JetBlue and Spirit Airlines saw their proposed $3.8 billion merger blocked last week by a federal judge on antitrust grounds. The low-cost carriers appealed the ruling, but late Monday their request was denied, seemingly ending JetBlue’s attempt to create the nation’s fifth largest airline.
The demise of the deal leaves Spirit facing an uncertain future, while also signaling trouble ahead for further airline consolidation.
Background of the Deal
JetBlue initially offered to buy Spirit for $3.6 billion in cash last February to expand its domestic network. Spirit had previously agreed to merge with rival discounter Frontier Airlines in a stock deal then worth $2.9 billion.
A bidding war ensued between JetBlue and Frontier to acquire Spirit and its fleet of about 280 Airbus jets.
The battle ended in October when Spirit’s board recommended shareholders approve the higher JetBlue offer, which including a ticking fee increased to $3.8 billion in cash.
Merging JetBlue and Spirit would have created the fifth largest U.S. airline by traffic and fleet size, displacing Allegiant Air. The merged airline projected annual revenues of about $11.9 billion based on 2021 figures.
Judge Blocks Deal Over Antitrust Issues
On January 10th, U.S. District Court Judge William Young rejected the merger over “undisputed evidence” it would reduce competition and raise fares for some travelers. The Department of Justice and attorneys general from six states and the District of Columbia had sued last year to halt the deal on antitrust grounds.
In his ruling, Judge Young invoked a line from Les Misérables, stating: “I have flown Spirit. I know how uncomfortable it is, but to people who can’t afford to fly in comfort, it’s something.”
He found the budget airlines compete fiercely with each other, especially on leisure routes, and a merger would give the combined company 60% market share on flights between JetBlue’s New York-area stronghold and Spirit’s major Florida destinations. This would enable the new airline to raise fares on these routes, negatively impacting low income travelers.
Airlines File Joint Appeal
Hours after the ruling, JetBlue CEO Robin Hayes and Spirit chief Ted Christie said they would appeal. In a joint filing Thursday to the U.S. Appeals Court for the District of Columbia they argued Judge Young applied the wrong standard in evaluating the merger’s impact on competition and consumers.
Spirit warned it “cannot continue indefinitely” without potential buyers and could face bankruptcy. But Judge Beryl Howell denied their emergency stay request late Monday, meaning JetBlue cannot close the deal while the appeal proceeds over likely months.
This could deal a decisive blow by spooking Spirit shareholders set to vote February 1st on the merger. JetBlue’s buyout offer remains in place but looks extremely unlikely to win approval now.
Turbulence Ahead for Spirit
With its planned sale suddenly scuttled, Spirit faces stormy skies operationally and financially. Its share price initially plunged 18% on the ruling before recovering as bankruptcy fears eased Thursday after reporting better-than-expected fourth quarter guidance.
Nonetheless, analysts warn discount carriers like Spirit may not survive without further consolidation in the increasingly crowded budget airline space. Alaska, Allegiant, Frontier and Sun Country also operate ultra-low cost business models but are much smaller than potential merger partners.
Spirit could still attract buyout interest from private equity firms or international carriers, albeit likely at a lower valuation absent a bidding war. It aims to refinance $1 billion of debt this year, which could buy more time to chart an independent course.
The airline predicts another strong year of growth after recovering well from the pandemic, by some measures outpacing JetBlue recently. But analysts say Spirt may need to cut unprofitable routes and possibly downsize its fleet without merger savings.
It could also slash fares to fill planes, but risks permanently damaging its low-cost brand if unable to maintain bare-bones service.
Bleak Outlook for Further Consolidation
Spirit twice appeared close to deals that would have consolidated the fragmented U.S. airline industry down to four large national networks. Lackluster growth prospects and efficiencies from scale drove the latest round of mergers.
But Judge Young’s strict reading of antitrust law in the JetBlue-Spirit case signals regulators may block further attempts at mega-mergers between the remaining mid-size carriers.
Alaska Airlines still hopes to finalize an acquisition of Hawaiian Airlines this year that the Justice Department has been reviewing since late 2021. Experts say that deal now faces high hurdles with federal trustbusters taking a newly aggressive stance on market concentration.
While individual mergers come and go, Judge Young’s populist ruling delivered a broader rebuke of the Biden administration and regulators failing to promote competition and protect consumers in the airline industry. It punctures optimism for smooth passages ahead in legally rationalizing consolidation.
Spirit shareholders are scheduled to vote February 1st on the merger with JetBlue, which executives still nominally favor but most observers believe dead. JetBlue could sweeten its offer further as a last gambit before fully abandoning its Spirit ambitions. Either way, the discounter seems destined to chart an independent course with continuing uncertainty whether the no-frills model remains viable absent greater scale.
For JetBlue the key question becomes whether to pursue international expansion or a new merger target to fuel growth. Alaska Airlines looks firmly intent on Hawaiian for now but analysts float a range of potential partners for JetBlue should it seek a plan B, albeit with likely much tougher regulatory scrutiny.
The closure of the JetBlue-Spirit merger also returns Frontier to center stage as the only remaining ultra-low cost competitor positioned for growth rather than survival. Meanwhile legacy network carriers may see openings to expand leisure domestic flying with a weakened Spirit.
But Judge Young’s stern opinion casts the longest shadow. Absent legislative changes it sharply curtails prospects for additional large-scale airline mergers, continuing the fragmentation of a perpetually turbulent industry struggling to reconcile vast deregulation with leaner economics from efficiency.
The Bottom Line
The defeat of the planned JetBlue-Spirit merger cements budget air travel’s place as a permanent if perpetually unstable fixture of American aviation. But the additional competition regulators prioritized in rejecting further consolidation threatens thinner profit margins that jeopardize Spirit’s pioneering low-cost model. For flyers seeking absolute rock bottom fares, Judge Young may have protected consumers at the ultimate expense of the cost leader carriers themselves.
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