Budget carrier Spirit Airlines has filed for Chapter 11 bankruptcy, the airline announced on Monday.
Spirit Airlines has faced years of mounting financial losses, a failed merger, and changing consumer expectations.
In a statement early Monday, the airline announced it had reached a prearranged agreement with its bondholders, which includes $300 million in debtor-in-possession financing to help it navigate the bankruptcy process. Spirit expects to emerge from bankruptcy by the first quarter of next year. The airline also assured that its vendors and aircraft lessors would not be affected. In a court filing, Spirit listed its assets and liabilities as being between $1 billion and $10 billion.
Despite the filing, Spirit emphasized that operations would continue as usual, and customers could still book flights.
“The most important thing to know is that you can continue to book and fly now and in the future,” Spirit CEO Ted Christie wrote in a letter to customers. He added that customers could use tickets, credits, and loyalty points without disruption.
What Is Chapter 11 Bankruptcy and What Happens To The Company?
When a company files for Chapter 11 bankruptcy, it is essentially seeking reorganization under the protection of the U.S. Bankruptcy Code. Chapter 11 allows the company to continue operating while it restructures its finances and attempts to return to profitability. Here’s what typically happens when a company files for Chapter 11:
1. Automatic Stay
- Immediate Protection from Creditors: Once the Chapter 11 petition is filed, an automatic stay goes into effect. This halts most collection actions against the company, including lawsuits, foreclosures, and debt collection efforts. It gives the company a breathing period to reorganize without the pressure of creditors seizing assets or taking legal action.
2. Reorganization Plan
- Restructuring the Business: The company must propose a reorganization plan that outlines how it intends to repay creditors, reduce debts, and restructure its operations. This may involve:
- Debt renegotiation (lowering amounts owed or extending repayment periods)
- Selling assets or subsidiaries to raise capital
- Cutting costs, which may include laying off employees or closing unprofitable locations
- Renegotiating contracts with suppliers, lessors, and other business partners
- The plan is typically developed in collaboration with creditors, legal advisors, and sometimes a court-appointed trustee or committee. The company remains in control of operations as the debtor-in-possession (DIP) unless the court appoints a trustee.
3. Creditor Meetings and Voting
- The company must hold meetings with its creditors, who will be grouped into classes (e.g., secured creditors, unsecured creditors, and equity holders). These creditors will vote on the proposed reorganization plan.
- The plan can be modified and negotiated, and creditors can object to parts of it. The company must get approval from the majority of the creditors in each class, and the plan must be confirmed by the bankruptcy court.
4. Operational Continuity
- Unlike Chapter 7 bankruptcy, which involves liquidation, Chapter 11 allows the company to keep operating its business. For example, employees can continue working, and customers can continue making purchases. The company can also maintain existing contracts and vendor relationships, although some may be renegotiated.
5. Financial Reporting and Oversight
- During the bankruptcy process, the company must submit regular financial reports to the court and creditors. This helps ensure transparency and allows creditors to monitor how the company is progressing with its reorganization efforts.
6. Debtor-in-Possession (DIP) Financing
- Many companies that file for Chapter 11 seek DIP financing—a special form of financing provided by lenders during bankruptcy. This financing helps the company maintain liquidity and keep operating while it restructures. DIP financing often has priority over existing debt, meaning it must be paid back before other creditors.
7. Plan Confirmation and Exit
- If the reorganization plan is approved by creditors and the court, the company will move forward with implementing the plan. Once the company has completed the necessary steps—such as debt reductions or asset sales—it can exit bankruptcy.
- Upon exiting, the company may emerge with a significantly altered financial structure, potentially stronger and more focused on its profitable areas. In some cases, the company may remain in debt but on more manageable terms.
8. Failure to Reorganize
- If the company cannot reach an agreement with creditors, or if the reorganization plan is not feasible, it may be forced to liquidate its assets. This may result in filing for Chapter 7 bankruptcy, which involves the selling off of the company’s assets to pay creditors and winding down its operations.
Key Takeaways:
- Chapter 11 is for reorganization, not liquidation. The goal is for the company to return to profitability and pay off its debts over time.
- The company stays in control of operations (unless the court appoints a trustee).
- Creditors are given the opportunity to vote on the reorganization plan, which must be approved by the court.
- DIP financing can help the company remain operational during the process.
This process is often used by large corporations that have significant debts but still have the potential to turn things around, rather than shutting down completely. It’s also frequently used by businesses that need time to negotiate with creditors, restructure, and emerge as a more viable entity.
