Why Spirit Airlines Rocketed Over 100% Higher This Week

Shares of discount airline Spirit Airlines (NYSE: SAVE) rocketed 105.4% higher through Friday trading at 10:30 a.m. ET, according to data from S&P Global Market Intelligence.

Spirit's equity had become distressed after a difficult operational year and after a federal judge blocked its merger with JetBlue in January.

With a key deadline looming last week, Spirit announced an extension to refinance its 2025 bonds. Additionally, news of a potential merger with a different airline surfaced, perhaps offering a way for equity holders to retain some value in a potential restructuring.

Spirit gets an extension and a potential new suitor

Last Friday, Oct. 21, was the deadline given to Spirit by its credit card processor U.S. Bank National Association to refinance its 2025 bonds. However, after market close, Spirit announced U.S. Bank National had granted the company a two-month extension on the refinancing, to Dec. 23. In conjunction with the extension announcement, Spirit also noted it had fully drawn its $300 million credit line, and forecast having $1 billion in liquidity by the end of the year.

Having its credit card processor cut off service could have been a death blow for Spirit, so the stock had fallen nearly to penny stock status last week. However, shares rallied 46% on Monday after the Friday after-hours announcement.

The relief rally was followed by a report from The Wall Street Journal on Wednesday that rival discount airline Frontier Airlines had renewed talks to potentially acquire Spirit.

That news sent the stock yet another leg higher. Merging with another company could increase scale, allowing the combined Frontier-Spirit airline to better compete with the "big four" in the industry. Smaller players like Spirit and Frontier have struggled recently, and therefore, consolidation is likely necessary for survival.

Spirit remains a risky bet

While this week's massive move higher might entice some investors, investors should note that the WSJ also said any debt refinancing or merger with Frontier would likely involve a restructuring of Spirit's debt, and possibly a bankruptcy.

Equity holders have sometimes survived bankruptcies with some residual value intact, and can potentially garner big gains from distressed levels. However, many times a stock's equity is rendered worthless in a restructuring. It all depends on how negotiations with bondholders go. Therefore, unless you are an expert in distressed investing and bankruptcies, this is still a stock to steer clear of.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.