JetBlue wins battle for Spirit Airlines, now in top 5 US airlines

JetBlue and Spirit Airlines announced a merger this week, effectively the acquisition of Spirit by JetBlue. The purchase price is $3.8 billion, with each Spirit shareholder to receive $33.50 per share. If the deal goes through (the US Department of Justice can say no), JetBlue will join a new “Big 5” of US airlines.

The news comes a day after Frontier Airlines, Spirit’s former suitor, ended its bid for the airline. This concluded a love triangle…er, bidding war…that began with Frontier and Spirit first announcing a merger in February 2022.

“It smacks of fusion spirit,” wrote Helane Becker, managing director Industrials & Airlines & Airfreight Consumer at Cowen Inc, summing up the soap opera with a nod to Nirvana. “Spirit and Frontier agreed to merge in February. In April, JetBlue came up with a better deal. Spirit continued to defend its decision to go with Frontier, assuming the deal would receive less pushback than a JetBlue deal. After delaying the vote four times, Spirit shareholders finally came together to vote no. The two companies have agreed to terminate the agreement and Spirit is obligated to reimburse Frontier for $25 million in merger-related costs.

(Full disclosure: I own shares in Southwest Airlines, American Airlines and JetBlue.)

After that deal collapsed, The Associated Press wrote, “With Frontier Deal Dead, Spirit Ponders Sale to JetBlue.” With an offer of $3.8 billion, the Spirit Board didn’t think too long. They agreed to merge with JetBlue the next day.

The new combination (if approved by federal regulators) will become America’s fifth-largest airline. In April 2022, American held 18.4% of the US airline market, followed by Southwest at 17.2%, Delta at 17.1% and United at 13.9%. Alaska Airlines had 5.6% and JetBlue 5.4%. Spirit was seventh in importance with 4.8%.

The JetBlue/Spirit entity will go beyond Alaska to join a new Big Five, made up of Southwest, Delta, United, American and JetBlue. But even with the acquisition of Spirt, JetBlue with 8-10% of the market will still be significantly smaller than the rest of the Big Five, all of which are still grappling with the devastation Covid has inflicted on airlines. Still, JetBlue can win in many areas, like the value of its loyalty program.

“The next step will be a Spirit shareholder vote on the new merger agreement, which is expected to take place within the next 60 to 90 days. Given the outcome of the vote on the Frontier-Spirit merger following JetBlue’s offer, we believe there is little risk in obtaining the necessary approval,” said Savanthi Syth, Managing Director, Global Airlines & Advanced Air Mobility at Raymond James. “Both airlines will continue to operate independently until regulatory approval is granted (if required), which could take longer than 18 months. In the meantime, JetBlue has its own appointment with the Ministry of Justice, because the hearing in the lawsuit regarding his Northeast Alliance (NEA) with American is scheduled for September 26.

The Biden administration is concerned that limiting competition will hurt consumers. Meanwhile, airlines like JetBlue are worried about their own ability to compete amid a profitless recovery for airlines.

Competition may well intensify among the new Big Five. But the largest ULCC (Ultra Low Cost Carrier), Spirit, would disappear, leaving the domestic low cost market to Frontier, Allegiant and even smaller carriers.

“The spirit will go, and with it, its low-cost structure,” William McGee of the American Economic Liberties Project told AP. “There is no doubt that tariffs will go up.”

In making its case, JetBlue cites its history of lowering fares. He says the new combo, with more than 450 planes, could force competitors to cut prices. Meanwhile, JetBlue said it would give up gates and landing slots at New York and Boston airports, which could then be given to low-cost airlines.

In an interview with AP, JetBlue CEO Robin Hayes said, “The real issue here is clearly what we can do in the United States to make the airline industry more competitive with the big Big Airlines. Oven. We believe the most disruptive and effective thing we can do is build a bigger JetBlue faster than we otherwise could.

Airlines have been in the doldrums this year. Seemingly endless issues like a shortage of pilots, flight cancellations, delays, preemptive flight curtailments, higher oil prices and higher fares have driven stock prices down even as domestic traffic returned to pre-COVID levels.

Wall Street greeted the news of the merger with a yawn. JetBlue ended the week at 8.42, down more than 40% from its yearly high of 16.64. Cowen and Company has an “Outperform” rating on JBLU. Price target? $14.00. JetBlue’s market capitalization of $2.7 billion is $1 billion less than Spirit’s reported purchase price.

Still, JetBlue is considered the premium airline in this deal. On the other hand, low-cost and paying Spirit (symbol “SAVE”) is one of the most criticized airlines. Spirit sadly canceled over 2,000 flights in one week last August. A key argument for JetBlue is that bigger can mean better service.

JetBlue operates on three continents and has won accolades for its premium Mint service and decent “Core” (coach) accommodations. The merger isn’t quite seen as the airline equivalent of a hypothetical “Nordstrom buys Kmart,” but it’s close.

Why did Frontier and JetBlue fight to trip Spirit? For both, the idea was to increase scale to more effectively compete with the “Big Four”. A successful merge can double the number of routes served. JetBlue serves 100 destinations in the United States, Mexico, the Caribbean and Latin America. The company began serving London last summer and has just announced service from JFK to Vancouver, Canada. Spirit’s extensive domestic network could feed Jet Blue’s international routes and vice versa.

Spirit and JetBlue operate fleets primarily of Airbus A320 family jetliners. Spirit has an all-Airbus fleet of 175 single-aisle A319, A320 and A321 jets. While there are clear operational efficiencies, JetBlue will still need to make costly changes. For example, Spirit has limited legroom, befitting its budget origins, while JetBlue has one of the most generous legrooms in the industry. JetBlue would eventually change all cabins to feature seatback screens, premium seats, and Mint seats and “suites”.

The turf war involving the meshing of pilots, including the negotiation of seniority and rank, will not be effortless either. Speaking of turf, there could be another labor battle if the merger goes through, according to Forbes airline expert Ted Reed, “JetBlue’s approximately 5,000 flight attendants are represented by the Transport Workers Union, while Spirit’s approximately 4,500 flight attendants are represented by the Association of Air Hostesses.”

An additional complicating factor may be the repayment of the loan portion of the government bailout that Spirit and JetBlue each received. And of course, airlines will need Department of Justice approval and then FAA single-certificate operations certification.

The last major merger, when Alaska Airlines bought Virgin America, took about three years and the inevitable missteps to pull off. Alaska (whose fleet consisted mainly of Boeing 737s) finally sold its old A321 plane to Virgin America.

This year, airline “competition” has focused on who can deliver the worst service and the most cancellations. If the merger can somehow achieve the impossible – quality service at competitive prices – it will be welcomed with open arms by passengers.

About Troy McMiller

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