In a stunning ruling on January 19th, a federal judge blocked JetBlue’s proposed $3.8 billion acquisition of Spirit Airlines on antitrust grounds, leaving the fate of both airlines uncertain and the industry bracing for potential fallout.
Judge Finds Merger Would Lead to Reduced Competition, Higher Prices
U.S. District Judge Leonie Brinkema ruled that combining the country’s 5th and 6th largest air carriers by capacity would reduce competition, drive up fares and diminish service, especially to smaller and underserved markets.
“The proposed merger would substantially lessen competition for air passenger service in nonstop markets and connecting city pairs throughout the country,” Brinkema wrote in her redacted ruling. The combination would result in “reduced choice, higher fares, and diminished service across the country.”
In defending the merger, JetBlue and Spirit argued that together they could offer more options and lower fares than larger rivals. However, Judge Brinkema dismantled that premise in her decision, stating that the New Horizons partnership between American Airlines, JetBlue, Alaska Airlines, and British Airways already provided ample connectivity and codesharing opportunities.
“I conclude that JetBlue has not convincingly shown that its partnership strategy will replicate the competitive attributes of an independent JetBlue,” the judge wrote.
|Effect on Competition From Merger
|Non-Stop Overlap Routes
|Eliminates “important competition” between JetBlue & Spirit
|Reduces options for travelers
|JetBlue’s Northeast Focus Cities
|Removes future competitor from Boston & New York
|Merging Spirit’s low-cost model would lessen downward pressure on fares
Brinkema determined that combining JetBlue and Spirit would reduce incentives to compete on price and service, directly harming consumers. She cited concerns voiced from the U.S. Justice Department and officials across 45 states and territories that the merger was “illegal.”
JetBlue and Spirit Plan to Appeal
Both JetBlue and Spirit expressed disappointment and vowed to appeal Brinkema’s ruling.
“We strongly disagree with the flawed logic, rationale and conclusions of the judge. We will appeal,” a JetBlue spokesperson said, adding that the ruling would also harm employees.
Spirit issued its own statement saying it will “continue to litigate through the appeal process to complete our merger and create the country’s most competitive ultra-low fare airline for customers.”
Sources say the appeal process could last up to two years. During this period, both carriers could face growing headwinds and business challenges.
“Spirit believes it has an incredibly compelling story on appeal,” airline analyst Helane Becker told CNBC. “The basis of the appeal is focused on the competitive attributes of the combined JetBlue-Spirit, together with the benefits the combination brings to customers.”
Spirit Faces Rocky Future Without Merger
With Brinkema’s merger block in place for now, Spirit finds itself in a particularly precarious position. As an ultra-low cost carrier dependent on high aircraft utilization and ancillary revenue, Spirit has narrower profit margins than most competitors.
The carrier saw its stock plunge over 30% on news of the blocked merger. Last week, Spirit bonds that are due in 2025 also dropped to just 39 cents on the dollar, indicating reduced confidence in repayment.
Without the backing of JetBlue or another suitor, bankruptcy risks for Spirit “increase materially”, warned JP Morgan airline analyst Jamie Baker in a note to investors. “Spirit could slash fares, restructure after failed JetBlue takeover,” reads one ominous headline from CNBC.
To stay solvent, Spirit may need to renegotiate aircraft leases, further reduce costs, or even shrink its fleet size. However, analysts say management remains focused on restoring profitability.
“Spirit has options including rightsizing its fleet and reducing capital spending,” UBS analyst Myles Walton told Reuters. “Spirit believes it has ample liquidity…[and] a path and ability to meet debt obligations.”
In an effort to reassure markets, Spirit management provided an investor update highlighting strong 4th quarter financial results, record revenue performance over the holidays and an improving booking curve for Spring and Summer 2024 travel.
“While we are disappointed and disagree with the ruling, we remain confident in our standalone plan,” said Spirit CEO Ted Christie. Whether these projections are enough to stabilize Spirit in the near-term remains uncertain.
Widespread Impacts for Travelers and Industry
While Spirit faces the most acute risks, reverberations from the blocked merger may extend across the airline sector.
With one less competitor, legacy carriers could raise fares and reduce options for price-sensitive travelers. Over 78% of Spirit’s bookings come from passengers who would not otherwise fly or would drive to their destination according to internal data. Removing Spirit could increase systemwide airfares by 2-4% based on past airline mergers. This compounds affordability challenges already facing many consumers.
The blocked merger may also limit future growth opportunities for both JetBlue and Spirit individually. JetBlue recently announced suspensions of 8 routes from New York City and elimination of service to Baltimore, likely to improve near-term profitability after spending heavily to acquire Spirit. Spirit’s growth is constrained by aircraft financing unless new investors can be secured.
For now, the fate of JetBlue’s Northeast Alliance with American Airlines remains intact, offering some joint network coverage. But analysts say the partnership is not a perfect substitute for an outright merger between JetBlue and Spirit.
All parties seem resigned to a long legal appeals effort before clarity on the transaction can emerge. Buckle up, because more turbulence likely lies ahead.
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