The federal government is preparing to sue to block JetBlue’s acquisition of Spirit Airlines. They’re paying a 40% premium over what Frontier Airlines was offering. And they even have to pay a lot of the money if the deal doesn’t close.
JetBlue is ramping up the P.R. side of the fight, releasing a video that tells their story about how growing their airline is good for consumers.
In truth, allowing the nation’s number 5 and 6 carriers by departures (according to data from Cirium’s Diio Mi) to merge would yield the nation’s… number 5 carrier.
Consumers flying ex-Spirit aircraft will enjoy a better inflight experience, with more legroom and TVs. While JetBlue’s fares and costs aren’t as low as Spirit’s. There will be winners and losers, but it won’t move the needle on competition. There’s no reason to stop this deal, other than to protect JetBlue shareholders from themselves (they’re massively overpaying). But that ship has largely already sailed.
JetBlue Portrays Itself As A Disrupter
They begin the video talking about their founding, offering a better product at low fares. They were a scrappy startup, their TVs were cool at the start, and they were the first to offer free internet.
They don’t tell you that they offer less legroom than they used to, and that they have basic economy fares now. And that they’re a less operationally reliable airline than their competitors, too.
JetBlue claims that they bring down fares, and give entry into the London Heathrow market as an example – their entry coincided with a return of travel during the pandemic, and they note walkup fares are down 50%. But JetBlue doesn’t have the schedule frequency to be the cause of that (at best, competitors would adjust fares to match on flights at comparable times). Instead, walkup fares are down because the composition of travel has changed and the corporate market which drives this route hasn’t fully returned.
What JetBlue doesn’t explain is how they’re a disrupter and Spirit isn’t. Because you’re replacing Spirit’s product and business model with JetBlue’s.
They talk about being more geographically dispersed helping them recover operationally (presumably, when weather is focused on a single region) but of course that also spreads delays across the country too. And it’s not what this merger is about. JetBlue themselves say it’s about planes, people (really, pilots) and access to facilities in congested markets in the video. That’s mostly in the Northeast.
JetBlue Is On The Hook For A Lot Of Money Even If They Don’t Get To Buy Spirit
There are (3) ways this deal gets more expensive as anti-trust delays closing the deal, or if the deal gets stopped completely.
- JetBlue already paid $2.50 per share when the deal was approved. That money is non-refundable.
- JetBlue owes more money each month so even delay as a result of anti-trust review is costly. The longer the deal takes to close, the more Spirit shareholders get. Spirit shareholders would receive an additional 10 cents per month starting from January 2023 through date of closing or deal termination, though the first $1.15 counts against the breakup fee.
- $470 million breakup fee if the deal falls apart over anti-trust. JetBlue has to write a big check for losing! Spirit shareholders can pocket $400 million of that money, the company gets $70 million, and shareholders still own the company and can re-sell it.
The Spirit Acquisition Is Bad Business For JetBlue
Spirit has had higher operating margins and lower costs than JetBlue. They’ve been the better business. JetBlue is buying them and dismantling their business.
JetBlue is going to be removing seats from planes, they won’t charge as many fees, and they’ll impose higher costs (their own and merger-related costs) on the business. In other words they’re going to take the more successful business and make it less successful. And they’re paying a 40% premium over what the next-highest bidder was willing to pay in order to do that.
And JetBlue has already committed to sell Spirit’s most valuable assets, slots in New York and gates in New York and Boston, in order to appease regulators. So they’re not even going to get to use those!
JetBlue would have been far better off – and served their shareholders far better – taking the nearly $4 billion in cash they’re spending to buy Spirit Airlines and simply investing it… give the money to the ghost of Jack Bogle, scoop of treasuries, it almost doesn’t matter as long as they’re not following Jim Cramer’s stock picks.
The merger costs, the fleet reconfiguration costs, the IT .. will all be on top of the $4 billion they’re spending to buy and dismantle Spirit’s business, shifting it from a high to a lower margin one. JetBlue is left with more planes and more pilots, both valuable assets, but they’re overpaying substantially for them.
Who Wins Most From A DOJ Lawsuit
If JetBlue settles with DOJ, the real winner is Frontier Airlines. Any deal will involve divesting slots and gates at congested airports and likely a requirement that those go to a low cost carrier… like Frontier (the only real one left!) which would be able to pick up premium Spirit assets without the merger expense. In other words, Frontier could get the benefit of the merger they’d originally proposed without having to actually do the deal.
Ultimately with Spirit as a standalone company there are more planes flying under a low cost business model than if Spirit is acquired by JetBlue. That means more lowest-fare competition for United, American and Delta. And the biggest beneficiaries of that are United’s, American’s, and Delta’s passengers – who pay less, without having to fly Spirit.
However it’s not at all clear that there’s anything problematic from a traditional anti-trust standpoint in smaller airlines like JetBlue and Spirit merging and becoming larger to potentially inveigh against the larger players in the industry of which there will still be several. DOJ’s suit is a stretch of traditional notions of anti-trust.
And the government isn’t interested in competition in congested markets, or else they wouldn’t protect incumbent players from competition with slot controls. They’d do more to expand air traffic capacity. Problems of competition aren’t a function of whether JetBlue and Spirit merge. They’re a matter of whether or not the government allows airports and airspace to expand.
Bah. How can JetBlue challenge the big four airlines when they are shAAcked up with American.
This whole deal makes zero sense. I was against the deal with Frontier, and I’m against the deal with Jetblue. No more mergers. They don’t serve the customer well. Its too bad for the Jetblue shareholders that Jetblue is going to lose in some manner on this, even if the merger goes through. But they need to take that up with the board, not the DOJ. Jetblue is paying way too much for Spirit. The DOJ needs to pretty much challenge any merger these days when it comes to airlines. The big three are big enouph, and the ULCC’s can grow on their own using their business plan. Jet blue is doing just fine without the merger. They just simply need to grow smart and slowly. Mergers take a long time to pay off, and they never really gain what they sell it as. Especially in this case. It would make more sense for JetBlue to adopt Spirits business plan than for them to dismantle Spirits business plan.
good article, Gary, and I largely agree with your conclusions.
I disagree with you regarding:
1. that Spirit was not a disruptor. They basically defined the ULCC model in the US and do a better job of executing on it than either of the other ULCCs.
2. that the B6/NK merger should go through because B6 will still be #5 among US airlines. The DOT looks at market concentration at the city/airport level and that is why there were problems for B6 as soon as they announced the merger while still holding onto the NEA. B6 is still the largest airline at BOS even though DL generates more revenue and AA plus B6 surpass DL at both JFK and LGA based on flights and that matters because of the NEA which is a joint venture affording opportunities between 2 domestic airlines that no other US airlines have.
The best thing that B6 can do is at least get rid of the JV portions of the NEA – the revenue sharing, schedule coordination, and ability to swap NYC slots. As long as B6 holds onto the NEA while pursuing the merger, there will be objections.
And the current administration including their DOJ think all big business is bad and getting larger makes them worse. There is no combination of any 2 US airlines that doesn’t impact consumers so the DOJ and Bernie and Pocahontas all have some legitimacy to their cries that the consumer will hurt from any consolidation. Taking out a lower cost competitor is anti-consumer by definition no matter how much B6 wants to spin it.
And you are absolutely right that B6 runs a poor operation and undoes everything they offer in terms of onboard product to target business travelers that are simply not willing to take a much higher risk of travel disruptions compared to competitors.
B6 does recognize that they need to diversify their network to gain more nationwide relevance including with their expansion to Europe. Whether they gain a financial advantage from European flying as well as balancing the cost of the merger vs. a very leisure oriented base for both B6 and NK remains to be seen – but that is B6′ board to figure out.
again, thanks for the changes to your blog that make it less focused on the sensational and more focused on industry issues – of which this is one. Getting rid of the political (and other) trolls is a vast improvement.
The only think JetBlue is disrupting in 2023 is your travel plans. A scrappy insurgent B6 may have been at launch a quarter-century ago, but now it’s a protection-minded incumbent trying to knock an LCC out of the game by merging it away.
Frontier + Spirit might have been genuinely disruptive; the result could have been a robust US coast-to-coast version of Ryanair. This deal holds no such potential; all it will do is make a poorly run, statistically unreliable airline even bigger and harder to manage. The only way it makes sense is if you want to reduce competition and consolidate industry pricing power in even fewer hands.
The notion that JetBlue’s management could integrate Spirit’s assets into a uniform B6 operation is hilarious; JetBlue as it is today is already in near-meltdown as SOP. The process would make Continental-United look smooth and cheerful.
This is just a mediocre, struggling airline aiming for scale as a would-be antidote to its many problems — and going about it in all the wrong ways.
Spirit’s route network does nothing to address the gaping holes in the JetBlue network that they’ve created out west post-Covid. JetBlue already has a significant Fort Lauderdale hub, which is Spirit’s base, so this seems more like killing the competition than covering more ground like Frontier/Spirit would’ve been. I hope regulators apply a lot of scrutiny to this
I would love to see the internal ROI for this deal that JetBlue management used to convince their board.
One can make this mess of a merger seem like a bad idea from any number of viewpoints. In our country the more competition is to the peoples benefit. The ones that actually need to fly Ultra Low Cost. This merger will be difficult costly. Do you want one Goliath Frontier Airlines? They will quickly take Spirits clientele and become the one that sets the cost of a ticket.
JetBlue can choose, it’s actually going to have to choose, between the NEA OR Spirit. One thing though is actually very clear though: it can’t have both. Period. The DOT is going to try and smooth talk them into choosing sooner rather than later, but in the end, JetBlue knows what’s up. They know what’s at stake and they’ve made it very clear to them. It’s time to fess up and choose. Quit playing games you guys.
Anyone who is against this acquisition and is supposedly against consolidation is really saying the following: I want the big 4 to be cemented in as the nations only truly national airlines. I want them to have fortress hubs and dominating networks that leave no room for any more competition. I want the big four to be too big too fail and ensure that if they do have any real financial issues, then the government can step in to save them. I want the remaining 6 or so to simply be irrelevant and fight over the scraps.
I fly a lot. I often see Delta flights sold out or selling just a few last seats for a high price on a same route and same times as a JetBlue flight with 20 open for a lower price. How? Because the big 4 have their network strength. And their loyalty program strength, and their credit card program strength, and their extra personal strength, and on and on. There are simply not enough physical resources left to grow into. That’s runways, gates, slots, people, planes, etc.
“Mergers never work!” people here shout. Well it worked for American/UsAir. It worked for Delta/Northwest. It worked for United/Continental. It worked for Southwest/Airtran. It worked for Alaska/Virgin. But no. You’re right. JetBlue and Spirit, no way.
When two dumpsters on fire collide, the result is a bigger fire and two wrecked dumpsters. NK has always been a disaster and could possibly be charged with crimes against humanity. B6 is a symbol of the arrogance of Noo Yawk, the city where everyone living in it seems to be ignorant of the knowledge that everyone outside of it hates the city and them. JFK is a latrine pit except for the TWA Hotel.
As you can tell, I want this merger to take place. I want NK to die like any purveyor of plague and misery. I definitely want B6 to die, because I want Noo Yawk to feel the kick in the genitals of losing their Hometown Airline and having its overblown reputation exposed for what it is, mendaciousness and a triumph of gaslighting an entire nation.
Bring it on.
When jet blue was a new airline it offered something special
Their program has always sucked and IMO they have had high ticket prices and then all the add on fees
I can not see how this would benefit any consumer accept raise fares
Prob not politically correct however
Spirit at least attracts a fair deal of folks I don’t want on my plane so I hope they survive
@Tim Dunn – “I disagree with you regarding:
1. that Spirit was not a disruptor. ”
You misread the post. My point is that JetBlue says they’re a disruptor, but their argument really needs to be that the combination of the two airlines is more of a disruptor than standalone. Spirit is already a disruptor, why do we need JetBlue for disruption?
“The DOT looks at market concentration at the city/airport level and that is why there were problems for B6 as soon as they announced the merger while still holding onto the NEA. ”
I believe the DOT approach to market concentration is flawed, and that the disgorgement that B6 has already committed to addresses the real competitive issues.
Wall Street analysts pressured a lot of the specialness out of the (initially fresh and interesting) JetBlue value proposition. Wall Street made them start charging for checked bags, for example. Other innovations like free seatback TV were matched by the competition over time. The service component seems to have actually deteriorated over time; I’ve had a couple of terrible inflight personnel experiences, and the hub airports on busy evenings seem to be run like high school bake sales. London excepted, there’s not that much to the JetBlue Difference anymore, and it’s often more expensive and more apt to operate late.
Consumers will suffer. Hope the DOJ stops this!
I was about to write that Tim Dunn made an interesting/relevant comment. Until the inane reference to Warren.
And he goes on to say “Getting rid of the political (and other) trolls is a vast improvement” after being a troll earlier in the post.
Gary,
this sentence
” What JetBlue doesn’t explain is how they’re a disrupter and Spirit isn’t.”
doesn’t sound like an acknowledgement that both B6 and NK were disruptors in their own way.
But I’ll take your reply here that you recognize that they are.
As for market concentration, telling us what you don’t like about the DOJ’s process doesn’t mean that they will change anything because you don’t like it.
GPG and I don’t agree about alot but he is right that B6 will have to pick which one of its two strategies it wants to protect -the NEA or the NK merger – but they won’t get both.
Neither are slam dunks even on their own but the combination of both – which does involve a very high degree of concentration in NYC, BOS and FLL because of both initiatives – make it certain that the merger won’t move forward w/ the NEA still intact.
Tom,
Wall Street pressured B6 to charge more because their margins have been falling for more than 5 years. Their focus on leisure oriented passengers means they should be charging for stuff that leisure passengers got for free but B6 was including in the process – that is what basic economy is about and B6 did the same thing other carriers except for LUV have been doing.
@Tim Dunn – I don’t expect DOJ to change, in fact the opposite, as I’ve written they’re pursuing anti-trust in a way that upends traditional law in the area that focuses on consumer benefit. To them mere concentration is enough! I’m not the only one that finds this highly problematic.
…that is precisely why the federal court system does play a role in the checks and balances of any administration including the application of antitrust law.
The DOJ has lost several high profile antitrust cases and JBLU clearly hopes they can keep going with both initiatives, hoping the courts will stave off the Biden administration.
It is very possible if not likely that a court could side with JBLU in part on one of its two initiatives but it is hard to believe that the combination of the two can survive a court challenge.
As long as JBLU sees the possibility of a favorable ruling, they will keep going.
Without this merger jetblue will have to shrink with its age fleet and pilots. It’s still cheaper to pay spirit shareholders 4 billion than it is to order 200 new airplanes and with the spirit deal, pilots come included.
I fly Spirit regularly. Many times Ive flown for $50 roundtrip between Miami and NYC. Will JetBlue offer that fare ? No chance, therefore prices will be HIGHER after the merger. Spirit fares allow a lot of students and low.income people to go and travel when they couldn’t do so before.. I hope the DOJ is successful blocking this nightmare deal.
Resigns from position of President & CEO of Spirit in 2016, joins JetBlue Board of Directors in 2018, JetBlue has huge interest in buying his old stomping grounds…hello Mr. Ben Baldanza.
Good lord. Some of your comments are absolutely ridiculous. New York is New York, O’Hare doesn’t have a stick big enough to hit it with. Typically mergers are not good and this one doesn’t make any sense. However, I will agree that some of these airline marriages actually worked out for the best for all of us. There was a time when many of our airlines were financially sick, so I’m not so sure that a bunch of competition is actually beneficial either. Seems like there’s a sweet spot.
Gary is anti-JetBlue PERIOD. Absolutely a bias article with few facts and little understanding of the big picture. He has said many times he thinks jetblue should cease to exist. Not really a good source of information. The merger will go through and JetBlue will have its challenges but it is true they can compete much better than NK against the big 4
@SMR “he thinks jetblue should cease to exist” not true, I said a business should maximize shareholder return and overpaying for an airline while simultaneously shifting those assets away from higher return strategies is a questionable strategy. And buying an airline in most cases is probably a low return strategy anyway!
US air travel is an embarrassing abomination. The idea of a free market here is laughable. The taxpayers are the prime stakeholders and guaranties one way or the other. European competition shames us. Fares of $30, $40 and $50 round trip for 2 and 3 hour long flights. Service to even small and out of the way airports. Young people flying all over the continent.
Still can’t believe Spirit has escaped the criminal Justice system for all their antics.
Need a break up of the cartel not further combination in restraint of competition. If we had a free market, all of the current carriers would have met their richly deserved Chapter 11s and a fresh new consumer oriented industry would have emerged.
Hope you didn’t induce me to waste my time posting here under the pretense it’s a forum for free speech
Industry is utterly corrupting and corrupted. What are there like 5 trillion miles out there. Happy shilling!!!!!
FTC needs to get into the game on sites like this that appear to be open to free speech but are complete banking and air cartel industry tools
Pissed I dropped my guard and wasted my time on this fraudsite.
@Tim Dunn: You wrote: “Tom, Wall Street pressured B6 to charge more because their margins have been falling… B6 did the same thing other carriers except for LUV have been doing.”
That is precisely the problem, and JetBlue’s undoing — Wall Street will always press for maximum shareholder returns and the least possible investment in product or customer sat. This naturally leads to uniform Spartan, minimal, undifferentiated value propositions among airlines. And when JetBlue is just as Spartan and expensive as the others, one can’t help but focus on JetBlue’s numerous flaws, from worst-in-class reliability to a skimpy network offering little utility to those not living in NYC or BOS.
A better company, within or outside commercial aviation, would have the guts to balance shareholder interests with those of customers and employees. I’m thinking in particular of Costco, which earns scorn from Wall Street for compensating its employees well and prioritizing member care but is nonetheless very successful, with sky-high loyalty scores. JetBlue could have been the Costco of US airlines but instead shrivels its value prop at the command of financial analysts.
we have flown both jet blue and spirit.we have flown several trips on spirit from mht to florida for
for under $100 when same flight from bos was over $300 rt.This merger wont lower any big 4 prices .the only thing that will happen is prices will be same as other big airlines.they are removing ulcc. spirit has made travel possible for us and students. we dont care about a tv or free snack we want low fares.this merger will hurt consumers and the snaller airports they service