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JetBlue, Frontier Each Make Case For Spirit Takeover

Published on Apr 7 2022 3:28 PM in General Industry tagged: JetBlue Airways / Spirit Airlines / Frontier Group Holdings / Spirit Airlines Inc

JetBlue, Frontier Each Make Case For Spirit Takeover

JetBlue Airways Corp JBLU.O on Wednesday 6 April mounted a vigorous defense of its unsolicited $3.6 billion bid to acquire ultra-low-cost carrier Spirit Airlines SAVE.N, saying that the company is "highly confident" of securing regulatory approval for the deal.

The New York-based carrier on Tuesday 5 April surprised Wall Street with a $33 per share cash offer, potentially derailing a $2.7 billion merger plan between Spirit and Frontier Group Holdings Inc ULCC.O.

Frontier on Wednesday 6 April said that it remained committed to its merger with Spirit as that would create the country's "most competitive" airline and offer more ultra-low fares to consumers.

JetBlue's proposed deal is widely expected to attract close antitrust scrutiny from President Joe Biden's administration, which has taken a tough stance against mergers that may reduce competition and increase prices for consumers.

The carrier said while it expects a lengthy regulatory process, it is counting on its track record of lowering fares and increasing competition to get the nod.

"We are convinced...that average fares come down more when JetBlue flies into a legacy market than when an ultra-low-cost carrier does," JetBlue chief executive Robin Hayes told investors on a call.

Some analysts, however, are not sure the administration will buy the argument that the acquisition would translate into lower consumer costs as JetBlue's fares are higher than Spirit's. JetBlue also has plans to remove some seats on Spirit's planes.

White House National Economic Council Director Brian Deese on Wednesday 6 April declined to comment on JetBlue's bid, but said the Biden administration takes "very seriously" the impact of industry consolidation.

JetBlue and American Airlines Group Inc AAL.O are already facing a lawsuit from the US Department of Justice over their Northeastern Alliance.

The partnership, announced in July 2020, allows the carriers to sell each other's flights in their New York-area and Boston networks and link frequent flyer programs in a move aimed at helping them better compete with United Airlines UAL.O and Delta Air Lines DAL.N in the Northeast.

Hayes said the company would not sacrifice the Northeastern Alliance in order to secure regulatory approval for the Spirit deal.

Costs & Benefits

Analysts are also questioning the benefits of JetBlue's Spirit bid.

Raymond James downgraded the company's stock, calling its offer for Spirit an "indecent proposal."

While both carriers have fleets dominated by Airbus SE AIR.PA, any potential cost savings from the deal will be diluted by JetBlue's need to bump up the pay of Spirit pilots, who are on a lower band, Raymond James analyst Savanthi Syth, said, adding that execution risk is higher in JetBlue's proposed deal than for the potential Spirit-Frontier merger.

JetBlue does expect higher labour costs as a result of the deal. But it said that the transaction would result in certain economies of scale, producing savings of $600 million to $700 million within three years. It also expects the transaction to be accretive to its earnings in the first year.

The company committed to maintain compensation and benefits for Spirit employees for at least 12 months.

Shares of Spirit were off 1.7% at $26.45 in afternoon trade on Wednesday 6 April, suggesting investors were skeptical of the deal going through. JetBlue stock was down 8%, while Frontier was off nearly that much.

JetBlue's Spirit Bid Takes Wall Street By Surprise, Analysts Question Deal Merits

The above news followed news that JetBlue Airways Corp's JBLU.O $3.6 billion bid for low-cost airline Spirit Airlines SAVE.N caught Wall Street off guard on Wednesday 6 April, with analysts questioning the benefits of a merger between the two carriers.

Though both carriers have a fleet dominated by Airbus SE AIR.PA, any potential cost savings from the deal will be diluted as JetBlue would need to bump up the pay of Spirit pilots, who are on a lower band, Raymond James analyst Savanthi Syth wrote in a note.

JetBlue said on Tuesday it made an unsolicited $3.6 billion bid for Spirit, at $33 per share, potentially derailing a $2.7 billion merger plan between Spirit and Frontier Group Holdings Inc ULCC.O.

Shares of Spirit fell 2.5% to $26.28 premarket, well below the offer, suggesting investors were skeptical of the deal going through. JetBlue stock was down 3%, while Frontier was also down 4%.

JetBlue's management is hosting a conference call at 8 am ET on Wednesday 6 April where it will speak more about the merger.

Frontier and JetBlue are vying to buy Spirit to create a low-cost airline they hope will lure more leisure travelers, which will help them compete better with legacy US airlines.

However, any combination will likely invite close antitrust scrutiny from President Joe Biden's administration, which has taken a tough stance against mergers that may reduce competition and increase prices.

JetBlue and American Airlines Group Inc AAL.O are already facing a lawsuit from the US Department of Justice over their Northeastern Alliance.

JetBlue chief executive officer Robin Hayes said he expects a vigorous antitrust review for any deal with Spirit from the US Justice Department that could last into 2023.

"We struggle with the idea (of a merger) given both airlines are concentrated on the East Coast with significant operations in Fort Lauderdale, and would suspect there will be heavy regulatory pushback," Brokerage MKM Partners said.

JetBlue Offers $3.6bn For Spirit In US Low Cost Carrier Battle

All of the above news was followed by news that JetBlue Airways JBLU.O said Tuesday 5 April that it made an unsolicited $3.6 billion bid for Spirit Airlines SAVE.N, potentially snarling merger plans between the ultra-low-cost carrier and Frontier Group Holdings ULCC.ORead full story

JetBlue Chief Executive Officer Robin Hayes said the deal would make the New York-based airline a stronger competitor to the so-called four legacy U.S. airlines that control nearly 80% of the U.S. passenger market.

"The number one complaint we get is why don't you fly to more places," Hayes said in a Reuters interview late Tuesday 5 April. "What we want to do is create a bigger JetBlue" that can serve more consumers.

JetBlue, the sixth largest US passenger carrier, would operate Spirit under the JetBlue brand and he does not think any divestitures are needed.

The move comes as airlines face higher fuel and labor costs, and work to attract more leisure travelers, who have returned at a faster rate than business travelers since pandemic restrictions were relaxed.

JetBlue offered $33 a share all cash, about 33% higher than Frontier's offer of 1.9126 shares of stock and $2.13 in cash, which would value Spirit at $24.93 per share as of Tuesday's closing price.

Shares of Spirit closed up 22% at $26.92, their highest level since mid-February. Sprit's 52-week high is $39.19. Just before COVID-19 lockdowns became widespread, Spirit shares traded around $45.

Spirit declined to comment beyond a written statement that it would review the offer.

Hayes said he expects a vigorous antitrust review from the U.S. Justice Department that could last into 2023.

"We've had unprecedented amounts of consolidation, which the DOJ has approved and now it's about how do we make sure the rest of us can continue to discipline the legacy carriers and create that competition," Hayes said. "We believe ultimately this is the best deal out there that is going to really drive more competition."

Andre Barlow of Doyle, Barlow and Mazard PLLC said the Biden administration "is concerned about consolidation that could lead to higher prices. This one impacts consumers, so I think it gets a tough look."

The Justice Department declined to comment.

The department filed an antitrust lawsuit last September against American Airlines AAL.O and JetBlue over their partnership, alleging it would lead to higher fares in busy Northeastern U.S. airports. Hayes said JetBlue is "very committed" to its alliance with American regardless of whether it was successful in acquiring Spirit.

Hayes said he expects the litigation over the American Airlines alliance will be completed before the Spirit deal review is completed.

He is speaking with analysts and reporters on an 8 a.m ET call Wednesday to tout the proposal that he says would boost operations in key markets such as Florida and access to constrained hub airports like Atlanta, Detroit, Miami and Chicago.

Meanwhile, Frontier said it was "surprising that JetBlue would consider such a merger at this time given that the Department of Justice is currently suing to block their pending alliance with American Airlines." American did not immediately comment.

JetBlue said the deal if completed is expected to deliver $600 million-$700 million in net annual synergies and that the combined airline is projected to have annual revenue of about $11.9 billion based on 2019 revenue.

Frontier said its Spirit offer "is in the best interest of consumers and shareholders and would deliver $1 billion in annual savings for consumers" and argued "significant East Coast overlap between JetBlue and Spirit would reduce competition and limit options for consumers."

In February, Frontier and Spirit proposed a merger that would create the fifth-largest U.S. airline.

Spirit's customer service has often faced criticism and the airline canceled 35% of its flights Monday amid weather issues.

"We don't think customers should have to choose between a low fare and a good experience - they should have both," said Hayes, noting JetBlue's presence in markets typically prompts larger airlines to lower airfares in what he called the "JetBlue Effect." But larger carriers do not always lower fares to match prices from ultra-low cost carriers like Spirit or Frontier.

The Spirit-Frontier deal faced criticism from some lawmakers and public interest groups warned in March that a merger between the carriers "would destroy competition in the only competitive market segment of the highly consolidated airline industry."

JetBlue Bids For Spirit Airlines - US Government Official

All of the above news followed news that JetBlue Airways JBLU.O had made an offer to buy Spirit Airlines SAVE.N on Tuesday 5 April, a US government official said, potentially holding up merger plans of Frontier Group Holdings ULCC.O and Spirit.

JetBlue has offered approximately $3.6 billion, The New York Times reported, citing people with knowledge of the matter said.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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