airlines found itself in a much more vulnerable position than before the proposed JetBlue deal. Essentially, valuable time had lapsed with little being done to bolster the core business. The risk of bankruptcy loomed large.
The danger is substantiated by Spirit Airlines' actions, such as cost-cutting and aircraft sales. These are the measures typically taken by financially distressed companies to keep operations afloat, waiting for an opportunity, however slim, to turn things around. Currently, the most promising possibility seems to be Spirit Airlines striking a new deal to sell the business. It is rumored to be in negotiations with Frontier Group, the owner of Frontier Airlines.
The dilemma is that Spirit Airlines is operating from a position of weakness at this point. If an agreement can be reached with Frontier Group, the sale price is unlikely to be substantially higher than its current share price. Even if Spirit Airlines manages to secure a 100% premium, which is highly improbable, the stock is currently traded at around $6 per share. In order to achieve millionaire status through this best-case scenario, you'd need to own a substantial amount of stock.
The downside risk is substantial
Having reviewed the backstory and the best-case scenario, consider the worst-case scenario. Bankruptcy could potentially leave shareholders with nothing, resulting in a complete loss if you are incorrect, with only modest gains if you are right. This represents a dismal risk/reward ratio, particularly considering the substantial investment required to transform this trade into a millionaire-making opportunity. Even highly daring investors might wish to steer clear of Spirit Airlines at this juncture.
In light of the financial struggles, Spirit Airlines is exploring options to sell its business, with Frontier Group being a potential buyer. However, the sale price is unlikely to significantly exceed its current share price, making it an expensive gamble for investors hoping to become millionaires.
Despite Spirit Airlines' efforts to cut costs and secure a deal, the risk of bankruptcy remains high, posing a substantial downside risk for investors who choose to invest in the airline. The potential rewards may be limited, given the low trading price, leaving little room for significant gains, even in the best-case scenario.