Sun. Sep 25th, 2022

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

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

“Smells like merger 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 flew in with a better offer. Spirit continued to defend its decision to go with Frontier, assuming the transaction would receive less pushback than a JetBlue transaction. After delaying the vote four times, Spirit shareholders have finally come together to vote No. The two companies agreed to terminate the agreement and Spirit is obligated to repay Frontier$25 million in merger-related costs.”

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

After that deal’s collapse, the Associated Press wrote, “With Frontier Deal Dead, Spirit Ponders Sale to JetBlue.” With a $3.8 billion offering, the Spirit board didn’t ponder too long. They agreed to merge with JetBlue the next day.

The new combination (if approved by federal regulators) will become the fifth-largest U.S. airline. As of April 2022, American had 18.4% of the U.S. airline market, followed by Southwest at 17.2%, Delta at 17.1% and United 13.9%. Alaska Airlines had 5.6% and JetBlue 5.4%. Spirit was the seventh largest at 4.8%.

The JetBlue/Spirit entity will leapfrog Alaska to join a new Big Five, composed 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 whom are still struggling with the devastation Covid wreaked on the airlines. Still, JetBlue may gain in may areas, like the value of its loyalty program.

“The next step will be a Spirit shareholder vote on the new merger agreement, which is likely to take place in the next 60-90 days. Given the outcome of the Frontier-Spirit merger vote following JetBlue’s offer, we suspect there is little risk in getting the necessary approval,” noted Savanthi Syth, Managing Director, Global Airlines & Advanced Air Mobility at Raymond James. “Both airlines will continue to operate independently until regulatory approval are granted (if so), which could take 18+ months. In the meantime, JetBlue has its own date with the Department of Justice as the hearing on the lawsuit over its Northeast Alliance (NEA) with American is scheduled for Sept. 26.”

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

Competition may well increase among the new Big Five. But the largest ULCC (ultra-low-cost carrier), Spirit, would vanish, leaving the low-fare domestic market to Frontier, Allegiant, and even smaller carriers.

“Spirit is going to disappear, and with it, its low-cost structure,” William McGee of the American Economic Liberties Project told AP. “There is no question that fares are going to go up.”

In making its case, JetBlue cites its history of lowering fares. It claims that the new combo, with over 450 planes, could force competitors to cut prices. Meanwhile, JetBlue says it will give up gates and landing slots at airports in New York and Boston which could then be turned over to low-cost airlines.

In an interview with AP, JetBlue CEO Robin Hayes said “The real issue here is clearly what can we do in the U.S. to make a more competitive airline industry against the large, Big Four airlines. We believe the most disruptive, the most effective thing that we can do is build a bigger JetBlue more quickly than we otherwise could.”

The airlines have been in the doldrums this year. Seemingly endless issues like a shortage of pilots, flight cancellations, delays, preemptive flight cutbacks, higher oil prices and higher fares have resulted in lower stock prices even as domestic traffic has returned to pre-COVID levels.

Wall Street greeted the merger news with a yawn. JetBlue ended the week trading at 8.42, down over 40% from its year-high of 16.64. Cowen and Company has an “Outperform” rating on JBLU. Price target? $14.00. JetBlue’s market cap of $2.7 billion is a billion dollars under the reported purchase price of Spirit.

Yet JetBlue is seen as the upscale airline in this transaction. By contrast, low-cost, fee-based Spirit (ticker symbol “SAVE”) is one of the most complained-about airlines. Spirit infamously cancelled more than 2000 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 Mint premium service and decent “Core” (coach) accommodations. The merger is not quite seen as the airline equivalent of a hypothetical “Nordstrom buys Kmart” but it’s close.

Why did Frontier and JetBlue fight for stumbling Spirit? For both, the idea was to increase scale to compete more efficiently with the “Big Four.” A successful merger may double the number of routes served. JetBlue flies to 100 destinations across the U.S., Mexico, the Caribbean, and Latin America. The company began service to London last summer, and just announced service from JFK to Vancouver, Canada. Spirit’s extensive domestic network could feed Jet Blue’s international routes and vice versa.

Both Spirit and JetBlue operate fleets primarily composed of Airbus A320 family airliners. Spirit has an all-Airbus fleet of 175 A319, A320 and A321 twin-jet single-aisle aircraft. Although there are obvious operating efficiencies, JetBlue will still have to make costly changes. For example, Spirit has limited legroom, as befits its economy origins, while JetBlue has one of the industry’s more generous leg spaces. JetBlue would eventually change out all cabins to feature seatback screens, upscale seating, and Mint seats and ‘suites.’

The turf war involving the meshing of pilots, including negotiating seniority and rank, will not be effortless either. Speaking of turf, there might be another union battle if the merger comes off, 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 Flight Attendants.”

An additional complicating factor may be paying back the loan portion of the government bailout Spirit and JetBlue each received. And of course, the airlines will need approval from the Department of Justice, then an FAA single certificate operating certification.

The last major merger, when Alaska Airlines purchased Virgin America, took about three years and the inevitable missteps to pull off. Alaska (whose fleet was primarily composed of Boeing 737s) ultimately sold off its former Virgin America A321 aircraft.

This year airline ‘competition’ has centered around who can offer the worst service and the most cancellations. If the merger can somehow achieve the impossible—quality service at competitive prices—it will be welcomed by passengers with open arms.

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