The Game Theory Behind Whether JetBlue Drops Its American Airlines Partnership

Spirit’s board almost has to take JetBlue’s offer now unless Frontier comes up with more cash. The federal government then has to make a choice whether to sign off on it in order to kill the JetBlue-American Airlines Northeast Alliance. If they make that offer, JetBlue almost has to take it.

Frontier winds up with divested slots and gates in the Northeast anyway. JetBlue massively overpays. American loses its New York strategy. And the big winners wind up Delta and United, who face less competition for New York (and Boston).

Spirit Airlines shareholders meet June 30 to decide on a dance partner. They have an agreement in place to be acquired by Frontier Airlines. Frontier is a Bill Franke airline, Franke led Spirit’s move to become an ultra low cost carrier. He still has loyalists on the Spirit board. This deal creates a larger ultra low cost carrier, with more planes operating under a model of lowest fares.

JetBlue is offering more money. A lot more money. Frontier’s deal is mostly stock, worth just over $20 a share based on Tuesday’s closing price. JetBlue is offering $33.50 a share. That means about two-thirds more money to Spirit’s shareholders if they take the JetBlue deal.

However Spirit rightly believes there’s going to be a whole lot of federal scrutiny of JetBlue acquiring them. That’s why they said they rejected the initial proposal which involved more money – a deal with Frontier that’s likely to close is better than a deal with JetBlue that doesn’t.

Since then, though:

  • JetBlue has sweetened the offer. They are offering a $3.20 per share breakup fee. If the government kills the deal, Spirit shareholders get $1.50 a share and keep their company. And JetBlue has committed to give up Spirit’s assets in New York and Boston so as not to grow there and offset key regulator concerns. They also agree to address South Florida.

  • The market clearly believes there’s a better deal out there than Frontier is offering. Frontier’s $20 a share bid is less than Spirit’s share price at Tuesday’s close by about 10%.

JetBlue is already overpaying for the assets. They are buying slots and gates in congested airports, but commit to give up (sell off or lease) the most valuable of those. They are buying planes and pilots to grow. But the assets are worth more to Frontier than to JetBlue. Frontier and Spirit have had much higher operating margins than JetBlue.

The JetBlue deal takes highly productive assets and transfers them to a less profitable business model. And in the process they add costs to the Spirit operation, too – raises for employees in many cases as well as capital spending to revamp the interiors of Spirit planes. If JetBlue wins it’s a classic ‘winners curse’ situation.

There’s little question that the deal will draw regulatory scrutiny even when JetBlue agrees to divest assets in New York and Boston and South Florida. The federal government isn’t going to like losing on the two largest ultra low cost carriers to a merger. They’re going to fear that means higher fares (which it probably would).

Whether the federal government has a strong enough case to win in court isn’t the point. They have a strong enough hand to extract concessions. And JetBlue has committed $350 million to Spirit if they fail to close the merger. So they’re going in ready to meet a lot of government demands rather than write that check.

Already the federal government is suing to stop JetBlue and American Airlines from cooperating in their Northeast Alliance, in a deal that the government just signed off on last year. The two airlines entered into a settlement with the government that gives up slots in New York and guarantees seat growth and thus lower fares (upon penalty of losing even more slots).

That case goes to trial in September and JetBlue says ‘it’ll be resolved one way or another before the Spirit acquisition will be’ so it’s irrelevant. Not so at all.

A JetBlue-Spirit deal puts the government in the drivers seat on the American Airlines-JetBlue alliance. If the Feds put it to JetBlue “you can have the Spirit merger if you drop the Northeast Alliance” JetBlue probably says yes. They seem to prefer the Spirit deal anyway and have already pre-committed $350 million as a credible commitment that they’ll meet whatever terms the feds extract.

Of course the Biden administration might not do that. They might not be ok with the Northeast Alliance or with this merger and they might think they can stop both. But if they aren’t certain of their case against the Northeast Alliance it’s a play where they get a big scalp. They might think they have to choose one or the other, and their case isn’t a slam dunk in either provided JetBlue divests assets as they’re committing to.

That suggests the biggest loser in this deal isn’t Frontier. As Cranky Flier points out Frontier could wind up with much of the divested JetBlue assets anyway since they’d be the remaining major ultra low cost carrier so giving the airline those gates and slots would ensure they continue being used the way Spirit had been using them (in terms of business model).

Instead the biggest loser would be American, whose New York presence rests heavily on the deal with JetBlue.

  • American is too small in New York to compete effectively against Delta and United on their own
  • They’ve tried using New York gates and slots to bring customers to New York rather than focusing their efforts on New Yorkers. They’ve tried selling a scaled down ’boutique operation’. Neither had made New York especially profitable for them.
  • The JetBlue deal lets them sell flights to customers together, creating a viable competitor against Delta and United
  • And American has learned that their loyalty program and credit card uptake rises as they become relevant in the market.
  • But without JetBlue they have no ‘Plan B’.

Without the Northeast Alliance American Airlines loses in New York. And the biggest winners, therefore, are Delta and United – not JetBlue, which is massively overpaying for assets that will become less profitable under their stewardship.

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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  1. So I’m going with Spirit Frontier merge JetBlue AA NEA thrives. Jet Blue buys AA

    But what to I know. I still remember flying North Central and Ozark 🙂

  2. Couldn’t a Plan B be a tighter tie with Alaska? Alaska has a decent presence at both JFK and EWR, and could make a strong bid for Spirit’s divested gates.

  3. Still not sure why Alaska and JetBlue don’t cuddle together; that would be a much better option for both.

  4. “JetBlue has committed $350 million to Spirit if they fail to close the merger. So they’re going in ready to meet a lot of government demands rather than write that check.”

    What if jetBlue has decided that $350 million is a fair price to pay for defeating Frontier’s bid for the next year or two? Isn’t $350 million less than the losses which would result from closing this deal? Or is jetBlue’s management just innumerate?

  5. Why would JetBlue have to give up anything in South FLa? Makes no sense. They would have a much smaller percentage of traffic there then most major Carrie’s have in their hubs. Absolutely ridiculous. The government has let everyone else pretty much run wild but when the 2 smallest carriers want to merge … forget about it.

  6. 1)Why isn’t Plan B to stop whining and moaning, and simply compete on price, service and schedule in New York?

    2) According to you, American has a vastly superior frequent flier program relative to Delta. If so, why can’t they use that program in an effective way to beat down Delta in the market without this alliance? How has Delta been able to outfight American head to head in this market with SkyMiles?

    3) Why does this happen over and over again – in truly competitive markets, American almost always get outfought but airlines like Delta (look at LAX or BOS) and sometimes airlines like Southwest. Maybe American should just compete better instead of relying on gimmicks like the NEA.

  7. AA could try differentiating itself from competitors by offering additional space to all customers. We are so tired of being crammed into tight seat pitch.

    AA could give this change a catchy name, like… I don’t know: More Room Throughout Coach.

  8. How about this – JetBlue/Spirit sells the Spirit NYC/BOS assets to American, and they exit the NEA.

  9. If DOT wants nationwide and ultimately global pricing discipline, they refuse B6/NK, in favor of F9/NK.

  10. The fight for Spirit (SAVE) is the most fascinating story in US airline history not because of the potential of losing the yellow taxi jets but because the legacy/global carriers are in very good shape while it is the lowest level of the US airline industry – low cost and ultra low cost carriers that are fighting for their survival. For years we have heard how much of a threat ultra low cost carriers would play to legacy carriers and yet the legacy carriers (AA, DL, UA and AS) are guiding investors to deliver higher profit margins than any other segment. WN is carrying the weight for the low cost segment while JetBlue, Spirit and Frontier are expected to lose money this quarter despite the massive surge in demand post-covid

    This would be a good time to remember that AA was the largest carrier in NYC for years. Its home was at LGA and it was only because of Scott Kirby and Doug Parker that Delta ended up with the 1/4 of the LGA slots that USAIrways owned but couldn’t make work. The fact that Delta essentially got those slots for $60 million is what is mind-blowing; AA/US had to divest the much smaller number of DCA slots they gained as part of that merger and Delta regained the Brazil frequencies it traded away – and wasn’t using pre-covid anyway.
    AA was also the largest carrier at JFK and lost its edge when JBLU was created and gifted slots that were used to compete against AA to the Caribbean where JBLU has been the largest airline from the NE for years. AA has not lacked for assets to use in NYC; they have simply mismanaged them.
    While Continental and then United have stayed largely west of the Hudson, Delta has built its position at both LGA and JFK and have outclassed both AA and B6 largely by organic growth by being more efficient and using the strength of DL’s global network to provide benefits that B6 can’t match. DL is the product of a merger with a Boston based airline (Northeast) and resurrected its Boston focus after shifting its focus to NE post 9/11. DL has now surpassed B6 in BOS by several metrics, again focusing on longhaul international and DL’s global network.
    AA’s answer was a virtual merger with B6 involving the NE that the DOJ is saying is too close. It is very possible that the DOJ will rule that the arrangement is too close regardless of what JBLU does with Spirit. The revenue sharing and slot swapping components of the NEA are unique among US airline partnerships present and historic because those are features that have not been permitted by US airlines.
    JBLU is trying to have its cake and eat it too – a partnership in the NE that helps but does not resolve its long-term strategic challenges – while also going after SAVE.
    SAVE’s stockholders have to decide if the higher risk of a JBLU offer are offset by the amount of cash they will get – but most of it will only come WHEN and IF the DOJ approves the JBLU acquisition (it is not a merger unlike the SAVE/ULCC deal).
    It is very possible that JBLU will start talking to the feds about the NEA if the SAVE stockholders decide to go with JBLU. The NEA doesn’t have to end but it will likely be pared back regardless of what JBLU does with SAVE and even more so if JBLU gets the opportunity to acquire SAVE.
    There are all kinds of anti-consumer and anti-competitive aspects of the JBLU/SAVE deal but JBLU could mitigate them if it isn’t also dealing with the NEA.
    Picking a single carrier (Frontier) to pick up divested assets is not a viable solution. The DOJ did that with Love Field gates that were part of the AA/US merger and the result has been that Virgin America and later Alaska has never used those gates to their full use. There is no assurance that Frontier will choose to use the assets that are divested esp. to compete against JBLU/SAVE.
    and yes, AAL is in a world of hurt strategically. The NEA was, at best, a means to make up for its lack of strategic vision regarding the NE. They likely cannot find another partner but the Alaska – AA deal on the west coast proves there is an acceptable level of partnership that AA can have with other domestic airlines.
    I hope that SAVE stockholders do vote on the deal next week; money is not the issue. The risk of getting the JBLU deal over the finish line is what matters

  11. @nsx More Room Throughout Coach was a financial disaster. No one wanted to pay for the extra space which is why AA dropped it after less than 2 years. Time after time the traveling public tells airlines that all they care about are price and schedule. Because of that we have what we have.

  12. Good read and what a mess. I’m a million-miler on AA. Sad to see what has happened to AA and what was once America’s flagship carrier.

  13. Missing in all this rhetoric: why does Spirit have this urge to merge? IMO they’re run better than JetBlue and Frontier at the moment. And a sounder strategy. I haven’t heard anything from the Spirit leadership arguing they can’t stay independent (I’m a stockholder) … so much energy wasted in a get-acquired pursuit that may well turn out to be futile!

  14. AA’s reason for existence as a for-profit publicly traded company is to make money for its shareholders and not to tout level of service claims.
    Pan Am and others figured that out the hard way – but too late.

    AA pursued being the largest airline at LAX and gave it up because its management recognized that flying a bunch of transpacific flights that cost the company tens if not hundreds of millions of dollars per year is not in line with its reason for existence.

  15. Is there any chance of the Feds saying no to any of the merger/acquisition offers? With a questionable economy and sky high fuel prices, is the tail trying to wag the dog here? JetBlue is poorly run and really could commit corporate suicide by doing this merger badly.

    To me AA is always trying to have their network issues solved by alliances, but so far has that worked? Will the Feds have the guts to say no?

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