After Frontier Airlines made an offer to buy Spirit Airlines, which the Spirit board accepted, JetBlue came in with a substantially higher offer. The Spirit board rejected JetBlue’s offer, arguing essentially that the federal government would never allow it to close for anti-trust reasons.
Spirit’s rejection was a gift to JetBlue which was already offering to overpay for Spirit. The “winner’s curse” was in effect, Since the market knows what Spirit is worth, in order to ‘win’ JetBlue was having to overpay. And indeed, Spirit is worth less to JetBlue than it is to Frontier.
- JetBlue is trying to buy Spirit for parts (planes, pilots, gates and slots)
- While JetBlue intends to spend heavily to retrofit Spirit’s planes to look like JetBlue planes, and would wind up giving almost everyone a Spirit a raise up to JetBlue wages
- Frontier would actually continue the low cost model, which has been more profitable for both Frontier and Spirit than JetBlue’s business model has been for them
JetBlue was going to pay more for Spirit than Frontier, and get less out of it than Frontier would, shifting Spirit’s assets from a higher margin business to a lower margin one.
JetBlue went and doubled down with a new offer. Unfortunately for their shareholders JetBlue offered the same amount of money while extracting less value from the deal.
- Still $33 cash for Spirit, a substantial premium over Frontier’s offer
- An agreement to divest Spirit’s assets in New York and Boston (because of the American Airlines alliance) as well as gates at other airports including Fort Lauderdale to address likely anti-trust concerns.
- $200 million break-up fee if the deal ends due to anti-trust
JetBlue is saying they’ll go to great lengths to ensure the deal goes through, reducing the risk to Spirit of engaging in the transaction.
Minutes after the JetBlue announced this offer Spirit’s board took JetBlue off the hook from a dumb move that’s been roundly criticized since it was announced.
Here Spirit rejected a deal that was worse for JetBlue since while they’ll still be getting planes and pilots, they won’t be picking up the scarce airport assets that would allow them to grow in places that are most constrained. This deal is potentially more likely to be approved, but it’s worse for JetBlue shareholders.
And make no mistake, it would still have faced substantial federal government opposition. The American Airlines partnership and Fort Lauderdale aren’t the only anti-trust concerns that the Biden administration and Senate Democrats have.
- There’s been some pushback even on Spirit-Frontier, though it’s expected this will eventually be approved.
- But under that deal there will still be far more planes operating under an ultra low cost model than if JetBlue buys Spirit and shifts it away from low costs
- As a result, the common view is JetBlue’s acquisition of Spirit will mean less low fare competition, and as a result higher fares.
A fun side note, JetBlue didn’t scrub their press documents.
Along with the name of the @GoldmanSachs VP who created the document. Again, a reminder to rename your documents and scrub all metadata. pic.twitter.com/bxjSiqmjBl
— Ross Feinstein (@RossFeinstein) May 2, 2022
If I were the Spirit board I’d demand a bigger breakup fee from any JetBlue deal – rather than walking away from it.
Updated to correct timeline of JetBlue’s revised offer and Spirit’s rejection.
They have not INCREASED the offer. They have made the same offer and added protections but have in no way increased their purchase price.
Due to inflation, every time they make the offer they’re lowering it.
@SMR – the offer now includes a breakup fee (higher cost offer) and the offer gets less (higher cost for what they get)
I never thought all these guys would be trying to shove their last rose at this infamous bridezilla!
Let’s keep in mind that B6 got into a bidding war with Alaska for Virgin America and still lost. Not only can B6 not run the airline it has but it can’t successfully compete with other airlines for key aviation assets.
Note that Spirit’s board rightly noted that the antitrust risk of having the B6 merger blocked is much higher because B6 intends to completely gut and rebuild NK (a very costly process in itself) into a low cost carrier moving NK’s assets up from an ultra low cost carrier.
Whether one likes the ULCC model, it is a given that regulators will push back much harder against a significant reduction in size of the lowest tier segment of the industry from a pricing standpoint.
Strategically, B6′ merger was doomed to fail but they will be spending all summer focusing on two major initiatives – the NK merger attempt and defending the NEA – all while paying lip service to fixing its core business which is badly broken.
JB is going to have a HUGE problem with a mega ULCC like F9/NK will create. They will go through great lengths to stop this from happening.
Are there any dance partners left for JetBlue?
How much lower are the realized fares *including fees* for ULCC vs LCC (same cabin basis, and route adjusted for leisure vs biz mix)
Gary, your blog has been sometimes good, sometimes not, with your topic and positions. Your title for this particular topic, is rightfully funny and hits the mark. Bravo.
To help JetBlue go bankrupt faster, they should triple down on stupid and complete the acquisition of Spirit Airlines as soon as possible.
You can count on Goldman to give a client all the tools to self destruct as long as Goldman gets its fee
@RF,
Yes…Allegiant 😉
I pray this does not go through. I love Spirit, I fly them all the time. Some may hate on them but no doubt they have made flying possible for a lot of people who would not be able to afford it under legacy carriers like Jet Blue et al. Fares will go lower if the merge with Frontier goes through and higher otherwise, we’ve been through this movie before.
@RF, Alaska. But Spirit has a much better footprint in the middle of the country which JetBlue Lacks. Alaska has a Boeing fleet so Frontier and Jet Blue’s fleets match up much better with Spirit’s Airbus fleet. Allegiant is also mostly Airbus.
B6 is on the highway to chapter 11 and its so painfully obvious. Premium travelers are being stolen from them by Delta and United (who both have decent premium cabins and are making serious investments in reliability) while leisure travelers are taking advantage of WN and ULCCs who offer a more reliable product at a better price point. I foresee an American merger in their future.
As a Spirit (SAVE) shareholder, I’m frustrated that that the board isn’t just taking the cash and running.
@DaninMCI You are incorrect. Frontier is all Airbus along with Spirit/Jetblue. Alaska is the carrier that is mostly Boeing and the small precentage being Airbuses.
Concorde,
not only would the DOJ get a chance to finally shoot down the level of cooperation that exists between AA and B6 if they tried to merge, but if they actually succeeded – w/ a bunch of divestitures – most of the routes wouldn’t work. AA has a higher cost structure than B6 so system costs would move toward AA’s level making many of the routes B6 flies no longer viable. The whole reason why AA sought B6 to fill in the holes in AA’s route network is because AA cannot viable fill them.
The reality is that B6 will increasingly be marginalized between a much stronger ULCC (Frontier/Spirit) and the big 4 (AA, DL, UA and WN)
I love how a miles and points guy is now an airline business expert.
JetBlue is not some static brick wall. They can take these assets and adapt the business as needed. You have no idea what thier plans may be.
The ULCCs are struggling harder the B6 to keep employees. If that continues to be a major issue going forward then your “giving everyone at Spirit a raise!!!” may be just what’s needed.
I suggest you look at the National. Texas Air, Eastern and Pan Am purchase, bidding war, merger. Pan Am paid $60 a share for $35 value, which had been trading for about $18 at the time. Yes, JetBlue maybe could/can use Virgin/Spirit, but the name of the game was/is to make sure the other guy really pays for it and doesn’t get it for cheap.