The recent shutdown of Spirit Airlines during its Chapter 11 reorganization process is a demonstration of both the benefits and pitfalls of Chapter 11 restructuring. Chapter 11 gives a respite from prior debt and the ability and need to service some of that debt while the company reorganizes. Chapter 11 also gives companies the tool to reject burdensome contracts as the company restructures. However, Chapter 11 cannot in and of itself make an unprofitable company profitable.
Spirit failed because, notwithstanding the respite from payment of its secured debt and other tranches of debt, it was unable to operate profitably, given market pressures including the price of jet fuel and the competitive landscape for air travelers. Had Spirit been able to operate profitably, notwithstanding its debt levels, a reorganization would very much have been possible and would have very well positioned Spirit to be competitive in the market given that its competitors are still encumbered by debts of their own.
Spirit could have emerged with a restructuring of its debt, including conversion of settlement debt to equity, but without a government bailout, it could not operate on a profitable basis in cash flow.
Customers holding confirmed tickets that had been purchased with debit or credit cards were generally unaffected by the shutdown other than the inconvenience of rescheduling flights, because anyone purchasing airfare by credit card (the vast majority of travelers) would have been able to seek recourse from the credit card companies for the failure to provide the requested service. Further, to the extent that people have deposited funds in advance of travel as payment for that travel, they would have had somewhat of a priority in the bankruptcy process.
Because Spirit underwent a complete shutdown and liquidation in bankruptcy and not a partial shutdown, its employees were left without COBRA or other medical coverage other than the current month which had been paid.
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