Spirit Airlines in talks with investment firm Castlelake

Spirit Airlines is in talks with alternative investment firm Castlelake for a possible buyout as the budget airline seeks a path out of bankruptcy, CNBC has learned.

Spirit filed for Chapter 11 bankruptcy last August for the second time in a year after its previous recovery plan failed.

Another budget carrier Border Airlines was in talks with Spirit over the years about a possible merger, including in recent months, but did not reach an agreement, according to people familiar with the matter, who requested anonymity to speak about the discussions. The two men reached an agreement four years ago, but the deal was canceled after a surprise cash offer from JetBlue Airways.

“We do not comment on market rumors and speculation,” a Spirit spokesperson said. Castlelake did not immediately respond to requests for comment.

It was not immediately clear whether Spirit and Castlelake bondholders would reach an agreement or what form it might take. Minneapolis-based Castlelake has been active in aviation financing for years. In August, it announced the launch of a new aviation lending arm, Merit AirFinance, with $1.8 billion in deployable capital.

Spirit said in mid-December that it had amended its agreement with its creditors to immediately receive an additional $50 million in financing, a lifeline for the carrier. Additional funding would be conditional on “further progress on a standalone reorganization plan or strategic transaction,” Spirit said Dec. 15. “Spirit is currently in active negotiations on each of these possibilities,” the company added.

In its fight for survival, Spirit has cut flights, reduced its fleet and cut jobs to save money. Last year, unions agreed to cut pay for the carrier’s pilots and flight attendants. That represents $100 million in concessions, the Air Line Pilots Association said in a Jan. 13 open letter, urging bondholders to support Spirit’s restructuring and avoid liquidation.

Spirit, based in Dania Beach, Florida, has enjoyed years of largely stable profitability and enviable margins in an often difficult airline industry. But things changed after the pandemic, when wages and other costs soared, customer preferences changed and an oversupply of domestic flights drove down airfares. This has been particularly punishing for U.S.-focused carriers, which lack luxury first-class cabins and big credit card and loyalty program deals.

The carrier’s problems snowballed after a Pratt & Whitney engine recall grounded dozens of its Airbus planes starting in 2023 and JetBlue’s proposed acquisition was blocked two years ago by a federal judge who deemed it anticompetitive, leaving the two carriers to fend for themselves in a context where the largest carriers dominate.

Spirit has tried in recent years to woo higher-spending customers by offering more spacious seats or bundled fares that include seat and baggage assignments, or allow for changes, to better compete with larger rivals whose profits have been bolstered by higher-spending customers after the pandemic.