Spirit Airlines, a US-based ultra-low-fare carrier that has been saddled with mounting losses and multiple Chapter 11 bankruptcies in under a year, is now reportedly in talks with alternative investment manager Castlelake. These discussions come after Spirit’s most recent merger negotiations with rival low-cost airline Frontier Airlines failed to yield any kind of agreement.

There is no doubt that the airline’s future is in doubt. Castlelake is a major aviation asset manager with a nontraditional portfolio and deep expertise in aircraft finance. The airline certainly has the capital at its disposal to offer Spirit Airlines a potential path out of bankruptcy. However, there is an increasingly growing concern that the firm might value Spirit more for its individual assets than as an actual airline. This kind of behavior would not be remotely out of place in a world of alternative investment managers making aggressive moves in capital-intensive spaces.

A Timeline & Overview Of The Situation

Spirit Airlines, which is known for its yellow-painted Airbus fleet and skin-and-bones service model, has faced extensive financial struggles in the wake of the pandemic. The airline has entered Chapter 11 protection multiple times as its cash reserves continued to dwindle. Prior to discussions with Castlelake, Spirit explored mergers with multiple peer airlines like Frontier and even JetBlue, but none actually materialized into a real deal, according to an analysis of the situation from CNBC.

While emergency funding continues to keep operations afloat and creditors continue to be actively involved in restructuring efforts, Spirit continues to explore alternative outcomes to a complete liquidation. Castlelake’s emergence as a potential buyer is one such path that could avoid liquidation, specifically through specifics around a potential deal structure, bondholder support setup, and operational future. Any transaction would need to clear a bankruptcy court and satisfy the key stakeholders in the matter.

What Exactly Is Castlelake, And What Does It Do?

Castlelake is a private, alternative investment manager that can best be described as a fund that invests in asset-backed private credit and real assets, with a major focus on the aviation industry. The company raises long-term capital from institutional investors and deploys it into loans and asset-backed deals where collateral is important.

The kinds of things Castlelake usually throws its financial weight into are aircraft, engines, consumer loan pools, maintenance equipment, and ground handling equipment. Castlelake has slowly become one of the largest and most important players in the aviation lending space. The airline helps both airlines and leasing companies secure financing for purchases.

The company has also gone out of its way to help build and develop dedicated platforms for the space, which include an aviation lending entity called Merit AirFinance. The company has also become very active in buying and managing aircraft portfolios, a key reason why the market has begun to take it very seriously when an airline’s restructuring could unlock additional value.

Why Might Castlelake Be Interested In Buying Spirit?

Castlelake is likely not interested in getting involved in the commercial airline business, especially with a company that has such a challenging balance sheet and weak market proposition as Spirit Airlines. The low-cost airline is very much a high-risk company, but what it does own are quite a lot of real assets.

Spirit Airlines has a large fleet, ground infrastructure, and many non-tangible assets like slot pair purchases (at congested airports) or gate allocations. These are all things that a company like Castlelake might be interested in taking control of to sell off to other players in the space.

This is not a particularly rare situation to occur, although it has been quite a while since the aviation industry has seen such a purchase-for-liquidation type of affair. This results from a company with financial resources and qualified analysts performing a sum-of-the-parts (SOTP) valuation and determining that a company is not as valuable as the sum of its individual components. Major investment managers have made tidy profits in recent years using this investment thesis to purchase companies and transform them.