JetBlue Airways’ proposed $3.8 billion merger with Spirit Airlines faces a new challenge: Wall Street analysts are increasingly calling for it to lower the purchase price given all of Spirit’s problems.
The airlines reached the merger deal in July 2022 after JetBlue won a bidding war with Frontier Airlines. It values Spirit at $33.50 per share — a nearly 200% premium to Spirit shares, which closed at $11.48 per share on Tuesday.
“In light of punishing fundamentals and sub-$5 share prices, we believe JetBlue and its board would be remiss in not pursuing revised deal economics,” J.P. Morgan analyst Jamie Baker wrote on Wednesday. His reference to “sub-$5 share prices” referred to what many think the price of Spirit shares could fall to.
The calls by Baker and others come after tough third-quarter results at both JetBlue and Spirit. They lost $156 million and $189 million, respectively, on an operating level, equal to respective negative 6.6% and negative 15% operating margins. And that was during what is traditionally the annual peak for U.S. travel, though one could note that Florida, where JetBlue and Spirit are strong, peaks during the winter quarters.
The situation is not expected to get better anytime soon. JetBlue and Spirit are expected to lose money again next year, and maybe in 2025. One big issue is the grounding of many Airbus A320neo-family aircraft powered by Pratt & Whitney geared turbofan engines. Both airlines are affected but the situation is more pronounced at Spirit, which anticipates having an average of 26 aircraft grounded at any given time next year. The number is forecast to peak at 41 aircraft in December.
Spirit only operates 202 aircraft, of which 88 are A320neo-family aircraft with Pratt engines.
“This is a material adverse change in the outlook for the company,” TD Cowen analyst Helane Becker wrote recently on Spirit. “It is also possible that JetBlue tries to renegotiate the price, especially if they win their case against the DOJ.”
The trial in the Department of Justice’s suit to block the merger began in Boston on Tuesday. The trial is expected to stretch into December with a decision issued by the judge sometime next year.
Neither Baker or Becker questioned whether the merger should happen, only the amount that JetBlue agreed to pay. The question of whether JetBlue, an airline that has long focused on innovation and better customer service, should merge with Spirit, a bare-bones discounter known for its low fares and numerous fees, is separate.
One industry insider recently referred to the combination as a modern Pan Am-National merger. That 1980 deal has gone down in history as a fiasco for Pan Am, which bought National for its U.S. domestic network to complement Pan Am’s own international service. The network synergies never materialized and a culture clash between staff of each airline only proved a financial burden for already struggling Pan Am. The airline shut down in 1991.
As for JetBlue and Spirit, renegotiating the purchase price would not be easy. Analysts think JetBlue could cite the “material adverse effect” clause in the merger agreement. But Baker noted that “very few buyers are able to invoke the [material adverse effect] get out of jail card easily.” Spirit leadership and the airline’s board would certainly try to hold JetBlue to the original terms, even if only for the benefit of the discounter’s shareholders.
Of course, if the DOJ wins its lawsuit and blocks the merger, all of this talk of a lower purchase price is moot as the deal would be off.
