Spirit Airlines SAVE.N would start talks with JetBlue Airways Corp JBLU.O on its $3.6-billion offer, the budget carrier said late on Thursday 7 April as it could likely lead to a "superior proposal" to the one from Frontier Group Holdings ULCC.O.
Details
JetBlue made an unsolicited offer of $33 per share in cash earlier this week, beating a near $25 per share cash-and-stock bid from Frontier made in February ULCC.O.
"We look forward to engaging with the Spirit Board to finalize our combination, to create a national low-fare challenger to the four large dominant US carriers that will result in lower fares and better service for customers," JetBlue chief executive Robin Hayes said.
Frontier did not immediately respond to a request for comment. Spirit said the discussions with JetBlue would be in keeping with the terms of its merger agreement with Frontier.
Denver-based Frontier and JetBlue are in a tug of war for Florida-based Spirit to capture a larger share of the leisure market and better compete with legacy carriers.
The moves towards consolidation come at a time when the pandemic battered airlines industry is working through higher fuel and labor costs to keep up the demand from travelers.
Either deal is sure to invite a close scrutiny from US antitrust authorities, who have taken an aggressive stance under the Biden administration toward deals that reduce competition and raise prices.
JetBlue is already facing an antitrust lawsuit over its partnership with American Airlines Group Inc AAL.O. The suit filed in September alleges the deal would lead to higher fares in busy northeastern US airports.
Shares of Spirit have lost 1.5% since JetBlue made its bid on 5 April, while those of JetBlue have dropped 11.4%.
ANALYSIS-JetBlue Faces Struggle In Selling Spirit Takeover Bid To Investors
The above news followed news that Robin Hayes, the ebullient chief executive of JetBlue Airways Corp JBLU.O, was on an Amtrak train on Tuesday 5 April coming back from Boston when news broke that his company had made an offer to acquire Spirit Airlines Inc SAVE.N.
Hayes said the company was not yet ready to go public with its offer for the ultra-low-cost carrier, but the news leak forced its hand. On a conference call the next morning, the reasons were apparent as JetBlue struggled to convince investors of the rationale behind its unsolicited $3.6 billion bid.
The surprise move by the New York-based carrier has baffled Wall Street because it seeks to combine two companies with very little in common other than fleets dominated by Airbus SE AIR.PA jets. As a result, the deal is expected to be very expensive for JetBlue, which raises questions about any assumed synergies.
JetBlue did not immediately respond to a request for comment.
The company's stock has fallen about 19% since the news broke. JetBlue shares were down 4.2% at $11.92 on Thursday 7 April afternoon.
A main concern of investors is the starkly different business models of the two carriers.
Spirit is a no-frills carrier that relies on fares stripped down to the lowest possible level, supplemented by charges for extras such as booking through a call center, a strategy known as unbundling.
The success of its business model is driven by a low cost structure that has allowed it to offer low base fares and maintain high profit margins.
In contrast, JetBlue is a premium leisure airline. Its offerings include free checked bags, an assortment of complementary food and private suites.
Hayes is promising lower fares following the deal's completion. Delivering on that promise, however, would be a tall order, analysts say.
JetBlue's costs and fares are already higher than those at Spirit and other ultra-low-cost carriers. Since the company would have to raise salaries of Spirit pilots to bring them in line with its pay structure, the cost pressure is expected to worsen.
Savanthi Syth, airline analyst at Raymond James, estimates wages for Spirit pilots would need to increase in the range of 7% to 51% to reach parity with JetBlue's current rates.
The company also plans to retrofit Spirit's fleet in order to provide more leg room and a "superior" onboard experience to customers, which it said would be a multiyear investment. Industry experts say the move would leave the airline with fewer seats to fill with passengers, resulting in lower productivity.
Equally daunting will be the task of integrating the culture of two airlines that have been following different service models. JetBlue told investors that cultural integration would be critical to the deal's success.
Aviation analyst Robert Mann reckons JetBlue's offer was "rushed to market." "Everybody is kind of somewhere between pulling their hair out and just dismissing it," he said.
"A Window Of Opportunity"
JetBlue, however, views the deal as a way to expand its domestic footprint amid persistent labor and aircraft shortages. It tried to buy Virgin America in 2016, but lost out to Alaska Air Group Inc ALK.N.
Hayes said the company had been thinking about how to pursue growth for a long time. And once budget carrier Frontier Group Holdings Inc ULCC.O announced a deal in early February to merge with Spirit, he said it created "a window of opportunity that if you don't act in it, it's gone."
The company is betting a combination with Spirit would accelerate its growth in Florida and Los Angeles and open up opportunities in Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami.
Following the deal, the two carriers will have a combined fleet of 455 aircraft, with deliveries of another 220 jets from Airbus expected by 2027. It offers greater flexibility at a time when airlines cannot get new aircraft delivered fast enough.
Henry Harteveldt, founder of travel consultancy Atmosphere Research Group, said growing in size would also allow JetBlue to attract pilots by offering them better careers.
"Clearly, the airline wants to be more than just a domestic airline," Harteveldt said. "So a combined JetBlue and Spirit would be appealing to pilots who want to work for a growing airline in the future."
Execution Risk
Despite these potential long-term benefits, industry experts say the deal is fraught with execution risks.
Veteran budget airline investor Bill Franke, who masterminded Frontier's tie-up with Spirit, once said that failing to remain disciplined about the business model and allowing other costs to creep in was the "path to hell" for airlines.
Franke stuck to that formula in the deal with Spirit. The two carriers not only have no-frills business models but also have highly complementary networks and both use Airbus jets.
In comparison, JetBlue and Spirit have a high degree of concentration in South Florida, which is expected to draw scrutiny from regulators.
Analysts at UBS said while the merits of a Frontier-Spirit combination were more straightforward, JetBlue's bid was a "head-scratcher."
The prospect of a tie-up between ultra-low cost and hybrid business models is reminiscent of Wizz Air Holdings Plc's WIZZ.L unsuccessful overtures toward Britain's Easyjet Plc EZJ.L last year, which the latter rejected.
Wizz is also part of Franke's investment stable, though his support for a move that seemingly breaks his own investment rule was unclear. Analysts at the time questioned the mixing of airline types, in what proved to be a precursor of the present debate over JetBlue's strategy.
"It's kind of half-baked, honestly," said analyst Mann, referring to JetBlue's bid.
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