Spirit Airlines Imploded Because of This

] Dr. Jim: Why did Spirit Airlines fail? What were the major reasons why an established brand fell over in a matter of months?

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[00:00:51] But when gas prices went through the roof, that model started to fail That's the reason that broadly everybody mentions. Let's [00:01:00] also note that this is an airline for the last twenty-four months had been operating in the red and had some s- really serious financial problems. But if you wanna drill down into the root causes for the failure of this airline it's really down to three things.

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[00:01:35] Now, the airline had filed for bankruptcy protection, and their CEO, Ted Christie, stepped down after a six-year tenure, and he was replaced by Dave Davis. And you would think that a company that has filed for bankruptcy protection and had a restructuring at the executive suite would probably be a little bit more prudent in terms of how its compensation package is supposed to be designed.

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[00:02:21] When you look at some of the root causes for the failure of Spirit Airlines, executive compensation definitely needs to come into the n- conversation, especially considering that this budget provider has likely one of the bigger gaps in wages between their frontline employees and their C-suite. And when you have compensation models that are way out of whack, like Spirit Airlines and other companies, that creates a risk that you might not be willing to bear.

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[00:03:25] But they were able to survive for nearly forty years using that budget model. Now, when you have that budget model, you become extremely sensitive to external factors, and the cost of innovation, while being a low-cost provider, becomes highly expensive. And what that means is that you are highly likely to be an acquisition target.

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[00:04:13] And what would have happened if the JetBlue-Spirit Airlines merger were to be allowed is that the low-cost tier in the US airline market would have been completely wiped out, and you would have seen poorer outcomes for the consumer. So the fact that Spirit Airlines wasn't a-allowed to bail themselves out by being acquired created a chain of events where we are today. While the executive compensation and The blocking of the merger and the tendency for the US market to favor anti-competitive behavior and growth by acquisition all factor into Spirit's failure.

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[00:05:27] Now, what's interesting and is still a little bit muddy is what role private equity played in the bad financials of Spirit Airlines. We've seen plenty of examples of private equity completely tanking established brands when they enter into the market. Red Lobster is a great example, and there's plenty of others. And while I haven't seen any direct evidence of this particular private equity company doing the same thing, you can bet that private equity being involved in Spirit Airlines operations had a [00:06:00] negative impact on their financials.

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[00:06:26] And this is what always happens. You saw it in the dot-com crash, you saw it in the housing crash, and you've seen it in any number of instances where poor decisions by corporate America get propped up and bailed out by the taxpayer, while all of their gains go into the pockets of their private equity company management team and/or the executive team of the company.

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[00:07:12] So when you think about why Spirit Airlines failed, if you want to put it on a bumper sticker, it's one of many other examples of late-stage capitalism doing late-stage capitalism things.

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