Spirit Airlines is in talks with investment firm Castlelake

Spirit Airlines is in talks with alternative investment firm Castlelake for a potential acquisition as the discount airline looks for a way out of bankruptcy, CNBC has learned.

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

Fellow budget carrier Frontier Airlines It has been in talks with Spirit over the years about a potential merger, including in recent months, but has not reached an agreement, according to people familiar with the matter, who requested anonymity to talk about the discussions. The two reached an agreement four years ago but it was canceled after a surprise cash offer from… JetBlue Airlines.

Spirit and Castlelake did not immediately respond to requests for comment.

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

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

In its struggle to survive, Spirit has reduced flights, trimmed its fleet and cut jobs to save money. Last year, unions agreed to reduce the salaries of pilots and flight attendants on board the carrier. That amounts to $100 million in liens, the Airline Pilots Association said in an open letter on Jan. 13, and urged bondholders to support Spirit’s restructuring and avoid liquidation.

Dania Beach, Florida-based Spirit’s company has for years enjoyed largely consistent profitability and enviable profit margins in the often tough airline industry. But things took a turn after the pandemic, when wages and other costs rose, customer preferences changed, and an oversupply of domestic flights drove down airfare prices. This has been particularly punishing for U.S.-focused airlines that don’t have a buffer of plush first-class cabins, credit card deals and big loyalty programs.

The carrier’s woes escalated after a Pratt & Whitney engine recall grounded dozens of its Airbus planes starting in 2023, and a planned acquisition by JetBlue two years ago was blocked by a federal judge who ruled it was anticompetitive, leaving both carriers to fend for themselves against a backdrop dominated by larger carriers.

Spirit has been trying in recent years to attract higher-spending customers by offering more spacious seats or bundled fares that include customizing seats and luggage, or allowing changes, to better compete with larger rivals whose profits boosted higher-spending customers after the pandemic.