JetBlue Airways pulled off a rare surprise in the airline industry when it unveiled a $3.6 billion proposal to acquire Spirit Airlines on April 5.
The combination would create a fifth-largest U.S. carrier and supplant the proposed $2.9 billion merger of Frontier Airlines and Spirit in a transaction that Wall Street analysts said caught them “off guard.” The surprise stems from the fact that a JetBlue-Spirit merger is not as obvious on its face as a Frontier-Spirit combination for a number of reasons, including opposing business models, network concentration, and costs — not to mention potentially raising antitrust red flags in Washington, D.C.
“This bid seems to be an attempt to derail the Frontier-Spirit merger, which would affect market positions and yields for JetBlue, especially on its leisure routes like Florida,” said Saikat Chaudhuri, a director at the University of California, Berkeley’s Haas School of Business and College of Engineering. He added that the proposed deal would be “extremely challenging” to execute given JetBlue and Spirit’s “radically different business models [and] positioning in the market.”
Asked whether the Frontier-Spirit deal prompted JetBlue’s offer, CEO Robin Hayes said it accelerated a process already underway at the New York-based airline. “Once the Spirit Frontier deal was announced, it creates a window of opportunity if you don’t act it’s gone,” he told analysts and the media on April 6.
Hayes described the proposed transaction as “bold and ambitious.” As he sees it, the deal is necessary to counter the domination of the Big 4 U.S. carriers — American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines — that control roughly 80 percent of the market.
“While I recognize there are some who look at further airline mergers in an uneasy sense because of what’s happened, the reality is, if we want to create competition against these large Big 4 airlines, it’s going to require some pretty big, audacious moves,” Hayes said.
The combination of JetBlue and Spirit would create an airline with an 8 percent share of U.S. domestic travelers, according to Transportation Department data via Cirium. It would operate 455 aircraft plus orders for another 312 planes — all Airbus A220 and A320neo family models — based on year-end 2021 numbers, serve more than 130 destinations, and generate combined revenues of roughly $11.9 billion. JetBlue forecasts $600-700 million in annual revenue synergies from the combination, fully realized within four years of the deal’s close.
The biggest concern for the proposed deal is execution risk, particularly antitrust approval. The Biden Justice Department has taken a very skeptical view of mergers in heavily consolidated industries, which includes airlines. And while a Frontier-Spirit combination is generally expected to get through after some inspection, the larger JetBlue-Spirit deal, which includes more concentration in markets like Florida, is expected to face heightened scrutiny.
“We recognize it will be a pretty lengthy regulatory process,” Hayes said in response to antitrust questions. JetBlue finance chief Ursula Hurley added that the airline has contingencies in place in order to secure regulatory approval, including an as-yet undisclosed reverse break-up fee paid to Spirit if the Justice Department denies the deal.
JetBlue is already positioning to get ahead of any regulatory challenge with Hayes repeatedly touting its bonafides as a “low-fare airline.” The carrier is not often viewed as a pricing leader in the market but several sources confirmed that, where JetBlue competes head-to-head with one of its larger competitors, it often does set the lowest fares the market. Those fares are in turn matched by competitors. However, where there is low-cost competition, say from Frontier or Spirit, JetBlue matches those fares.
Potentially complicating the matter is the Justice Department’s pending lawsuit against JetBlue’s Northeast Alliance with American that is set to go to trial in September. J.P. Morgan analyst Jamie Baker joked in a report that “at least JetBlue already has DOJ on speed dial.”
Several analysts expect the Justice Department’s current Northeast Alliance suit to translate to, as MKM Partners analyst Conor Cunningham put it, “significant pushback” to the transaction.
Asked whether JetBlue would drop its partnership with American in exchange for approval of the Spirit deal, Hayes said: “No. We see this as absolutely complementary to the” Northeast Alliance.
Many steps remain to a JetBlue-Spirit combination even reaching the Justice Department. Spirit’s board must back the deal and shareholders approve it, during which time Frontier backed by Indigo Partners will have the opportunity to make a counteroffer. And JetBlue could counter a Frontier counter, with Hayes saying their proposal is not a “take-it-or-leave-it offer.”
Frontier CEO Barry Biffle, in a letter to staff on April 5, said the airline’s board of directors would evaluate JetBlue’s proposal and “determine the best course of action” for the carrier. He gave no indication one way or another if Frontier planned to counter. But then, the airline could be willing to let Spirit go.
“Spirit converted to a JetBlue model may actually benefit Frontier leaving it the only high-utilization [ultra low-cost carrier] model,” wrote Raymond James analyst Savanthi Syth in a report.
Updated with comment from Frontier CEO Barry Biffle.