Major airline and 2 travel brands face Chapter 11 bankruptcy risk
It’s relatively uncommon for a company to file for Chapter 11 bankruptcy without displaying signs of financial trouble beforehand. Observant customers may notice indicators such as lower staffing levels or reduced inventory in retail settings. In the restaurant sector, financial woes often manifest in lower-quality ingredients, smaller portion sizes, or other cost-cutting measures.
The Inefficacy of Cost-Cutting
While companies may attempt to trim expenses in hopes of improving financial health, simply cutting costs rarely leads to a turnaround, especially if previous mismanagement has occurred. Savings can sometimes be found by eliminating waste in less visible areas, but reducing the quality or quantity of goods and services offered almost always backfires with customers.
For publicly traded companies, signs of financial instability are often clear. They are required to disclose their financial results, and when expenses outpace revenue and cash reserves dwindle, analysts can typically predict impending bankruptcy well before an official announcement is made.
Insights from Creditsafe’s Financial Outlook
Ragini Bhalla, Head of Brand at Creditsafe, shared insights from the company’s Financial & Bankruptcy Outlook: Transportation Report, highlighting significant financial risks faced by three prominent companies in the travel and transportation sectors, reflected in their stock prices.
The Transportation Industry in Crisis
According to Bhalla, the transportation industry is currently grappling with various challenges. She noted a significant increase in mergers and acquisitions (M&A) activity during the pandemic, with deal values skyrocketing from $51 billion in 2020 to over $150 billion in 2021, before falling to $95 billion in 2022. However, Bhalla anticipates a shift in 2024.
“While M&A activity cooled in 2023, insiders predict 2024 will see consolidation. This makes it vital for both sellers and buyers to conduct thorough due diligence,” Bhalla emphasized. Companies considering acquisitions must ensure they aren’t investing in businesses that are financially distressed.
Airlines and Rental Car Companies at Risk
Among the companies facing financial challenges are Spirit Airlines and two rental car giants, Avis Budget Group and Hertz. Spirit Airlines has been under unofficial bankruptcy watch since its merger with JetBlue fell through. Questions regarding the sustainability of its ultra-low-cost business model are increasing, and Creditsafe has identified a real risk of Chapter 11 bankruptcy for the airline.
Earlier this year, Spirit Airlines indicated plans to refinance $1.1 billion in debt due in 2025. Compounding these issues, the airline has struggled with timely bill payments. Late payments surged dramatically in late 2023, escalating from 7.00% in September to over 51.08% in January 2024.
Investors are reacting accordingly, with Spirit’s stock price plummeting to $4.29, a staggering 73.8% drop over the year.
Avis Budget and Hertz Facing Similar Challenges
Both Avis Budget Group and Hertz are exhibiting similar financial distress. Avis’s long-term debt has increased consistently over the past three years, with a marked rise in late payments from 8 days in March to 31 days in April 2023.
Hertz is experiencing a parallel trend, with delinquent payments rising from 4.64% in August to 10.73% by October 2023, suggesting it, too, is struggling to meet its financial obligations.
As of Friday, Avis Budget shares closed at $107.70, down 39.2% for the year, while Hertz finished at $7.58, reflecting a 25.7% decline.
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