Why Airline Stocks Like JetBlue and Frontier Are Soaring Today

Shares of Frontier Airlines parent Frontier Group Holdings (NASDAQ: ULCC) are up 18% as of midday Friday, followed closely by JetBlue Airways' (NASDAQ: JBLU) 16% surge. Both rallies are in response to reports that rival carrier Spirit Airlines (NYSE: SAVE) is considering filing for bankruptcy. If true, it could mean the sale of part or all of the struggling airline.

Bankruptcy imminent?

Take the report with a grain of salt, as it did not come from the company itself. Rather, the Wall Street Journal suggested the possibility on Thursday evening, only citing "people familiar with the matter" as its source.

Still, it's a credible possibility. Spirit CEO Ted Christie conceded following the company's disappointing second-quarter results that it was in conversations with bondholders regarding the then-upcoming maturity of much of its debt. In no real position to repay this principal or even refinance these loans then -- Standard & Poor's downgraded the airline's bonds from a rating CCC+ to just CCC, or "junk" status, in June -- the carrier's not likely in any better position to do so now.

The upshot for JetBlue, Frontier, and most other airlines is clear: Even though the intimated chapter 11 bankruptcy filing would legally allow Spirit to continue operating as-is, it's still clearly on the defensive, translating into opportunity for its competitors. Should Spirit's bondholders demand some or all of the airline to be sold to repay this loan, its rivals' opportunities to expand widen further.

From here, too much risk and too little reward

It's tempting to join the crowd and plow into JetBlue or Frontier shares while a competitor is on the ropes. But don't take the bait.

That's not to suggest there isn't real opportunity here. While still unconfirmed by the company, the Wall Street Journal's reporting makes sense in light of Spirit's recent struggles (it's not been profitable in any quarter since late 2021). Other airlines are rightfully licking their chops as to whether Spirit is forced to restructure.

The issue, rather, is the sheer scope of today's reaction. If there truly is any tangible upside on Spirit's struggle for Frontier or JetBlue, it's now already priced into their respective stocks. If there's not any tangible upside, both stocks are now overvalued. And either way, both of Friday's surges are apt to invite at least a little profit-taking sooner than later.

At the very least, interested speculators will want to wait for today's dust to settle before wading in.

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James Brumley has 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.