What You Need to Know
Boston, MA - On January 16, 2024, a federal judge overruled the filed merger between JetBlue Airways (B6/JBLU) and Spirit Airlines (NK/SAVE), valued at approximately USD 3.8 billion. The decision is no surprise to many, despite the many assets JetBlue agreed to divest as part of the tentative acquisition. Had the merger gone through, the combined carrier would have pulled behind Southwest (WN/LUV) as the fifth-largest carrier in the United States.
JetBlue had previously agreed to acquire Spirit in July 2022 following a bidding war with ULCC-rival Frontier Airlines (F9/ULCC). At the time, both airlines were struggling in different ways. JetBlue was setting record lows for on-time performance and even had a meltdown similar (relatively speaking, as JetBlue is a much smaller airline) to the one Southwest suffered in the holiday season 2022. Meanwhile, since 2020, Spirit's net profit after tax has continually declined: -$429 million in 2020, -$473 million in 2021, and a whopping -$554 million in 2022.
By merging with Spirit, JetBlue would obtain assets to help compete directly with the country's "Big Four" - American, Delta, Southwest, and United, respectively. Both airlines fly Airbus A320 aircraft, thus allowing the carrier a much more extensive fleet and crews to accompany them. Spirit even has many low-time Airbus aircraft, allowing JetBlue to add some longevity to its aging fleet. Further synergy can be found elsewhere, but nowhere near as perfect as a merger with Frontier would have been.
The deal would have included a $33.50 per share payout, including a $2.50 per share prepayment, under the condition that Spirit's stakeholders would approve the deal. For most (myself included), this proposal seemed like a steep overpayment at the time. However, the Justice Department, seeking to fight anticompetition in America, filed for a permanent injunction between the two airlines, citing the traveling public would be far worse off without the power of Spirit Airlines to keep fares affordable.
The process dragged on for what felt like forever, as one by one, JetBlue agreed to divest Spirit assets upon conditional approval of the merger. For example, all of Spirit's holdings at New York City's LaGuardia Airport would be surrendered to rival Frontier upon closure of the deal. Further divestitures were agreed upon in Boston, New York City, and Fort Lauderdale, and closing arguments were made on October 31, 2023.
Since then, Judge William G. Young of the U.S. District Court for the District of Massachusetts has been weighing the arguments of both sides. Ultimately, he agreed with the Justice Department that consumers would be worse off had the deal been approved. No matter JetBlue's argument, fundamentals show that airfares would undoubtedly be impacted without Spirit. In the report, Young states:
"Spirit is a small airline. But there are those who love it. To those dedicated customers of Spirit, this one’s for you. Why? Because the Clayton Act, a 109-year-old statute, requires this result – a statute that continues to deliver for the American people."
Meanwhile, JetBlue and Spirit are contemplating the next legal steps following the blocked deal. Both airlines are seeing heavy financial consequences as Spirit shares have fallen occasionally in excess of 50% since the news broke, while JetBlue is facing $470m in sunk costs (on top of what they have already paid) thanks to an agreement to pay Spirit a "consolation prize" following a potential rejection. Unlike Spirit, JetBlue shares have risen 5% due to the rejection reflecting 3 billion USD of recovered costs on financial reports for 2024. Unanimously disagreeing with the decision, representatives for both airlines earlier stated:
“We continue to believe that our combination is the best opportunity to increase much-needed competition and choice by bringing low fares and great service to more customers in more markets while enhancing our ability to compete with the dominant U.S. carriers,”
How Should I Feel?
Well, like anything, I can't force you to feel a thing, nor do I want to. But, personally, you all can thank my relentless prayers to the aviation gods for making this deal die with fire. We will see if this ruling is ably challenged, but I do not know enough about aviation law to determine the probability of success or potential outcomes. I would imagine it would be low, as it was hard to believe that a combined carrier would ultimately benefit U.S. travelers.
Spirit is a necessary evil (I agree, a little drastic of me). Despite the overall premise of sacrificing experience and, ultimately, three hours of our happiness for very affordable base fares, one cannot deny Spirit's loyal customer base of returning customers, the closest thing aviation has come to a cult. In fact, I have one close friend, working in a separate industry, who continually sends me Spirit memes and books travel with them any chance she gets.
The notion put forth by JetBlue that, without Spirit, fares would somehow decrease was hollow from the start. Most of us knew it - JetBlue has come down to earth from the friendly carrier fighting the good fight that everyone loved in its early days. In fact, internal network projections that showed price hikes for Spirit airfares as high as 40% were leaked to the public, forcing JetBlue and Spirit to defend their position quickly and dealing a crucial blow to their merger chances. When that news came out, I recall several "I knew it!" texts in group messages with friends.
Further, Spirit has long been a staple in many smaller markets, like Atlantic City and Myrtle Beach. To make these markets work, communities with less purchasing power become affordable thanks to the ultra-low airfares. JetBlue has shown in recent years a desire to compete in larger markets, putting these smaller communities at a plausible risk of losing a valuable resource. The prices would indeed be compromised, and this was thankfully also an argument put forth by the Justice Department in defense.
Yes, there needs to be more competition in the airline industry, with the Biden Administration even acknowledging this as a priority. JetBlue and Spirit paint a picture of them solving many problems, but the truth is that the combined carrier would create far more than it would solve. The net result would be a more expensive Spirit, and as consumers of the product, we would have directly suffered as a result, and a dangerous precedent would have been set for future deals.
Where Do We Go From Here?
The ruling only opens a whole other can of worms, and it will be interesting to see how the rest of the saga plays out. Certainly, Alaska Airlines and Hawaiian Airlines are nervous about their merger proposal valued at 1.9 billion USD filed in late 2023. Like many, I have little opposition to that merger, and at the end of the day, I believe it will go through. I don't like or support consolidation, but it is survival of the fittest. We must evolve or die, and I would rather not see an airline become extinct.
Make no mistake, other routes do exist to allow JetBlue and Spirit a different approach to combining the two airlines, all of which will likely be explored. However, substantial damage has been done, and with the precedent set, any path will require a steep uphill climb on both ends. We will cross future bridges when we get there - this is the reality of the present moment.
The rejected deal presents future complexities for both airlines. Spirit is particularly vulnerable to the fallout, with the pending agreement described by some as a lifeline for the struggling carrier. JetBlue has a little more leeway, but now they must make critical decisions that could drastically impact their future sustainability). Breeze Airways would make for an interesting conversation should they seek an alternative acquisition target. However, the ultra-low-cost dynamic would still exist, albeit on a far smaller scale.
Shout out to all the Frontier "stans" who felt like they were robbed of a match made in heaven - I celebrate with you today. The deal between Frontier and Spirit would have gone down as one of the most seamless transitions in airline history. There is synergy everywhere you turn - fleet type, business model, and even existing infrastructure at major airports, like LaGuardia and Orlando-MCO, where both split an exclusive terminal. Their customer journeys are virtually indistinguishable, forcing one to wonder about the potential impact of combining forces. Unfortunately, we are left only to dream.