In some of its most forceful comments yet, Spirit Airlines rejected JetBlue Airways’ unsolicited merger offer, making clear that it believes the best outcome for shareholders is the already planned merger with Frontier Airlines.
JetBlue’s offer is “illusory” and unlikely to survive regulatory scrutiny, Spirit CEO Ted Christie said in a call with analysts after the markets closed on May 23. “At the heart of the board’s decision is the fact that JetBlue’s offer is not reasonably capable of being consummated,” Christie said. “JetBlue’s regulatory case is weak and defies common sense.”
Spirit’s board has now spurned JetBlue’s merger attempts twice, urging shareholders instead to vote for Frontier‘s $2.9 billion offer. Shareholders are expected to vote on Frontier’s bid on June 10.
The crux of Spirit’s objection is that JetBlue is embroiled in a lawsuit brought by the Justice Department (DOJ) over the airline’s northeast alliance with American Airlines. “It’s inconceivable to us that an acquisition of Spirit by JetBlue gets approved unless they abandon the [northeast alliance], the anticompetitive alliance with American Airlines,” Christie said.
Christie said Spirit has asked JetBlue if it would abandon the pact with American to ensure its merger with Spirit is more easily approved. But JetBlue refused, he said. “JetBlue has demonstrated that preserving this alliance with American and not its acquisition of Spirit is its first prize,” he said. “If they think approval is so likely, why refuse to do whatever it takes to get the deal done?”
Even if JetBlue offered relief by divesting slots and reducing flights on the East Coast, it wouldn’t be enough, said Andrew Finch, an anti-trust lawyer Spirit has retained. “In our opinion, if JetBlue wins or settles the [northeast alliance] litigation, the DOJ will be even more determined to stop an acquisition of Spirit as JetBlue will have just completed a de facto merger in the Northeast with American Airlines, which is the largest airline in the world,” Finch said. “On the other hand, if JetBlue loses the [northeast alliance] litigation, JetBlue would likely appeal in the last ditch effort to save the anticompetitive alliance that it has implied is more important to it than an acquisition of Spirit, and that could take well over a year to resolve.”
Christie stressed that JetBlue is a “high-fare” airline and that a merger with Spirit would eliminate low-fare competition, particularly in the Northeast and in Florida. A merger with Frontier, on the other hand, would create a national ultra-low-cost carrier, similar to those, like Ryanair and Wizz Air, in Europe.
But not everyone is convinced that the Frontier deal is more of a win for Spirit’s shareholders. Although it’s true that a Frontier merger would create a large low-fare airline, JetBlue tends to have a bigger presence in the airports it flies to and brings down average fares in those markets, Raymond James analyst Savanthi Syth argued in a note to investors. “We view both mergers to be pro-consumer, either by introducing more low fares or by resulting in a stronger ‘disrupter’ to legacy airlines,” she wrote.
Syth added that a Frontier-Spirit merger probably will be easier to execute and will take less time to complete than a JetBlue-Spirit merger, however. But either would be a good deal for shareholders, especially if Frontier sweetens its offer.
Christie reserved his harshest comments for what he sees as JetBlue’s motive in making an offer for the airline. JetBlue, fearful of ultra-low-cost competition, wants to derail the Frontier merger, Christie said, calling it a “cynical” motive. A Frontier-Spirit merger could result in the country’s fifth-largest airline, after American, Delta Air Lines, United Airlines, and Southwest Airlines, and would make JetBlue less relevant, he said.
JetBlue has alleged that Spirit’s board did not engage with it in good faith. This, Christie said, is “total fiction,” and that Spirit has spent considerable time with JetBlue’s board on the offer. “To be clear, over a 4-week period, we spent hundreds of hours and hundreds of thousands of dollars assessing the regulatory risk of an acquisition of Spirit by JetBlue, including assessing the validity and merits of JetBlue’s own analysis,” he said.
JetBlue did not respond to a request for comment on this story, but last week it defended its offer and blasted Spirit’s board. JetBlue contends that Spirit’s board is compromised by the airline’s previous ownership by Indigo Partners, Frontier’s majority stakeholder, an allegation Spirit dismisses.
“The Spirit board, driven by serious conflicts of interest, continues to ignore the best interests of its shareholders by distorting the facts to distract from their flawed process and protect their inferior deal with Frontier,” JetBlue said. “We are confident that as we continue to share the facts directly with Spirit shareholders, they will be even more perplexed than they already are about why the conflicted Spirit board has refused to negotiate with us in good faith.”
Clarification: This story has been updated to say shareholders will vote on June 10 on Frontier’s bid for Spirit.