JetBlue Wins Battle for Spirit Airlines, Now in Top 5 US Airlines

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JetBlue and Spirit Airlines announced a merger this week, basically the acquisition of Spirit by Jet Blue. The purchase price is $3.8 billion, with each shareholder of Spirit receiving $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 carriers.

The news comes a day after Spirit’s former lover Frontier Airlines ended its bid for the airline. That closed off a love triangle… er, bidding war… that started when Frontier and Spirit first announced a merger in February 2022.

“Smells like a fusion spirit,” wrote Helane Becker, Managing Director Industrials & Airlines & Airfreight Consumer at Cowen Inc, summing up the soap with a nod to Nirvana. “Spirit and Frontier agreed to merge in February. In April, JetBlue came in with a better offer. Spirit continued to defend its decision to do business with Frontier, assuming the transaction would receive less pushback than a JetBlue transaction. After postponing the vote four times, Spirit’s shareholders finally got together to vote no. The two companies have 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 Jet Blue.)

After the collapse of that deal, the The Bharat Express News wrote, “With Frontier Deal Dead, Spirit is considering selling to JetBlue.” With an offer of $3.8 billion, Spirit’s board didn’t think twice. They agreed to merge with JetBlue the next day.

The new combination will become the fifth largest U.S. carrier (if approved by federal regulators). 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 at 13.9%. Alaska Airlines had 5.6% and JetBlue 5.4%. Spirit was the seventh largest with 4.8%.

The JetBlue/Spirit entity will skip Alaska to join a new Big Five consisting of Southwest, Delta, United, American and JetBlue. But even with the acquisition of Spirt, JetBlue will still be significantly smaller than the rest of the Big Five at 8-10% of the market, all of whom are still grappling with the devastation COVID has wrought on airlines. Still, JetBlue can win in many areas, such as the value of its loyalty program.

“The next step is a vote from Spirit’s shareholders on the new merger agreement, which is likely to take place in the next 60-90 days. Given the outcome of the vote on Frontier-Spirit’s merger following JetBlue’s offer, we suspect there is little risk of 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 so), which could take more than 18 months. In the meantime, JetBlue has its own date with the Department of Justice, as the Northeast Alliance (NEA) lawsuit hearing with American is scheduled for September 26.

The Biden administration’s concern is that restricting competition will harm consumers. Meanwhile, airlines like JetBlue worry about their own ability to compete amid a useless recovery for the airlines.

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

“Spirit is going to disappear, and with it its cheap structure,” William McGee of the American Economic Liberties Project told the TBEN. “There is no doubt that rates are going up.”

In making its case, JetBlue cites its history of lowering rates. It claims the new combination, with more than 450 aircraft, 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 can then be transferred to low-cost carriers.

In an interview with TBEN, JetBlue CEO Robin Hayes said: “The real issue here is clearly what we can do in the US to make a more competitive airline industry versus the big, Big Four airlines. We believe the most disruptive, the most effective thing we can do is build a bigger JetBlue faster than we could otherwise.”

The airlines are in the doldrums this year. Seemingly endless problems such as pilot shortages, flight cancellations, delays, preemptive flight cuts, higher oil prices and higher tariffs 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. Jet Blue closed the trading week at 8.42, down more than 40% from the year-to-date 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 one billion dollars below Spirit’s reported purchase price.

Nevertheless, JetBlue is seen as the luxury airline in this transaction. In contrast, the cheap, fee-based Spirit (ticker symbol “SAVE”) is one of the most complained about airlines. Spirit infamously canceled more than 2,000 flights in one week last August. An important argument for JetBlue is that bigger can mean better service.

Operating on three continents, JetBlue has won awards for its TBEN premium service and solid “Core” (coach) accommodations. The merger isn’t quite seen as the aviation 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 the scale to compete more efficiently with the ‘Big Four’. A successful merger can double the number of routes. JetBlue flies to 100 destinations in the US, Mexico, the Caribbean and Latin America. The company began flights to London last summer and just announced a 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 consisting primarily of Airbus A320 airliners. Spirit has a full Airbus fleet of 175 A319, A320 and A321 twin-jet single-pass aircraft. While there is clear operational efficiencies, JetBlue will still need to make costly changes. For example, Spirit has limited legroom, as befits its economic origin, while JetBlue has one of the more generous legrooms in the industry. JetBlue would eventually change all cabins with backrest screens, deluxe seats and TBEN seats and ‘suites’.

The battle between the pilots, including negotiating seniority and rank, will not be effortless either. Speaking of grass, there could be another union battle if the merger goes through, according to TBEN aviation expert Ted Reed: “JetBlue’s roughly 5,000 flight attendants are represented by the Transport Workers Union, while Spirit’s roughly 4,500 flight attendants are represented by the Association of Flight Attendants.”

An additional complicating factor could be the repayment of the borrowed portion of the government bailouts Spirit and JetBlue each received. And of course the airlines need approval from the Department of Justice and then an FAA single certificate certificate.

The last major merger, when Alaska Airlines bought Virgin America, lasted about three years and the inevitable missteps had to be done. Alaska (whose fleet consisted mainly of Boeing 737s) eventually sold its former Virgin America A321 aircraft.

Airline ‘competition’ this year revolves around who can provide the worst service and the most cancellations. If the merger somehow achieves the impossible – quality service at competitive prices – it will be welcomed with open arms by passengers.