The airline sector is beginning to feel a squeeze, and no one is under more pressure than Spirit Airlines(NYSE: SAVE).
Shares of the discount airline lost 17.8% in July, according to data provided by S&P Global Market Intelligence, after a mid-quarter update prompted discussions about a potential bankruptcy filing.
A bad situation could get worse
Spirit has been flying through a lot of headwinds. The company saw its planned acquisition by JetBlue Airways fall apart due to regulatory concerns, leaving Spirit to fly on its own at a time when demand for domestic fares is softening and pricing power is scarce.
The airline is also one of the carriers most exposed to an RTXengine issue, giving it less flexibility to adjust its capacity in response to demand.
The predicament left many on Wall Street worried about Spirit's second-quarter results, causing a flurry of downgrades and price-target cuts early in July. On July 16 the airline confirmed those fears when it lowered its revenue view for the quarter.
Spirit has a significant amount of debt that must be renegotiated in the months to come. Although most on Wall Street believe the airline will be able to negotiate a deal to extend the debt, the airline could be forced to file for bankruptcy if those negotiations do not go as planned.
Is Spirit Airlines stock a buy?
On Aug. 1 Spirit reported Q2 results that missed the lowered guidance, causing the shares to fall further. CEO Ted Christie said that "significant industry capacity increases ... have made it difficult to increase yields, resulting in disappointing revenue results."
The shares fell a further 8% on the news, extending July's declines.
Investors who are hopeful of calling a bottom should be cautious. Creditors are likely to work with Spirit on its debt issues, and the airline has a good chance of avoiding an equity-destroying bankruptcy at least for now. But the competitive pressures Spirit is facing are unlikely to ease any time soon, and it is difficult to see how this airline turns profitable in the foreseeable future.
The issues are not confined to Spirit alone: As domestic demand softens, all carriers are feeling pressure. But airlines including Spirit that rely on U.S. leisure travel and don't have strong international alliances and established business accounts will feel the impact more than others.
Spirit shares are cheap, but they are priced that way for a reason. Anyone considering buying in here should keep their seatbelts fastened in anticipation of turbulence and limit their investment to a small piece of a well-diversified portfolio.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends RTX. The Motley Fool has a disclosure policy.
