Surprise Bid for Spirit Could Derail Deal With Frontier
Pushing Back: Inside the Issue
Well, that was a surprise. JetBlue, seemingly out of nowhere, announced a bid for Spirit. JetBlue’s offer of $3.6 billion is $700 million more than what Frontier offered and could derail Frontier’s bid. At first, the industry reacted with shock — no one saw it coming. But as the dust settled, the deal started to make sense. After all, it would allow JetBlue to acquire more (and compatible) aircraft and grow into a worthy competitor to the Big Four airlines. But the flip side is that JetBlue-Spirit isn’t as obvious a combination as the tie up between two ULCCS like Frontier-Spirit.
And as the dust settled further, consensus built that the real winner actually is Frontier. If it gets Spirit, it immediately becomes a large, truly national ULCC. But JetBlue acquiring Spirit eliminates one of Frontier’s main competitors in the budget airline space. Meanwhile, JetBlue, already under the regulatory microscope for its alliance with American, could face even more Justice Department scrutiny for this deal. There’s never a dull moment in this industry.
The Airline Weekly Lounge Podcast
Edward “Ned” Russell and Madhu Unnikrishnan discuss the JetBlue-Spirit/Frontier-Spirit merger machinations, and the word from European airlines at the recent Airlines for Europe summit. Just how bullish are European CEOs about summer demand? Listen to the episode, and go here for the archive.
Fleet
Airbus’ plans to aggressively ramp up aircraft production are on track, despite new constraints on the global supply of Russian titanium, a critical metal for aerospace manufacturing.
The European airframer quashed rumors that its A320 and A350 production increases will be delayed by titanium-supply issues. “We continue to assess the impact of the current situation in detail, but we do not see any issue in the short to medium term,” an Airbus spokesperson said. “Regardless, we are accelerating our efforts to secure alternative sources of supply.”
Airbus previously indicated that it sourced as much as half of its titanium needs from Russia. It continues to buy the metal from the country. “Airbus is directly sourcing titanium from Russia as well as from other countries, and indirectly sourcing it from Tier 1 suppliers,” the spokesperson said. “This is done in accordance with all sanctions and applicable export control regulations in place.”
Airbus plans to increase production of its A320 family to 65 aircraft per month by the middle of next year, an aggressive target that analysts and even Air Lease Corp. Executive Chairman Steven Udvar-Hazy have questioned. Last year, analysts pointed to other supply chain problems, not least of which were staffing issues at the airframer’s suppliers.
But CEO Guillaume Faury stood by the company’s targets and said Airbus can deliver 20 percent more aircraft this year compared with last year. “We are ready,” he said in February before the conflict began.
Before the war in Ukraine, Russia provided up to 20 percent of the world’s raw titanium, and VSMPO-AVISMA is the world’s largest producer of the metal for the aerospace industry. Before the conflict, Boeing and VSMPO-AVISMA were in a joint venture to provide part of the U.S. airframer’s titanium requirements. But European, Japanese, and U.S. sanctions have prompted aerospace firms to avoid Russian supplies of the metal in order to comply with broader sanctions. China, Japan, Kazakstan, and the U.S. produce the balance of the world’s supply of titanium.
Earlier this year, Boeing CEO David Calhoun assured investors that the company’s supply of the metal was secure. “As long as the geopolitical situation stays tame, no problem,” he said on January 26. “If it doesn’t, we’re protected for quite a while, but not forever.”
But the company started diversifying its supply in 2014 after Russia annexed the Crimean Peninsula. Boeing accelerated the process after Russia invaded Ukraine on February 24, and has since suspended all titanium purchases from the country.
“Our inventory and diversity of titanium sources provide sufficient supply for airplane production and we will continue to take the right steps to ensure long-term continuity,” a Boeing spokesperson said. “As aerospace is a longer cycle business, we largely have longer-term agreements that bridge short-term supply issues, which give us priority and protection from the fluctuations in the market.”
Embraer sourced much of its titanium from Russia before the war broke out, raising questions about its ability to meet its delivery targets this year. But in a recent filing with the U.S. Securities and Exchange Commission the Brazilian airframer said it had enough supplies for the near term.
“Embraer informs that there is no immediate concern over the availability of titanium in its supply chain, considering its strong current inventory position and the existing contracts for the provision of this material with companies in other countries,” the company said. “Embraer will continue to monitor its supply chain and to seek alternative sources.”
Fleet Briefs
- Air Lease Corp. ordered 32 Boeing 737 Max aircraft — of both the -8 and -9 variants. The lessor recently added 18 Maxes to its orderbook, and its backlog for the type is for 130 aircraft. “The addition of more 737 MAXs, including 737-8s and 737-9s, will enable ALC to respond to accelerating market demand as air travel continues to recover,” said Ihssane Mounir, senior vice president of commercial sales and marketing at Boeing. ALC Executive Chairman Steven Udvar-Hazy has stressed strong demand for next generation narrowbody aircraft as the world’s airlines focus on shorthaul demand as they emerge from the pandemic.
- CDB Aviation is providing five Airbus A320neos to Volaris in a sale-and-leaseback deal. The lessor now has 13 aircraft placed at Volaris, four of which have been delivered, with the balance to be delivered by the fourth quarter of 2024.
- Lessors’ exposure to Russia is coming into clearer focus. Avolon last week said it had 16 narrowbodies leased to Russian carriers and, as of the end of March, 10 remained in the country. The exposure is less than 1 percent of Avolon’s portfolio of 592 aircraft. By contrast, AerCap has 135 aircraft worth $3.5 billion in Russia.
Separately, Avolon said it signed 54 new leases in the first quarter and delivered six aircraft. The lessor also signed deals for Vertical VX4 eVTOLs with AirAsia, Gozen Holding, and Air Greenland. - WestJet took delivery of the first of four converted 737-800 freighters last week. Its three stablemates are expected to follow by the end of the year. WestJet will operate the freighters on its existing route network, with crews sourced from the passenger operation. Elsewhere in Canada Lynx Air took its first flight, from Calgary-Toronto, on a 737 Max. The carrier plans to operate 148 flights per week on as many as 12 routes across Canada as it ramps up.
Sky Money
- The Lufthansa Group has signed a €2 billion ($2.2 billion) unsecured syndicated revolving credit facility. Chief Financial Officer Remco Steenbergen said the revolver, which replaces €700 million in undrawn bilateral credit lines, will help achieve the group’s €6-8 billion liquidity target. The facility has a three-year tenor with two one-year extensions. HSBC, Landesbank Baden-Württemberg, and UniCredit Bank were coordinating bookrunners and mandated lead arrangers.
- Gol will boost capital with an up to 2.9 billion Brazilian reais ($611 million) through the issue of up to 67.3 million preferred shares. Existing shareholders have until May 13 to subscribe the the issue, after which shares will be offered to third parties.
- Ryanair has honed its guidance for the 2022 fiscal year that ended in March, and now expects a €350-400 million ($382-436 million) net loss. That is the higher end of its previous €250-450 million loss guidance. Passenger numbers just missed Ryanair’s 100 million target at more than 97 million. Speaking earlier in April, Group CEO Michael O’Leary said he expects fares to be at 2019 levels this summer on lower industry capacity.
- The U.S. Commerce Department said Aeroflot, UTAir, and Azur Air violated export controls in operating several aircraft outside Russia, including to destinations in India, the United Arab Emirates and Saudi Arabia, and to Armenia and other countries neighboring Russia. The department says the three airlines continue to operate aircraft subject to sanctions without authorization, and is moving to levy penalties on the carriers. U.S. export controls apply to any aircraft with more than 25 percent of its components built in the U.S., which encompasses all Boeing, Airbus, and Embraer aircraft.
— Edward Russell & Madhu Unnikrishnan
State of the Unions
The federal mask mandate on flights may be ending soon, but that won’t eliminate the threat of unruly passengers disrupting flights, the head of the largest U.S. flight attendants union warns.
“I don’t view the two as related,” Association of Flight Attendants (AFA) President Sara Nelson said. “Clearly we have had conflicts on masks, but the issue of violence on board is a bigger issue: It’s about not wanting to follow the rules.”
Nelson and the AFA are putting their weight behind a new bill introduced by Representatives Eric Swalwell (D-Calif.), Brian Fitzpatrick (R-Penn.), and Senator Jack Reed (D-R.I.) that would stiffen penalties for disruptive behavior onboard aircraft. “Unfortunately, too many of our pilots, flight attendants and crew members are dealing with unacceptable abuse from passengers — everything from kicking to spitting to biting,” Swalwell said in introducing the bill. “This behavior is not only inappropriate, but it also puts other crew and passengers at risk.”
The bill would create a national list of passengers who are barred from flying due to disruptive behavior. This would be separate from the Federal Bureau of Investigation’s (FBI) “no-fly” list of suspected terrorists or criminals. Instead, the list would be managed by the Transportation Security Administration (TSA) and would allow redress for passengers who think they were included in error.
Currently, it is up to each airline to determine whether a passenger should be banned, with nothing preventing a passenger barred from one airline from buying a ticket on another.
Nelson called this provision important, but acknowledged that it could raise civil-liberty concerns, particularly in an industry already grappling with highly politicized reactions to mask mandates and other Covid-mitigation measures. “Individual airlines now can ban people, but there is no transparency, and information from one airline can’t be shared with other airlines,” she told Airline Weekly.
Flight crews reported almost 6,000 unruly-passenger incidents last year, more than the previous 30 years combined. Non-compliance with the federal mask mandate — a deeply polarizing mandate in the U.S. — resulted in several altercations, but it wasn’t the only factor. Alcohol is another, Nelson said.
Although rules limit the number of drinks an airport restaurant or bar can serve, the rules are not strictly enforced. Moreover, during the pandemic, airport concessions often encouraged to-go alcohol sales, despite rules prohibiting passengers from drinking alcohol they brought on board. “There needs to be better enforcement of rules around alcohol,” Nelson said. “There also needs to be a crackdown on concessionaires that are pushing alcohol to-go.”
But enforcement of the rules is a more intractable problem. Airports are typically policed by local law enforcement. The aircraft itself is the federal government’s jurisdiction. Nelson said there needs to be better coordination between law enforcement agencies to prevent excessive alcohol sales and to arrest disruptive passengers after landing.
The Swalwell-Reed bill addresses that by centralizing offenders in one list, Nelson said. “This sends a message that there are consequences for bad behavior,” she said. “Flying is a privilege, not a right.”
AFA to Capitalize on U.S. Labor Momentum
Separately, Association of Flight Attendants President Sara Nelson noted that the labor movement now is enjoying a “moment,” with several high-profile and successful organizing efforts at Amazon warehouses and Starbucks stores. AFA is focused on seizing the moment to spread the gospel of unionization in all industries, but also at airlines that aren’t organized.
“There is incredible energy and momentum among Delta flight attendants,” Nelson said. “We are on track to file [for unionization] this year.”
Delta historically has fended off organizing drives. The workforce opted not to organize after the Atlanta-based carrier absorbed the unionized Northwest Airlines flight attendant workgroup in 2009. But AFA hopes to change that.
AFA has found a receptive audience among the more junior members of Delta’s 24,000 flight attendant workforce, Nelson said. “Younger workers are taking charge, and the more senior workers are excited by what they’re seeing.” ‘
In the larger economy, the path to unionization is steep. Despite recent successes, the numbers remain small. “People have won in the thousands, but there are tens of millions of workers in the country,” Nelson said. There is an awakening of solidarity and the power that generates, but we have a job to do to help the tens of millions of people who want to join unions.”
Wizz, Unions Square Off Over U.S. Permit
The war of words over Wizz Air’s application for a U.S. foreign air carrier permit and exemption continues to rage on, as the European Commission now has weighed in to defend the Hungarian discounter’s application. Wizz Air does not currently have any aircraft capable of flying to the U.S. in its fleet, but it is applying for permission to fly a cargo Airbus A330 owned by the Hungarian government to the U.S. A coalition of unions and other stakeholders have objected to Wizz Air’s application, claiming the airline is anti-union and thus violates the U.S.-EU open skies agreement’s labor protections. The European Cockpit Association has alleged Wizz Air’s safety oversight is lax.
But EASA clapped back, saying in a recent filing with the U.S. Transportation Department that the union allegations are “unsubstantiated and lack any evidence.” EASA also ponted out that the EC’s oversight ensures that carriers comply with all applicable labor rules.
But unions aren’t buying it. “Facts are stubborn things and the fact is Wizz Air is an anti-union, foreign air carrier whose safety culture raises concerns. It is clear they do not have an adequate safety culture because Wizz has almost certainly not implemented the Safety Management System process, the foundation of which is a pro-active, non-punitive safety reporting and analysis process,” Air Line Pilots Association President Joe DePete said. “Given this record, ALPA is calling on the United States Department of Transportation to work to ensure labor protections are in place, consistent with the Biden administration’s strong support for workers’ rights.”
Labor Briefs
- JetBlue pilots ratified a new agreement that grew out of a dispute over the airline’s Northeast Alliance with American Airlines, the Air Line Pilots Association (ALPA) said. When the Northeast Alliance was announced in 2021, pilots objected, arguing that JetBlue struck a deal that could change pilots’ working conditions without the consent of the union. Without the new letter of agreement, the dispute would have gone to arbitration. Details were not released, but an ALPA representative said the deal “provides improvement to our current pay scale and sick-leave policies.”
- Is SAS‘ new CEO Anko Van der Werff cleaning house less than a year after taking the helm of the Scandinavian airline? On April 4, Chief Commercial Officer Karl Sandlund announced his departure for another opportunity with plans to leave no later than October. Sundland is the second C-suite executive to announce their departure from the airline in as many weeks after Chief Financial Officer Magnus Örnberg unveiled his departure on March 23.
— Madhu Unnikrishnan & Edward Russell
Jet Green
European airlines are mounting a unified front against the European Commission’s proposed climate legislation that aims to reduce carbon emissions by 55 percent from 1990 levels by the end of the decade.
“Airlines want to decarbonize. We have to decarbonize. But we need the means to do so,” Airlines for Europe (A4E) Managing Director Thomas Reynaert said at the trade group’s annual summit on March 31. He was joined by the CEOs of four of the the continent’s largest airline groups: EasyJet, International Airline Group (IAG), Lufthansa Group, and Ryanair.
Better known as “Fit for 55,” the legislation proposes to raise jet fuel taxes, tighten emissions trading rules, and increase sustainable aviation fuel — or SAF — blending requirements in order to reduce emissions. And while European airlines back efforts to reduce emissions and are committed to net zero emissions by 2050, they disagree with the means by which Fit for 55 would increase their costs without offering commensurate economic benefits.
“We all support the idea [of Fit for 55] and we all believe as Europeans that Europe, if it does it right, can serve as a role model, innovator for the world,” Lufthansa Group CEO Carsten Spohr said. But the reductions need to be done “while maintaining our competitiveness as the European aviation industry with other parts of the world.”
This is not the first time airline executives have objected to EU climate rules. The industry strongly objected to the EU’s inclusion of all flights to, from, and within the bloc in its aviation emissions trading program that was implemented in 2012. Foreign carriers were ultimately exempted from program in favor of a global approach under the auspices of the International Civil Aviation Organization (ICAO), which led to the development of Corsia program, which remains voluntary until 2027.
But the industry also has a point: Many of the investments needed in, for example SAF, cannot come from airlines alone. To scale SAF production to the point where it is a competitive with petroleum-based jet fuel will require billions of dollars of investment. Airline executives on both sides of the Atlantic Ocean say they cannot make this investment alone without government backing.
“With the right policy in place, 30 SAF plants could be built across Europe over the next eight years,” IAG CEO Luis Gallego said. By the industry’s estimate, with government support SAF could make up roughly 5 percent of global aviation fuel supplies by 2030, he added.
Across the Atlantic, U.S. airlines are also pushing for increased government support of SAF. United Airlines flew a Boeing 737 with one engine powered entirely by cooking oil-derived sustainable fuel to Washington, D.C., in December to garner support from lawmakers for the emerging sector. The U.S. is the global leader in SAF production with many global airlines, including Lufthansa and Qantas Airways, blending the fuels with traditional jet A at airports in California.
Implementing the EU’s stalled air traffic control modernization initiative, Single European Sky, is another way European leaders could meet climate goals and help the industry, the executives said. First proposed in 1999, the plan calls for removing national borders from air traffic control and make other reforms to improve the efficiency of air traffic management over Europe. Airlines estimate that, if fully implemented, a Single European Sky alone could reduce carbon emissions by 10-15 percent. However, the initiative has stalled amid national interests of individual member states.
“The air traffic management people, I believe … they don’t understand this change,” EU Transport Commissioner Adina Vălean said of Single European Sky. “And, maybe, the authorities aren’t courageous enough to make this push.”
Ryanair Group CEO Michael O’Leary put it more bluntly. “Single European Sky has failed … Let’s liberalize European air traffic management, and let [individual organizations] compete with each other.”
O’Leary cited the frequent strikes by French air traffic controllers, which manage the airspace between Ireland and the UK and many of popular beach spots on the Mediterranean, as an example of the broken system. These strikes delay flights and force length reroutings that, he said, increase carbon emissions in addition to other added costs.
Despite the calls for changes to the European Commission’s Fit for 55 proposals, European airlines are making other strides in reducing their emissions. Most are focused on renewing their fleets with more fuel efficient aircraft to meet short-term goals, for example Air France-KLM in December committed to up to 160 Airbus A320neo family aircraft to update the KLM and Transavia fleets. And others, including Finnair and Lufthansa, are introducing bus and rail alternatives to short domestic flights under the guise of reducing emissions.
The European Commission aims to enact the Fit for 55 legislation into law sometime this year.
Green Briefs
- Latam Airlines Group is giving a boost sustainable fuel producers in South America. The Chilean airline group plans to meet 5 percent of its fuel needs with SAF by 2030 with a preference for SAF produced on the continent. Despite Latam’s commitment, even CEO Roberto Alvo acknowledged in a statement that meeting its SAF supply targets will require government and private industry support.
Landing Strip
- At long last we know where Frontier Airlines will go at Denver airport. The hometown carrier has agreed to move to 14 ground-level boarding gates on the eastern end of Concourse A — gates that were built as a temporary capacity reliever in 2018 ahead of the airport’s current expansion program — by 2024. As part of the deal, Denver will add five additional gates to the ground-level facility for $183 million. The move comes as work is wrapping on extensions to all three of the airport’s concourses that will set off a series of moves by most airlines: Southwest Airlines will move into 16 new gates on Concourse C in May; American Airlines to C from Concourse A this fall; and United Airlines into new gates on A and Concourse B also this fall. And, for those wondering, Spirit Airlines, which Frontier is courting with a merger proposal, will move to A in early 2024.
- The Metropolitan Washington Airports Authority (MWAA) has officially kicked off plans for a new concourse at Washington Dulles for hub carrier United Airlines. First disclosed last year, the authority plans a $500-800 million, 14-gate facility built to the east of the existing Concourse C AeroTrain station that would replace existing ground-level Concourse A gates. MWAA is seeking $230 million for the facility from the Bipartisan Infrastructure Law that passed in 2021.
Routes and Networks
- Qantas Airways keeps expanding, following the late 2021 reopening of the Australian border. The airline will begin its first ever service to Bangalore with four-times weekly flights from Sydney on an Airbus A330 from September 14. Two months later, Qantas budget arm Jetstar Airways will launch thrice-weekly flights between Sydney and Seoul Incheon on November 2 that will then be complemented by additional flights on Qantas metal from December 10. In addition, Qantas and IndiGo have reached a tentative codeshare agreement that would allow travelers to connect between their respective flights in Bangalore and Delhi.
Elsewhere in the Jetstar network, Busselton, Western Australia — serving the popular Margaret River wine region — finally got long-awaited flights. The discounter began a thrice-weekly nonstop between the airport and Melbourne on April 6, a route that was delayed two years because of Covid. Jetstar is Busselton’s first scheduled airline since Virgin Australia ended flights to Perth in 2015, per Cirium. - Despite staffing challenges and high oil prices, Delta Air Lines is defending its position in New York with new nonstops to Kansas City and Milwaukee from JFK, per Cirium schedules. The carrier will offer daily service on the two routes from June 6, less than three months after JetBlue Airways as part of its Northeast Alliance with American Airlines debuted in both markets.
But it’s not all growth for Delta. The airline has pulled plans to resume daily nonstops between its Minneapolis-St. Paul hub and Albany, Rochester, and Syracuse in September, as well as continue its summer service to Providence through the fall and winter. Delta continues to serve the four airports from other hubs. - American is jumping on the bus, literally. The carrier is the latest to partner with Landline to offer new ground connections at its Philadelphia hub. Landline will connect the Philadelphia airport to Atlantic City, N.J. — a new destination for American — and Lehigh Valley in Allentown, Pa., from June 3. Buses will arrive and depart inside security at all three airports. The partnership is the third for Landline, which operates buses for Sun Country Airlines in Minneapolis-St. Paul and United Airlines in Denver.
Separately, American will connect Ocho Rios, Jamaica, with its Miami hub twice weekly with an Embraer 175 from November 5, per Cirium. The route is Ocho Rios’ first-ever nonstop to the U.S. - More additions are coming to Stockholm this summer. SAS will add three new routes from Arlanda: six-times weekly service to Warsaw from May 5, and seasonal summer nonstops to Pärnu, Estonia, from June 25, and Tivat, Montenegro, from June 28. And Croatia Airlines will return to Stockholm after a nearly three-year hiatus with new twice-weekly flights between Arlanda and Split from June 10.
- Icelandic startup Play is looking ahead to winter even as it prepares its summer schedule. The discounter will connect its Reykjavik hub to Liverpool from November through April 2023; and Geneva flights from February 1 and to March 23, 2023. Both routes will operate twice weekly. The additions come as Play is set to launch U.S. flights to Baltimore-Washington on April 20.
- Chilean discounter JetSmart is heading north. Peruvian authorities granted the Indigo Partners-owned airline a domestic air operators certificate on April 7. JetSmart aims to begin domestic flights by the end of June with initial service to Arequipa, Chiclayo, Cusco, Iquitos, Juliaca, Pucallpa, Puerto Maldonado, Piura, Tarapoto and Trujillo. Future international flights to Cancun, Mexico City, and San Jose, Costa Rica, are also planned. JetSmart already serves Arequipa, Lima, and Trujillo from its Santiago, Chile, base, per Cirium. American has a letter of intent with JetSmart for a new commercial partnership that includes a minority investment by the U.S. carrier.
Feature Story
JetBlue Airways surprised the airline industry when it unveiled a $3.6 billion proposal to acquire Spirit Airlines on April 5, potentially upsetting Frontier Airlines‘ planned merger with Spirit. But upset or not, Frontier stands to gain no matter what the outcome of which airline Spirit ends up with.
JetBlue is offering $33 per share in cash for Spirit, or a nearly 28 percent premium over Frontier’s offer with an implied value of $25.83 per share — $2.13 in cash plus 1.9126 Frontier shares — based on closing prices the day before it made its February 7 offer. Frontier’s offer is valued at $2.9 billion.
A JetBlue-Spirit combination would create a fifth-largest U.S. carrier 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.
“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, versus a 7 percent share for Frontier and Spirit, according to Transportation Department data via Cirium. It would operate 455 aircraft plus orders for another 312 planes 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.
But multiple analysts say the real winner of JetBlue’s surprise offer is Frontier. “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.
The general thesis is that either the Frontier-Spirit deal happens and Frontier gets the merger it wants, or JetBlue-Spirit happens and Frontier, as Syth noted, gains from being the only larger deep discount carrier in the U.S. market. A third option, that neither deal happens, is considered a possibility but an unlikely outcome by most Wall Street analysts.
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.
Spirit, for its part, is considering JetBlue’s unsolicited bid. “Our board intends to engage in discussions with JetBlue with respect to their proposal. However, this does not mean our board has determined that JetBlue’s proposal is, in fact, superior to the one we previously agreed to with Frontier,” Spirit CEO Ted Christie told staff on April 7.
JetBlue 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.
Whether the deal is approved remains an open question. JetBlue already is under regulatory scrutiny for its partnership with American, known as the “Northeast Alliance.” The U.S. Justice Department last year sued to block that partnership, arguing that it would reduce competition on the East Coast. Both American and JetBlue vowed to fight the suit, with then-American CEO Doug Parker saying bluntly: “We’ll win.”
“We recognize it will be a pretty lengthy regulatory process,” Hayes said. 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.
Congressional Democrats also have signaled they have little appetite for further consolidation. Senator Elizabeth Warren (D-Mass.) and Representative Mondaire Jones (D-N.Y.) in March introduced legislation to beef up the Justice Department’s antitrust oversight and to allow the federal government to unwind mergers deemed anticompetitive. The lawmakers singled out the proposed Spirit-Frontier deal as an example of concentration in one industry going too far.
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.
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.
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.”
And then, if a JetBlue-Spirit merger happens, there’s the actual integration, which has tripped up countless airlines in the past. As Alaska Airlines Chief Financial Officer Shane Tackett, who held key roles at the carrier during its integration of Virgin America, put it in March: “Mergers are not for — they’re tough. They’re not for the faint of heart.”