Being billed as one of the last of the US mega-mergers, JetBlue and Spirit are to combine in a multi-billion dollar agreement. Chris Sloan reviews the deal
It’s official. JetBlue is poised to become the United States’ fifth largest carrier after beating Frontier in a heated and protracted bidding war for control of Spirit Airlines (NK). On July 28, 2022, the Spirit and JetBlue boards of directors agreed a definitive merger under which JetBlue (B6) will acquire Spirit for $33.50 per share in cash for $3.8bn, valuing the entire enterprise at $7.6bn. If approved by the US Department of Justice, the transaction is expected to close by early 2024.
JetBlue is taking over Spirit to supercharge its growth. Put simply, it appears NK is being bought for parts – valuable assets such as its fleet, facilities, gates and employees, especially Spirit’s much sought-after pilots. Fans of NK’s distinctive yellow and black livery will be disappointed to learn that much of its brand, business model, South Florida corporate headquarters and senior leadership team may not survive the proposed deal.
Robin Hayes, JetBlue CEO, will lead the two combined carriers while Spirit chief Ted Christie is expected to depart once the transaction closes.
JetBlue says the combined network will serve around 77 million customers annually on more than 1,700 daily flights to over 125 destinations in 30 countries. If realised, the agreement will increase JetBlue’s relevance and scale outside its Northeast, Florida, Caribbean and transcontinental strongholds.
B6 says it will increase competition as the big four US carriers react to “the JetBlue effect” – a combination of lower fares and award-winning customer service. It claims its entry to a market decreases legacy fares on average by 16%. Interestingly, the New York-based carrier says the establishment players typically don’t match the ultra low-cost carrier (ULCC) fares touted by Spirit and Frontier, even when factoring in their Basic Economy products. In essence, JetBlue claims it makes them react in a way few others do.
The transaction will allow B6 to grow in its focus cities such as Fort Lauderdale, Orlando and San Juan. It should also increase JetBlue’s presence at high-fare hubs such as Los Angeles, Miami and Las Vegas, where it is relatively weak, but Spirit is better established. The tie-up would also likely introduce the JetBlue brand for the very first time to new destinations such as St Louis, Memphis and Atlantic City. Spirit’s larger footprint in the American heartland between the coasts will help fill voids in JetBlue’s current route map. That said, don’t expect the two airlines’ schedules to be directly overlaid – significant adjustments are likely to the combined carrier’s point-to-point network.
The supersized JetBlue and its customers will undoubtedly benefit from the two-year-old Northeast Alliance (NEA) with American Airlines in JetBlue’s New York and Boston strongholds. However, JetBlue has to be very careful in touting this, and has pledged not to grow overall capacity in these important markets as a condition of winning US Department of Transportation (DoT) approval. Seemingly aware of the sensitivities, JetBlue has pre-emptively offered to divest gates and slots in these cities.
In terms of raw metal, JetBlue expects the combined airline to boast a fleet of 458 aircraft with a whopping order book totalling 312 Airbus examples. One somewhat inevitable consequence of the deal is that the jet roster would become more complex with A320s, A321, A220s and Embraer 190s all on the books.
Fleet isn’t the only area where the two carriers are slightly out of sync. JetBlue’s higher-end product is not directly compatible with Spirit’s ULCC model, and is certainly nowhere near as close as Spirit and Frontier.
B6’s Robin Hayes initially said capacity of the two carriers would decrease, with 10-15% of seats being removed from Spirit aircraft, but this isn’t definitive.
JetBlue could opt to create a higher density version of its basic ULCC-fighter ‘Blue Basic’ fare (à la Spirit) in part of the cabin. It seems likely that B6 will remove Spirit’s ‘Big Front Seat’ product and add its ‘Even More Room’ offering to make additional use of the available real estate.
Reconfiguring the cabins will require a significant investment. Not decreasing capacity (which tends to increase fares) as much as is expected could quell some of the concerns of the DoT and Wall Street – but while it could keep some quarters happy, it may have a detrimental effect on JetBlue’s much-vaunted brand.
Early indications suggest that all passengers at the new venture will enjoy a higher quality inflight product. As per the current B6 offering, they will continue to receive free snacks, non-alcoholic drinks, on-board TV and internet connectivity.
But all of this calls into question what JetBlue would do to offset the significant loss of Spirit’s ancillary revenue stream, which generates an average of $50 per ticket by charging extra for everything from water to Wi-Fi. While JetBlue’s ‘Basic’ branded fare charges extra for bags and seat assignments, there are plenty of other potential moneymakers that will need to be assessed.
Looking beyond the upselling of ancillaries, generating the true financial synergy savings that JetBlue pegs at $600-700 million annually is more elusive.
B6’s pricing structure in terms of cost per available seat mile (CASM, excluding fuel) is roughly 50% higher than Spirit or Frontier according to official filings in 2019-21. Spirit’s labour costs, in particular, will likely have to be brought up to a par with those of JetBlue.
The final Frontier?
A Frontier/Spirit tie-up had long been expected. Both carriers have grown exponentially over the last decade with Spirit typically stronger in the east and Frontier in the west. Slowly but surely, their networks have become increasingly competitive with each other. This has reached the stage where Frontier and Spirit have established bases on each other’s traditional turf. Nevertheless, they weren’t exactly blood-red competitors nationwide as the US domestic market was perceived to be big enough for both of them. In effect, the two owned a virtual ULCC duopoly.
The dynamic fundamentally changed early in the morning on February 6, 2022. It was announced that Frontier would acquire Spirit via a combination of stock and cash for $2.7bn in a transaction valued at $6.5bn. The proposed budget behemoth would leap to the number five position in domestic market share with combined annual revenues of approximately $5.3bn based on 2021 results. Frontier shareholders would own approximately 51.5% and existing Spirit equity holders would acquire approximately 48.5% of the combined airline. With annual operating synergies of $500 million and the enormous scale, investors seemed likely to reap the rewards as its stock value increased in the years to come.
The United States’ collapsing stock market had other ideas. In its worst start to the year in 50 years, airline stocks were battered by the carnage, with Spirit and Frontier not immune to the crisis.
Day by day, the perceived benefits of the deal became less appealing to many prospective investors – but not everyone was spooked. The JetBlue crew in Long Island City spied an opportunity; B6 stunning the industry on April 5 with a much higher all-cash offer, priced at $3.7bn. The $33 per share represented a 52% premium to NK’s share price on February 4.
Spirit shareholders would receive cash in hand, rather than having to take the risk (or reward) of future stock valuation changes. JetBlue claimed it had looked at Spirit for years, but obviously the Frontier takeover was the catalyst for the company to mount its own takeover. The buyout bid almost immediately turned hostile with the Spirit board sticking to the original Frontier deal. “Customers shouldn’t have to choose between a low fare and a great experience, and JetBlue has shown it’s possible to have both,” said JetBlue CEO Robin Hayes, illustrating the difference between a JetBlue-Spirit vs Frontier-Spirit merger.
The Spirit board quickly spurned the offer, purportedly on the basis that a takeover by JetBlue would be unlikely to receive approval from regulators, and it could leave Spirit in limbo for years during the process. Days later, JetBlue addressed these fears by adding a ‘break-up fee’ of $350m if the deal wasn’t able to be consummated. B6 management accused the Spirit board of acting in its own interests versus shareholders’ interests, not engaging with JetBlue in good faith and providing the same due diligence that it offered to Frontier.
Over the next two months, an unusually heated and protracted bidding war broke out.
JetBlue continued its campaign with several more “enhanced offers” to win the votes of shareholders, raising a reverse break-up fee to $400m and increasing its bid. Frontier then upped the ante with its own share increase and a break-up fee.
A shareholder’s vote to reject or approve the merger with Frontier was set for June 30. With the tide turning in favour of JetBlue – particularly among institutional investors – the Spirit board postponed the vote two more times to allow further negotiations and campaigning, with July 12 set for the final vote.
At the 11th hour on July 10, Barry Biffle, the Frontier CEO, wrote to the Spirit board declining to raise its bid. But even though the Frontier deal was now hanging on by a thread, he wasn’t ready to concede defeat just yet. With rumours circulating that the Spirit and JetBlue boards were now engaged in more serious talks, the CEO of Frontier publicly asked Spirit’s board to come clean and state their true final intentions.
A fourth delay of the vote to July 27 was requested.
When a major advisory firm reversed its stance, recommending Spirit shareholders to vote against the deal and calling JetBlue Airways’ all-cash bid a “superior alternative”, the writing was on the wall.
On July 27, Spirit and Frontier were forced to scuttle their merger plans in favour of JetBlue. Spirit is now contractually obliged to pay Frontier a $25m break-up fee – not far off the price of a new Airbus A320neo.
One last dance
After decades of turbulence following deregulation in 1978, the US airline sector has emerged as one of the most stable and consistently profitable regions in the world, with consolidation accepted as a key factor. Over the last 20 years, the industry has seen nine major mergers and acquisitions beginning with TWA and American in 2001, and really kicking off in earnest with Delta and Northwest in 2008, United and Continental in 2010, Southwest and AirTran in 2010, American and US Airways in 2013, and most recently Alaska and Virgin America in 2016. The so-called ‘Big Four’ of American, Delta, United and Southwest control 80% of the domestic market. Unsurprisingly, this increased scale has resulted in increased pricing power and profitability. It has also, even less surprisingly, resulted in less competition, to the ire of regulators in Washington DC.
Despite the successful entrance and strong growth of ULCCs, none have mustered a market share higher than a number six ranking and five per cent market share, according to most recent DoT statistics. Even as the fifth-largest carrier, JetBlue, with Spirit, would have only 9% market share, compared with 13% for United – the fourth largest – and 23% for American, the nation’s largest domestic carrier.
Number five-placed Alaska Airlines, with a share of 5.6%, was itself the product of a merger with Virgin America. In this case, JetBlue played the role of spoiler and sparked a bidding war. Then, as now, B6 was pursuing a feisty competitor to create more relevance outside its traditional strongholds. Although Alaska ultimately prevailed, JetBlue bid up the price to $2.6bn, causing the Seattle-based firm to overpay. JetBlue now finds itself in the opposite position.
Enter the regulator
Arguably the biggest question that loomed over this contentious tie-up was, and is, which if any of the two suitors is most likely to secure regulatory approval.
With the Spirit brand due to vanish, there will only be one dominant ULCC, removing a significant competitor from the market.
Unsurprisingly, both Frontier and JetBlue saw themselves with the advantage. B6 believes it has at least an equal shot in bringing a higher calibre service to more markets while lowering overall fares via its aforementioned ‘JetBlue effect’. The New York-based firm contended that Frontier overlaps with Spirit on significantly more nonstop routes (104) than it does (54) and B6 has less overlap in flights, seats, and available seat miles than its Denver competitor in the metropolitan areas served by both carriers.
The Spirit deal isn’t the only thing keeping B6’s legal department busy. JetBlue is burdened by a lawsuit over its Northeast Alliance (NEA) with American Airlines. Critics argue that it operates more like a joint venture that makes the two carriers more formidable competitors in NYC and Boston to the dominant United and Delta. JetBlue counters that the NEA actually is more pro-competitive and helps its overall case to buy Spirit. B6 hasn’t advised if or how it is willing to dismantle the NEA, although it seems likely that this matter will be raised by officials scrutinising the deal.
Frontier campaigned to investors that its uber-ULCC combo was much more pro-competitive, noting that “the stronger financial profile of the combined company will empower it to compete even more aggressively, especially against the dominant big four.”
Spirit, which consistently favoured jilting JetBlue in favour of a Frontier marriage, reported: “By contrast, a JetBlue/Spirit combination will result in a higher-cost and higher-fare airline that would eliminate a lower-cost and lower-fare airline and remove about half of the ULCC capacity in the United States, resulting in higher fares for consumers.”
Amid the war of words, the regulator could also view the creation of a single, dominant ULCC as anti-competitive. The nation’s other ULCCs – Allegiant, Breeze and Avelo – fly around the fringes with their respective niches rather than competing against the big guys. It would likely take years for them to mount a challenger to replace Spirit.
Every merger has its share of drama, but this one has become personal. The Frontier and Spirit relationship is rife with backstory. William Franke, the billionaire chairman of Indigo Partners (parent firm of Frontier), was once chairman of Spirit. He hired Ben Baldanza as Spirit CEO in 2006 to turn around the flagging company and transform it into the nation’s first truly successful ULCC, tweaking the model made famous by Michael O’Leary at Ryanair.
In a reversal of Frontier acquiring Spirit, a decade ago Franke suggested Spirit purchase the ailing Frontier (which had filed for bankruptcy in 2008) from Republic Airways to create an even larger ULCC, but the Spirit board rejected the idea. Franke resigned from the company in August 2013.
On December 3, 2013, Indigo Partners concluded its purchase of Frontier from Republic for $145 million. Barry Biffle, formerly executive vice-president of marketing at Spirit and a chief architect of its ULCC transformation, joined Frontier in 2014. As the airline’s new president, he immediately began converting it from a higher-cost model to a West Coast-focused Spirit clone. Also, Ted Christie, Spirit’s current chief executive, was Frontier’s SVP and CFO from 2002 until 2009.
Meanwhile, Spirit’s Baldanza who had hired Biffle and Christie, left the company in 2016 and joined the JetBlue board in 2018. In switching from yellow to blue, Baldanza’s presence has been felt at B6 with its additional focus on costs, densification of aircraft, and creation of ‘Blue Basic’ fares designed to better compete with ULCCs.
JetBlue and Spirit have long been rivals, particularly in Florida at Spirit’s home base of Fort Lauderdale where NK has overtaken B6 as the top player, and Orlando where they compete powerfully. The Sunshine State offers an attractive, well-established mix of year-round leisure traffic.
However, the acrimony rocketed to the next level when Spirit successfully led the charge to get the US Department of Justice to unwind American and JetBlue’s nascent NEA, centered around New York and Boston. At the time of going to press, industry sources suggest that Spirit may be a material witness in the Department of Justice trial scheduled for September.
In an unconnected, but nonetheless notable development, in July this year JetBlue lost the award of 16 slots vacated by Southwest at Newark to Spirit, following a tightly fought three-year competition.
Although Frontier and Spirit compete vigorously, it could be argued that they share a common enemy in the form of more established legacy carriers. Earlier this year, JetBlue’s Robin Hayes publicly accused the Spirit board of being conflicted and putting their own interests over those of the shareholders: “Why won’t the Spirit Board engage with us constructively? The interests of Bill Franke’s Indigo Partners and the long-standing relationships between the two companies is the obvious answer,” he alleged. Frontier countered: “No false claims or gimmicks can fix JetBlue’s fatal problems, and these are not even JetBlue’s only regulatory problems. The anti-competitive rationale for its bid is obvious.”
In a CNBC television interview immediately following the merger announcement, Spirit’s Ted Christie was asked to defend his earlier comments that “JetBlue may have ulterior motives in its [NK] offer.” Put in an awkward spot during a live interview with JetBlue’s Hayes, Christie responded politically: “We were defending our deal in the interests of our stakeholders then and now we're doing the exact same thing, getting this deal done and creating a lot of value.”
Winners and losers
Under the category of ‘be careful what you wish for’, if JetBlue ultimately succeeds, it will face a costly, lengthy and challenging integration process against the backdrop of a weakening economy, labour shortages, operational issues and escalating costs. No doubt, unions from both sides will leverage the situation to raise wages. While there are also external factors at play, JetBlue’s stock is down 42% since it announced its intention to acquire Spirit. However, a person close to the process told Airliner World: “The problems of merging outweigh the problems of not doing a deal. JetBlue will gain its last, best chance of scale, enhancing its chances of remaining independent.”
If the deal goes through, the Spirit brand with its boldly yellow painted ‘flying banana’ livery may be peeled from its airplanes and its shiny new headquarters near Fort Lauderdale Airport likely to be repurposed for other uses. Employees may find themselves part of a larger business that appears to have a more positive culture and brand; and then there is the aforementioned possibility of enhanced pay and conditions.
Away from the front line, integration and the merging of seniority lists is often painful. Many of Spirit’s top leadership team will probably enjoy a financial windfall on completion of the deal, but most won’t have jobs at the combined carrier.
Irrespective of the ultimate outcome, Spirit will be in limbo while the regulators examine the deal, which JetBlue expects to be wrapped up by early 2024.
On the face of it, the biggest loser seems to be Frontier. Franke and Biffle’s vision of the world’s largest ULCC are dashed for now, but the Colorado company is paradoxically the only sure winner. It has succeeded in removing its major competitor and made JetBlue pay more for the asset than intended. Both JetBlue and Spirit will now be tied up with regulatory distractions, as they continue to operate separately as competitors.
What becomes of American and its two-year-old NEA with JetBlue?
A scenario certainly exists where B6 does the jilting to American with the alliance becoming a casualty, if that’s what it takes to get the deal done. There is also a possibility that regulators reject the transaction completely. That could mean Spirit remaining independent or Frontier circling back for another attempt at landing the deal.
The ‘fasten seatbelt’ sign has been illuminated, with the expectation of a rather bumpy ride.
Right now, no one knows for sure how this fight of a flight will eventually land.
The turbulent triangle
· Fort Lauderdale-based Spirit (NK) operates 21,300 flights per month to 80 destinations in 17 countries.
· NK is ranked number seven in domestic market share with 4.9%.
· It has 177 A319, A320 and A321 Family aircraft with a further 150 on order.
· The company has 9,000 employees.
· Denver-based Frontier (F9) operates 13,900 flights per month to 113 destinations in 13 countries.
· It is ranked number eight in domestic market share with 3.3%.
· F9 has 113 A320 and A321 Family aircraft in operation with another 229 on order, including A321XLRs.
· The company has 5,000 employees.
· New York-based JetBlue (B6) operates 27,400 flights per month to 104 destinations in 28 countries.
· B6 is ranked number six in market share with 5.3%.
· It has 280 aircraft comprised of A320, A321s, Embraer E190s, and A220s with another 153 jets on order.
· The company has 19,000 employees.
All data via Cirium. Correct as of July 2022.
As the dust settles on one of the most intensive bidding wars in US commercial aviation history, it’s worthwhile to reflect on what might have been. Let’s be clear – a Spirit and Frontier combination was the most obvious. Both airlines share a common fleet type, business model, product and the management teams know each other well. The budget colossus would ultimately have had 700+ aircraft offering more than 1,000 daily flights to upwards of 145 destinations in 19 countries, across complementary networks. Market share would have been around 8.2%, putting the partners in fifth place nationally.
Frontier and Spirit pitched that their merger would deliver $1 billion in annual consumer savings thanks to increased access to ultra-low fares by adding new routes to high-fare markets. Additionally, the failed tie-up would have formed the nexus of an unprecedented international ULCC alliance with Indigo Partners’ controlled carriers’ Wizz Air, Canada’s Lynx, Chile’s JetSMART and Mexico’s Volaris.