https://abcnews.go.com/Business/spirit-airlines-bankruptcy-airfares-experts-weigh/story?id=116004672

Note: In addition to the video, please see the following article included at the above-referenced internet address:

“Impact of the Spirit Airlines Bankruptcy”

According to the article, budget carrier Spirit Airlines filed for bankruptcy this week, stoking concern about how the financial peril of a low-fare option could impact prices across the industry.

The Florida-based company has vowed to continue operations as normal while bankruptcy proceedings unfold over the coming months.

“Guests can continue to book and fly without interruption and can use all tickets, credits and loyalty points,” Spirit Airlines said in a statement.

Those plans should minimize the effect on airline prices in the short term, leaving the options available to customers essentially unchanged, according to industry analysts.

Projected Long-Term Implications

Analysts differed about the bankruptcy’s long-term implications, however.

Some experts downplayed the effect on prices, saying Spirit Airlines holds a relatively small market share and alternative low-cost carriers would jump into a void left in the event of downsizing or merger. While other experts warned of meaningful price increases for some flight routes because of diminished competition.

“This is not a black and white situation,” according to Henry Harteveldt, a travel industry analyst at Atmosphere Research Group. “It’s very much a thousand shades of gray when it comes to the potential impact of Spirit’s bankruptcy on pricing.”

Comparing Revenues

Spirit Airlines brought in roughly $1.3 billion in revenue over a recent three-month stretch, which marked a 10 percent decline compared to the same period a year ago, according to an earnings release in August.

Frontier Airlines, another budget carrier, brought in $935 million over a recent three-month period, earnings showed.

By comparison, Delta earned about $15 billion over a recent three-month period, while American Airlines brought in $13.6 billion.

The disparity in size between the low-priced airlines and the top firms underscores a fissure in the industry separating budget carriers in select markets from the major airlines that dominate flight offerings nationwide, according to Mike Boyd, president of aviation consulting firm Boyd Group International.

“The airline industry is made up of those two basic groups,” Boyd said. He pointed to the relatively small stature of Spirit Airlines as a reason why its bankruptcy would likely have little impact on prices across the sector.

“Spirit isn’t big enough to cause airfares to go up,” Boyd said.

Plus, the other budget airlines would likely jump into the flight routes set aside by Spirit Airlines, if the company chooses to downsize or merge with a competitor, Harteveldt said.

The emergence of those replacements would preserve the downward pressure on prices in the relevant flight routes where budget airlines prosper, he added.

“It’s very possible other airlines would step in,” Harteveldt said. “Price competition would be alive and well.”

At least one industry analyst sharply disagreed with such optimism.

Jamie Larounis, a travel industry analyst at Upgraded Points, said the potential loss of some low-fare flight options at Spirit Airlines would deliver a significant blow to the budget offerings available to consumers.

“You would be pulling out a major player in the ultra-low-cost carrier market,” Larounis said.

The low price point offered by Spirit Airlines on online booking platforms forces the larger carriers to reduce their prices, even if added fees for checked bags or seat selection end up raising the cost of a given Spirit Airlines flight, Larounis said.

The financial travails faced by Spirit Airlines are part of a wider trend that has thinned out low-cost offerings, placing increased importance on the fate of Spirit Airlines for the competitiveness of the marketplace, Larounis added.

A potentially diminished version of Spirit Airlines could “drive prices up,” Larounis said.

 

Industry analysts emphasize that much remains to be determined about the fate of Spirit Airlines.

The company will likely seek to reduce costs while homing in on its most profitable markets, some experts said, acknowledging that the company may ultimately merge with a larger carrier.

For now, Spirit Airlines has not announced any route changes or reductions in flight capacity.

“The company is saying everything is business as usual during the bankruptcy,” said Sarah Foss, head of legal at financial consulting firm Debtwire.

“They haven’t talked about any changes to routes or flight schedules, but I would imagine that might come during the bankruptcy or afterward,” Foss added.

 

Discussion Questions

1. What is Chapter 11 bankruptcy? How is Chapter 11 bankruptcy distinguishable from Chapter 7 bankruptcy?

Chapter 11 bankruptcy is business reorganization bankruptcy. In Chapter 11 bankruptcy, the debtor typically stays in business and seeks to comply with a reorganization plan approved by a federal bankruptcy court. Chapter 11 reorganization plans typically involve debt repayment restructuring, with perhaps some debt forgiveness approved by the court. In contrast, Chapter 7 bankruptcy involves business liquidation, with the organization ceasing to operate as an ongoing business concern.

 

2. This article reveals the wide gap between large and small airlines. As indicated in the article, in a recent three-month period, Spirit Airlines brought in roughly $1.3 billion in revenue, while another budget competitor, Frontier Airlines, brought in $935 million. In comparison, during the same three-month period, Delta earned about $15 billion, while American Airlines brought in $13.6 billion. Should these numbers raise antitrust concerns in the airline industry? Why or why not?

This is an opinion question, so student responses may vary. In your author’s opinion, such financial data should give rise to concern. Although there is no “scientific litmus test” by which to determine whether an industry is a monopoly or a near-monopoly, when there are only a few “major players” left in an industry, that will raise a “red flag” for government regulators, making it more difficult for proposed mergers in the industry to be approved by the government. That is even more the case when an industry involves essential goods or services, such as air transportation.

 

3. In your reasoned opinion, should the federal government provide funding support for businesses, such as Spirit Airlines, that provide essential goods and services to the American public? Why or why not?

This is an opinion question, so student responses may vary. Many oppose such financial support, arguing that it is contrary to a free market that allows businesses to prosper or fail based on what economist Adam Smith called the “invisible hand” of competition. Those who would argue for such support would emphasize the fact that companies like Spirit Airlines are providing essential services to customers that are necessary to the infrastructure of a prosperous, fully-functioning economy.