Spirit Airlines Declines Government Loan With New $850m Offering

Spirit Airlines this week announced it was no longer participating in the US Department of Treasury’s loan program that was part of the relief package Congress passed for airlines back in March. The airline, instead, is leveraging its brand and loyalty program to raise $850 million in financing.

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Spirit Airlines has closed its $850 million notes offering, and thus, has declined the US Treasury Department loan. Photo: Getty Images

The notes offering

Spirit Airlines is leveraging its brand and loyalty program to raise $850 million in 8% senior secured notes due in 2025. These notes are secured by, among other things, cash proceeds from the airline’s Free Spirit loyalty program’s co-branded credit card, membership fees of the $9 Fare Club program, and certain intellectual property required or necessary to operate the airline’s loyalty program, in addition to the brand’s intellectual property. The notes have a maturity date of September 20th, 2025.

On September 17th, following the completion of the offering of the notes, Spirit Airlines also announced that it would not participate in the US Treasury Department’s loan program. This loan program was instituted alongside $25 billion in payroll support for the industry back in March. There was another pool of $25 billion available for loans to airlines. Earlier this year, Spirit Airlines received just over $334 million in payroll support from the Treasury Department and had made progress on getting a loan from the Treasury Department.

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Spirit Airlines did take advantage of the Payroll Support Program (PSP). Photo: Getty Images

In the second quarter, Spirit recorded a $144 million net loss, far better than its larger network peers. Its CEO believes that it will be one of the first carriers to return to profitability, citing its low-cost structure. Not to mention, the low-cost carrier has plenty of room to grow its route network and attract new customers, and thus, new revenue.

However, as a low-cost carrier, the airline makes most of its revenue from ancillary fees. These include bags, seat selection fees, inflight purchases, and more. For example, in the second quarter of 2020, Spirit earned just over $63.7 million in fare bookings, while earning over $67 million from non-fare items.

Leveraging the airline’s loyalty program

Loyalty programs are incredibly valuable for airlines. The big three US carriers have all used their loyalty programs to raise cash. American was the only one to use its loyalty program for loans from the US government.

United Airlines leveraged MileagePlus earlier this year to secure $5 billion in additional liquidity. Meanwhile, Delta Air Lines used its SkyMiles program to raise $6.5 billion. That later ballooned to an impressive $9 billion.

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Spirit has joined its network competitors in using its loyalty program to raise funds in the private market. Photo: Getty Images

The size of the loyalty program does have a direct relation to how much value an airline can get out of it when heading to the private market. Spirit’s loyalty program is smaller than Delta, American, and United’s. With fewer Free Spirit and $9 Fare Club members than other programs, the airline’s revenues are less. Nevertheless, $850 million will do the airline a lot of good.

What are these programs?

Spirit Airlines has its main loyalty program called “Free Spirit.” This operates like a traditional mileage program whereby Spirit passengers earn miles whenever they fly and spend on other non-airline partners. Then, passengers can redeem their miles for award travel.

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Spirit Airlines is known for its iconic yellow Airbus A320 family aircraft. Photo: Getty Images

Then, there is the $9 Fare Club. Despite its name, the enrollment for the club is $59.95 per year (or about $5 per month) for the first year and $69.95 (or just under $6 per month) for each successive year. $9 Fare Club members receive discounted fares on most routes, up to 50% of baggage fees compared to paying at the airport.

Spirit Airlines anticipates that both of these programs will continue to operate normally despite being leveraged.

Do you think Spirit Airlines is making the right decision by declining the US Treasury Department loan? Let us know in the comments!