The drawn-out bidding war between JetBlue Airways and Frontier Airlines over Spirit Airlines has taken another turn.
JetBlue came in with what it characterized as its “last, best, and final” offer for the airline, at $3.7 billion in cash. Frontier asked Spirit to delay a stockholder vote again on Frontier’s offer of $2.6 billion in cash and stock, which was scheduled to run July 15-27, so it could try to improve its offer for the discount carrier.
That would mark the fourth such delay in the vote after reports suggested that Spirit likely didn’t have the votes to make the merger happen. One problem complicating the decision is that airline passengers are deeply unhappy with JetBlue.
In the Wall Street Journal’s annual rankings of domestic airlines, JetBlue plummeted from sixth place in 2019 to seventh place in 2020 to ninth place, dead last, in 2021. In that same period, Frontier climbed from seventh to sixth place, and Spirit climbed from fifth to fourth, stalled out, and then fell to eighth.
The reason for JetBlue’s decline was all the flight delays and cancellations. Regulators who have to approve any final deal are applying close scrutiny, though they’re raising some competition concerns about some Frontier routes as well.
Gary Leff, author of the influential View from the Wing website, told the Washington Examiner that Frontier is continuing to try to cobble together a better deal because “Spirit is worth more to Frontier than it is to JetBlue.” This is because “Frontier plans to keep the ultralow-cost business model that has been a higher-margin business, while JetBlue would give out a lot of raises, spend a lot to retrofit aircraft, and shift to a less profitable business model.”
At the same time, JetBlue shareholders should be wary because “JetBlue, if successful, seems like it would be substantially overpaying,” he said.
As things stand, Leff said he thinks “Spirit shareholders should prefer the JetBlue deal even if it is blocked by regulators.” This would trigger a “$400 million termination fee, and they still have their stock, including the option of selling the airline in the future.”
Former Continental CEO Gordon Bethune echoed Leff’s point about overpaying, though he cautioned that the deal could work out poorly for either party if the economy continues to struggle.
“It reminds you of two dogs chasing a bus. I’m not sure the winner is the one who catches the bus,” Bethune said on CNBC’s Power Lunch.
As for how this would affect customers, Leff didn’t land where the Wall Street Journal survey did.
“The JetBlue customer product is better than the Spirit product, which is better than the Frontier product,” he said. “A JetBlue-Spirit deal is better for customer experience, a Frontier-Spirit deal is better for low fares.”
Where regulators are concerned, Leff predicted that they are “likely to take a much stronger stance against a JetBlue deal and perhaps use it as leverage to get JetBlue to walk away from their American Airlines ‘Northeast Alliance.’”
He cautioned, “That would be bad for competition in New York since neither JetBlue nor American are big enough on their own to compete against Delta and United but are viable together. JetBlue choosing their Spirit deal over their American partnership would leave American in an untenable position in New York, once again too big to walk away but too small but succeed.”
Asked if he would pursue an airline merger given today’s market conditions, Bethune joked, “I’d probably want a psychiatrist.” Then he made the serious point that whichever company acquires Spirit should take pains to ensure that the Spirit team does not view this as a “hostile takeover” — or there will be more turbulence ahead.
