Two months ago Frontier announced a deal to acquire Spirit Airlines creating a powerhouse ultra low cost airline. However – and this is not an April Fool’s joke – JetBlue has now made a bid for Spirit that’s 40% higher than Frontier’s offer.
Spirit shares closed up more than 22%, and 17% over the Frontier offer. JetBlue closed down 7%. The market clearly sees any deal for Spirit going for more than what Frontier had offered. At this point I’d say whatever airline winds up closing the deal will suffer from winner’s curse.
There’s no question that Spirit’s shareholders are better off with the price of the JetBlue deal, if they think they can get it to close (DOJ doesn’t stop it) or if the breakup fee is high enough. As an ongoing business combination, Spirit seems more valuable to Frontier than to JetBlue. And a Spirit deal could create new complications for JetBlue’s Northeast Alliance with American Airlines.
Spirit Airlines is a no frills, high fees carrier. They cram seats in together more than the legacy carriers and more than JetBlue.
While JetBlue is only marginally friendlier to customers (with a bit more legroom, seat back TV, and free internet) than American, Delta, and United – though less operationally reliable – Spirit’s model is based on low costs, low fares, and low service. This is what the corporate culture of Spirit is built around.
It’s great that customers have a choice and product differentiation in the market, they can choose Spirit or choose to pay more to fly other airlines. And it’s great that Spirit competes down price even for those consumers who choose not to fly Spirit. But their model and culture are completely different from JetBlue, which still thinks of itself as offering more of a premium product.
The legacy Spirit operation’s costs will climb. Spirit aircraft will need to be retrofit if they’re meant to fly as JetBlue. Confusion will reign if they’re separate operations. And costs would rise if there’s some product harmonization between the two. And then you’ve got merger costs.
A deal like this undercuts the advantages that Spirit has, and makes no sense as part of an ongoing JetBlue operation. What it does, though, is give JetBlue access to slots and gates in congested airports that Spirit currently has, planes and pilots, though the Department of Justice could take issue with that combination as well.
There’s anti-trust concern about a Spirit-Frontier combination. The federal government is concerned that this will mean less low fare competition, but Spirit and Frontier don’t generally compete with each other as much as against legacy carriers whose pricing they can undercut with lower costs. They’re bringing on so many new aircraft that we can safely assume a Frontier-Spirit tie-up will mean more low cost flying in the future rather than less.
If there’s a concern here it should be in re-Frankeifying Spirit which has invested heavily in its product the past several years, improving its operational reliability (last summer and last weekend notwithstanding) once out from under the thumb of the aviation king of cost-cutting. Franke’s Frontier would be the surviving leadership.
However, if the Department of Justice has shown consternation about a combination of Spirit and Frontier, teeth will gnash back and forth between DOJ and DOT over JetBlue-as-acquirer. While the federal government claims JetBlue is a discounter in filings meant to block the American Airlines-JetBlue joint business venture (which they sued to stop shortly after approving it), JetBlue control over Spirit really would mean higher costs at Spirit and less low cost flying and meaningfully increases concentration in South Florida.
And given Spirit’s inroads into congested airports in the Northeast, this would create even more (and legitimately new) anti-trust concerns about an American-JetBlue tie-up in New York since it would give JetBlue a greater presence in the New York market (more concentration) and marginally weaken their case that they can’t operate as a viable competitor to Delta and United on their own. There’s no way that American + JetBlue + Spirit would have been approved, and DOJ would have legitimate new grounds for objection.