Spirit Airlines has secured a compensation package from Pratt & Whitney (P&W) valued between $150 million and $200 million for the grounding of “nearly all” the Airbus A320neos powered by PW1100G geared turbofans (GTFs) in its fleet.
On 26 March, the carrier entered into an agreement with P&W affiliate International Aero Engines to provide Spirit a monthly credit through year end that is expected to make a major impact on the Florida-based carrier’s full-year financial results.
The final amount will depend on the “number of days accumulated in 2024 in which Spirit aircraft are unavailable for operational service due to GTF engine issues”, the carrier says in a 29 March financial filing.
The ultra-low-cost carrier (ULCC) has previously said it expects an average of 25 aircraft will be grounded for the full year of 2024, and an average of 40 jets will be grounded during the fourth quarter.
As part of the agreement, Spirit releases International Aero Engines from future claims related to the impacted PW1100G engines.
“Spirit intends to discuss appropriate arrangements with Pratt & Whitney in due course for any Spirit aircraft that remain unavailable for operational service” after 31 December.
Asked to comment, P&W says, “We are working closely with our airline customers to minimise disruption and, in some cases, provide special support. Each support agreement is unique. It would not be appropriate to discuss individual customer specifics”.
Spirit has expected for several months that a P&W compensation package would materialise as a “significant source of liquidity”.
Indeed, a host of airlines are anticipating financial settlements with P&W for aircraft groundings due to component defects resulting from problems with a powder-metal manufacturing process. The issue requires more than 1,000 engines be removed from wings for inspections and part replacements.
Cirium fleets data show that more than 600 A320neo-family aircraft are currently in storage, while some 2,670 of the popular next-generation narrowbody jets are in service globally.
The monthly credit from P&W will provide a welcome cash infusion for Spirit, which has posted major financial losses each of the past two years and appears on uneven footing after a federal judge scuttled on antitrust grounds its proposed deal to be acquired by JetBlue Airways.
Some analysts have warned Spirit is at risk of bankruptcy and liquidation in the deal’s absence.
Steve Segal, an mergers and acquisition attorney in Buchalter’s Denver office, believes Spirit has “a pretty decent runway of cash” from sale-leaseback transactions it has recently executed. In December, the company sold and leased back 20 of its narrowbody Airbus jets – and in January completed transactions for five more aircraft – generating a total of $419 million in cash.
However, the carrier holds significant debts that are set to come due next year. “Unless they get pressured from creditors earlier, then they should have some time,” Segal told FlightGlobal this month. “We’ll see what the summer travel season brings them.”
”Bankruptcy is not a foregone conclusion, but it’s a real risk,” he says.
Spirit would likely file for Chapter 7 liquidation rather than Chapter 11 reorganisation because so many of its aircraft are now leased rather than owned.
“The aircraft market is pretty hot, so there’s a sense that lessors would be less likely to re-negotiate with Spirit because they can go sell [aircraft] on the open market and be more sure of getting their return,” Segal says.
Spirit executives have maintained that the company has the financial resources necessary to succeed without a deal with JetBlue, with chief executive Ted Christie pushing back against what he called the “misguided narrative” that the carrier cannot make it as a standalone entity.
Spirit reported holding $1.3 billion in cash and equivalents as of 31 December, which chief financial officer Scott Haralson said in February ”should be more than adequate to get us to our primary goal of getting the business to generate cash”.
Company executives hope to be generating positive cash flow as soon as the second quarter.
The South Florida-headquartered ULCC lost $447 million on the full year of 2023, compared with a $554 million loss the previous year.
Story updated on 30 March 2024 to include a comment from P&W.
