Instead Of Buying Spirit Airlines, JetBlue Should Exit The Airline Business

The best argument I’ve heard for JetBlue to acquire Spirit Airlines is that they simply had no choice. They don’t have options for organic growth, and at best they’ll stagnate and could face serious decline. For instance,

I do not think this argument is correct.

  • JetBlue is taking valuable assets and shifting them from a more profitable strategy to a less profitable one (Spirit has had higher margins than JetBlue operating as an ultra-low cost carrier)

  • They are taking on cost – JetBlue employees are in many cases paid more than Spirit employees, and those Spirit employees will be getting a raise; JetBlue will be taking on the expense of converting Spirit planes to JetBlue interiors.

  • The merger cost isn’t just the amount paid to Spirit shareholders, it is years of IT and labor relations costs and distraction to integrate another airline. And this is an airline that has already had challenges focusing on running a reliable operation for their current planes and schedules.

  • This could cost JetBlue their American Airlines partnership, since the federal government opposes that already and they face anti-trust scrutiny for this deal.

In other words this costs more than the almost $4 billion they’re spending on Spirit. They’ll have ongoing costs, and now they can’t take that $4 billion and do something else with it.

Let’s look at the different arguments for the merger in turn, and then address what JetBlue should actually do if the thesis holds that they had ‘no other options’ besides overpaying for Spirit.

Acquiring Spirit Gives JetBlue More Pilots

The pilot shortage is real and this deal gives JetBlue more pilots, but that only means more flexibility if they exit Spirit routes. Remember that Spirit has had better operating margins than JetBlue has, so they’d be taking pilots off of more profitable flying to deploy those pilots to less profitable flying. They can do so, but that’s not an argument for the deal exactly.

Airlines can’t just go hire new pilots at higher pay. The union contract specifies what the airline can pay. New pilots have to go to the bottom of the seniority list. Government regulation keeps the supply of pilots limited (1500 hour rule, mandatory retirement), but unions keep pilots locked into their jobs and they can’t seek a higher wage on the market. Unions are often good for senior employees at the expense of more junior employees rather that at the expense of the company (although work rules can be bad for the company, too.)

In the longer run there are solutions to the pilot shortage. In the short run they’re getting more pilots who are already doing something that’s more valuable than what JetBlue will do (Spirit business model) and they’re paying far more than what they were doing is worth (since the deal costs about two-thirds more than Spirit’s market cap before the Frontier merger agreement was announced). Surely $3 billion can solve the pilot shortage more creatively than this.

JetBlue Gains Access to Slots And Gates At Congested Airports

It’s tough to expand in airports that are full, either because they’re slot controlled (or schedule-facilitated) or because of lack of available gates. However JetBlue has already stipulated they’re willing to give up Spirit’s assets in New York and Boston to gain anti-trust approval for the deal. Access to a modest amount of Chicago O’Hare flying, for instance, isn’t going to get them very much here.

And Spirit uses its assets already, again more productively than JetBlue, so it’s not clear how the value of the merged airlines becomes worth more rather than the same or less in order to justify the big price premium relative to Spirit’s market value before merger agreements were announced.

Spirit’s slots and gates weren’t worth two-thirds more than the value Spirit was extracting and JetBlue, with higher costs, will likely extract even less value. Plus they’re going to shed some of the most valuable slots and gates they’d be acquiring.

JetBlue Is Going To Get More Planes

It’s not really clear that the binding constraint on JetBlue’s growth is aircraft, which are available on the market (including the used market) without buying an entire airline. It’s also not clear that Spirit’s leased fleet solves the specific expansion needs JetBlue faces. While both airlines operate Airbus narrowbodies with Pratt & Whitney engines (fleet commonality), JetBlue may need more longer range aircraft to reach thus-far underexploited destinations.

Here’s What JetBlue Should Do Instead

JetBlue doesn’t fly to Hawaii. They’re not strong on the West Coast. They’ve just launched their first transatlantic destination. There are markets to expand to. The question is whether those are profitable markets, but that’s the same question as whether Spirit Airlines assets will be deployed profitably and indeed whether JetBlue can earn an acceptably high rate of return on their investment.

When Alaska Airlines acquired Virgin America they were supposedly doing it for slots and gates at congested airports. They’ve turned out to make little progress exploiting those. But at least Alaska had the argument that in acquiring Virgin America’s San Francisco hub and presence in major business markets they were acquiring customers for their co-brand credit card which is profitable. JetBlue doesn’t have the same degree of opportunity with Spirit.

If it’s true that JetBlue really faces the choice of grow or die, and this is the only way to grow, then they should be thinking about other ways to deploy their capital. There is nothing written in stone requiring JetBlue to grow in the airline business, or even to maintain their current airline operation. As a company JetBlue should find the most profitable ways to deploy its assets.

JetBlue should consider pivoting away from the airline business if they can’t earn a good rate of return in the airline business. Surely they’d even do better for shareholders by giving the cash used in the Spirit deal to Jack Bogle.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. This is at least the second post that you’ve mentioned that JetBlue pays better. So three things come to mind.

    One: you seem to have a bit of a fetish with this issue.

    Two: the pay is not nearly as different as you seem to think. Pilot and FA contracts are very complex. Every one has its own unique clauses that the employee can use to maximize their pay.

    Three: I wonder if it was NK buying B6, would you then post…This is great! Now they can pay all these B6 employees less!

    Honestly though, none of your post matters. It’s just click bait.

  2. Obviously you don’t understand business. I for one do and fly on all the carriers. Thank God JB is buying spirit instead of the other way around. 100% click bait post

  3. This is the most ridiculous article I’ve read in my entire life, and that’s saying a lot.

  4. Actually this is more like a 3rd grader didn’t meet the word count for an essay and just spewed out nonsense for paragraphs and paragraphs.

  5. Jet Blue is controlled by Evil Investor, George Soros.
    Don’t believe me? Google it.
    Do YOU want to give your money to that America-hating bastard??

  6. The writer of this article has penis envy of Jet Blue. Typical liberal loser. Please go fly another airline.

  7. What a terrible piece of writing. Were you proud of it as you proofread this garbage? You probably just smiled and thought you were click bait clever.

  8. @AirlineExpert is clearly not an airline expert, or expert in even making an argument – there is literally no argument in your comment, or specific thing you think I’ve written that’s incorrect.

    I’ve made an argument, but I’ll put it in even more simple terms: if you had $4 billion to invest, would you invest it in buying an airline? Or are there better places to invest $4 billion? JetBlue, especially, should be putting the capital to work somewhere else.

  9. @Charles – why on earth would I envy JetBlue? Flew them earlier in the month, one of the remaining planes that hasn’t been updated, still has TV control buttons on the arm rest. It’s funny you call me a ‘liberal loser’ and some other commenters complain I offer a ‘view from the (right) wing’ I am so confused.

  10. Great article. I fly Spirit regularly and i don’t get who benefits from this. The public ? I have flown Spirit for as low as $34 roundtrip NYC to Florida. Brand new Airbus, got my weekend bag and i get there. jetBlue charges 5x that. How is that gonna lower prices for the general public ? I hope the Govt stops this madness.

  11. Companies have to continually invest back into themselves. You can’t just take $4B and run, that’s idiotic. You have to invest in the core business.

    The issue with Spirit/JetBlue/Frontier right now, is attrition! They can’t grow or execute any future plans, let alone staff their current flying, because their attrition rate is so high. They are all stuck in this 100-200 fleet size, to small to be viewed as a career job by many, but a stepping stone. To small to offer competitive earnings, wages, compared to who else is hiring (DAL, UA, AA, SWA, UPS, FedEx). The aquisition of Spirit is about fleet commonality, new generation aircraft (NEO), but most importantly, new blood. They need the boost in people, this boost will set themselves apart from the others in the middle market, increase revenue with growth and a result offer competitive earnings/wages, to attract and retain talent, not stagnant and die.

    Currently, legacies are hiring everyone, not just pilots, they are poaching everyone on the airport, to keep their flying staffed, with bonuses and better wages.

    As a common stock holder, I voted no to the Frontier/NK deal. Had the deal been reversed and Spirit was aquiring Frontier, I would have approved the vote. I don’t trust Indigo and Frontier to manage the assets of Spirit, with that said, current Spirit management has been extremely disappointing this past year, with business decisions. I attributed that to Frontier/Indigo Management pulling strings in the background leading up to the merger.

  12. Speaking as a 20+ year commercial airline pilot with BS in Aviation Management. IMO from a business perspective JetBlue is stagnant and going nowhere.

    CEO Robin Hayes’s description of a “customer centric, fifth largest airline” will continue to lose money. JetBlue is trying to find its way in a defunct lane between legacy an ULCC. They will continue to be squeezed (crushed) from the top and bottom of the market. This “customer centric airline” model leaves only a modest opportunity for profit.

    Hayes was smart to stop Frontier/Spirit merger, but to overpay for Spirit may not have been so smart. Jetblue will be over leveraged for years to come. Consumers discretionary money is on the decline and we could see JetBlue in a lot trouble.

    This JetBlue/Spirit deal leaves Frontier Airlines with no competition. Frontier will triple in size in the next ten years, sucking up the passengers that Spirit has left behind.

    The new combined JetBlue/Spirit airline should abandon the “customer centric” business model and pick a side. Their only option now is ULCC unless they convince Alaska to join to compete in the legacy lane.”

  13. What a poorly thought out clickbait article. Of course

    JetBlue would invest $4B into accelerating growth – both Boeing and Airbus are years behind aircraft deliveries ordered today, save goes for trained pilots at every airline.

    “I’d like to pay $50 plus get nickel and dimed to ultimately pay almost a JetBlue ticket for a worse customer experience” said no customer ever.

    This merger is a win-win for consumers and JetBlue+Spirit. Gary Leff thinks he’s smarter than all the investors who ditched the Frontier deal or economists/board working at JetBlue.

    Delete your damn “fake news” website before people think you’re an expert. Pretty obvious you’re getting paid by Frontier or other vested interests from this biased article.

  14. You flying on one JetBlue flight behind on cabin refitting is a sample size of 1 – PointsGuy and SimpleFlying should tear your logic apart. Also pretty obvious you don’t understand statistics or fly other airlines frequently. Legacy carriers charge 25-30% more from hub airports while losing your bags & treating you like cattle class.

    FYI JetBlue is top of the list amongst top airlines in the the world almost at Delta-level. Do a well-rounded unbiased article.
    https://www.worldairlineawards.com/worlds-top-100-airlines-2021/

  15. You flying on one JetBlue flight behind on cabin refitting is a sample size of 1 – PointsGuy and SimpleFlying should tear your logic apart. Also pretty obvious you don’t understand statistics or fly other airlines frequently. Legacy carriers charge 25-30% more from hub airports while losing your bags & treating you like cattle class.

    FYI JetBlue is top of the list amongst top airlines in the the world almost at Delta-level. Do a well-rounded unbiased article.
    https://www.worldairlineawards.com/worlds-top-100-airlines-2021/

  16. @W – “PointsGuy and SimpleFlying should tear your logic apart.”

    That’s actually funny

    “pretty obvious you don’t understand statistics or fly other airlines frequently.”

    Yeah, ok.

    “JetBlue is top of the list amongst top airlines in the the world”

    Tell that to the DOT Bureau of Transportation Statistics

  17. @GaryLeff “ JetBlue should consider pivoting away from the airline business if they can’t earn a good rate of return in the airline business. Surely they’d even do better for shareholders by giving the cash used in the Spirit deal to Jack Bogle.”

    Your conclusion of this, might I say it again, I think I will; garbage, is indeed terrible writing. You clearly don’t understand business. Why don’t you give Jack Bogle your $100 and maybe he can turn it into $108. Oh wait no he can’t. He’s deceased. JetBlue obviously only has intrest running and growing an AIRLINE. But your genius move is to give a BORROWED $4bil for which they will be paying (lots of) interest, to be invested somewhere else not relating to the expansion of the airline, to an investor?!

    Yeah….ok. Brilliant!

    Now you sound like an expert. Ha!

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