Pundits, consumers, and anyone that’s ever flown seems to have an opinion on why JetBlue’s unsolicited bid to acquire Spirit is a bad idea. They’re all wrong and here’s why.
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It’s Not a Merger, It’s an Acquisition
So many questions on social media about why JetBlue, which has built a reputation of providing a somewhat premium experience (even without Mint class), would have interest in Spirit, an Ultra Low Cost Carrier (ULCC.) However, those who view this as a merger are mistaken. JetBlue has made this clear to staff and in posts that have appeared right here on LiveAndLetsFly, that this will not be a merger, it is JetBlue buying Spirit and making Spirit into JetBlue.
That’s a key difference.
Why This Makes Sense
There are a few examples of why this makes sense in business cases that reside both inside and outside of the aviation space. If JetBlue were to operate Spirit as a separate business unit, plenty of cases have shown that economies of scale can work to improve the bottom line even in non-integrated entities.
By Any Other Name
Matthew disliked the “specious” comments by JetBlue CEO, Robin Haynes, in a post yesterday. He and I agree on a lot but not everything and definitely not this. I agree that eliminating Spirit and absorbing it into JetBlue will not keep low fares around in the same way they are today with Spirit but with the added comfort of JetBlue. But I also don’t think they will fully abandon the market Spirit has built.
Matthew also mentioned that creating a Bigger ULCC in Spirit/Frontier would then put more pressure on the Big Four. That’s one possibility. Another is that Allegiant doesn’t even come close to comparing so there’s no longer any competition in the ULCC space and fares and ancillary costs creep up without having a check and balance in place. With Frontier and Allegiant being far closer in size, though different, they could remain competitors and keep prices low for cost-sensitive customers.
But this acquisition, if it looked different than buying out an active competitor, would be no problem at all. For example, if JetBlue (especially as competitors had jets parked and for sale in the desert) bought hundreds of airplanes for immediate use, that wouldn’t violate any anti-trust rules. If they had a hiring spree and overnight took on the 9,000 employees that it would take to operate that many new carriers and destinations – no one would say a word.
If the JetBlue acquisition is blocked, Spirit-Frontier will merge and there will be a very large ULCC and a smaller one but two in total. If the JetBlue acquisition is approved, there will still be two ULCCs operating in the US. The question is which one keeps pressure on fares at the lowest price levels.
Size and Scale/Loyalty
JetBlue has an opportunity to become one of the biggest carriers in the US and thus, one of the largest in the world. Its expansion across the pond to London from both New York and now Boston have shown that its customers and the market were ready for JetBlue to make this transition.
Just a few more long-range planes could add Paris, Dublin, Amsterdam, Lisbon, Edinburgh, Glasgow, Manchester, and on the outskirts of that could be Madrid, Frankfurt, Munich, Copenhagen, Helsinki and others. Prior to US Airways’ merger with American Airlines, they flew to just a handful of destinations in Europe.
TrueBlue also better aligns with Spirit than Spirit does with Frontier. If anything, the Free Spirit loyalty program would offer improvements if elements were adopted by JetBlue – just don’t point out those facts to the American Express Platinum crowd.
Staff/Pilots/Crews
Staff is perhaps the biggest coup. On Twitter, industry giant, Henry Harteveldt, described this as an “acqui-hire” because JetBlue is gaining a ton of flight attendants, pilots, and staff members that will become even more scarce in the near future. This is an easy way to guarantee survivability as the pilot shortage takes shape. Reducing capacity on overlapping routes will free pilots and crews to ease the burden.
Stations/Slots
Lots of digital ink has been spilled (including by JetBlue itself) about the kind of market share a combined JetBlue would have in Orlando, and Fort Lauderdale.
“Combined, they’d be responsible for 50% of the departures at Fort Lauderdale-Hollywood International Airport (FLL) and 51.4% of the capacity, a significant amount of market share at an airport that’s known as a lower-fare alternative to neighboring Miami International Airport (MIA), 25 miles to the south via Interstate 95. (A combined Frontier and Spirit would control about 25% of the capacity and 30% of the departures at Orlando International Airport (MCO), the largest airport in that proposed deal.)” – Ethan Klapper, ThePointsGuy
That’s a lot of capacity, wow, mergers bad.
I wonder what other airports look like:
- Miami – American Airlines – 68% marketshare
- Dallas/Fort Worth – American Airlines – 84% marketshare
- Philadelphia – American Airlines – 70% marketshare
- Washington National – American Airlines – 49% marketshare
- Houston Bush – United Airlines – 78% marketshare
- Chicago O’Hare – United Airlines – 47% marketshare
- Denver – United Airlines – 42% marketshare
- Orlando – Southwest Airlines – 22% marketshare
- Las Vegas – Southwest Airlines – 38% marketshare
- Detroit – Delta Air Lines – 43% marketshare
- Atlanta – Delta Air Lines – 69% marketshare
- Minneapolis – Delta Air Lines – 72% marketshare
- Seattle – Alaska Airlines – 46% marketshare
- Honolulu – Hawaiian Airlines – 46% marketshare
American, United, Delta, Southwest, Alaska, and yes, Hawaiian are all products of mergers in the last 10-15 years. All of them faced regulatory hurdles, but were ultimately approved. Sign me up to be the attorney that gets to fight claims with the DOJ over Orlando at 30% or Fort Lauderdale at 51% would simply be too much marketshare at a single location. Marketshare at two Florida airports pales in comparison to other approved merged carriers.
Regardless of how expensive flights are now in this brief moment of pent-up historic levels of demand and reduced capacity, over the last 20 years flights have been cheaper relative to inflation than they were in the 1980s, 1990s, and even early 2000s.
What JetBlue gets out of this acquisition is a lot of stations and landing slots. Take Pittsburgh for example, JetBlue used to fly to West Palm Beach, Fort Lauderdale, New York JFK, and Boston. Currently, JetBlue offers only to Boston and is not overly competitive. Spirit flies to (8) destinations including Los Angeles, and Cancun among others. Kansas City just received its first JetBlue service but this acquisition would add (8) more non-stops none of which overlap.
JetBlue has tried and failed to expand at Pittsburgh in a way that Spirit has been successful. The airline is just now dipping their toes in the water at Kansas City, MO where Spirit has as many destinations as Delta, and more than United and with JetBlue, as many as American. JetBlue is instantly live in more destinations in a meaningful way and that makes a lot of sense for expansion.
Equipment
Similar aircraft type is the key to a low cost operation of any kind. Southwest started this with its all 737 fleet, RyanAir continued that trend. Spirit and Frontier both operate all A320 family equipment which helps. The combined fleet will be over 700 aircraft rivaling Southwest for fleet size when new aircraft on order are delivered.
Most importantly, fleet homogenization won’t take as long as it would with separate equipment. New deliveries could be converted to the JetBlue layout so there would be a period where Spirit planes would fly with a JetBlue exterior but Spirit interior for some time but by-in-large, getting the planes to look and feel the same won’t take that long.
Government Approval
The Department of Justice (DOJ) is currently suing JetBlue for it’s “NEA” partnership in the Northeast US with American Airlines. In fact, one DOJ member suggested that it wasn’t a good time to put yet another questionable piece on their docket.
That said, if evaluated on its own, JetBlue acquiring Spirit is actually less controversial than Frontier and Spirit merging instead. Why? Spirit and Frontier are two of only three ULCCs operating in the US. By joining forces, not only do they become the fifth largest carrier, but the combined carrier would leave just Allegiant to compete in the space as a far smaller carrier with a far more limited footprint.
JetBlue buying Spirit leaves two similarly sized carriers in the ULCC space, but also provides a very good reason (Spirit has an existing customer base) to keep at least some of the fares very low. That should be a winning combination for critics of the Frontier-Spirit merger that Senator Warren objected to.
Who Loses?
The “Sunday school answer” is that consumers lose in this acquisition. Historically, that’s false but it won’t stop anyone from saying it anyway.
Frontier
And boy, do they lose. They either pay a higher price and ditch the merger charade, or hope that JetBlue’s bid gets shot down by regulators but that they somehow have the magic formula. They also find themselves competing with JetBlue in a new way that’s unfamiliar and possibly threatening. When regulators choose between a JetBlue vs Spirit-Frontier option, either one leaves fewer ULCCs so if the acquisition isn’t approved, the merger is doubtful as well.
The Big Four Carriers
American, Delta, United, and Southwest Airlines were going to face a combined fifth-largest carrier one way or another. It’s a lot easier when that combined carrier charges for carry-on bags (other than a personal item) and frankly, excels in service above them. JetBlue Mint offered premium seating that was superior to most on the market at launch, and remains among the best across the Atlantic.
Spirit-Frontier was far easier to dismiss but a combined carrier with JetBlue’s level of service would make a real competitor in the fifth spot in the United States.
Further, American, Delta, and United already offer a Basic Economy product that compares to Spirit’s service. All but Southwest charge for checked bags in most situations, the aforementioned network carriers charge for first class but at a higher rate than Spirit’s Big Front Seat and none of them have the service across the fleet that one finds on a JetBlue flight.
Conclusion
Spirit Airlines is an easy target for late night talk show hosts and lazy bloggers. However, taken as an acquistion rather than a merger, this is a genius move. While competing carriers are cutting schedules to operate a more competent slate this summer, JetBlue can go jumbo right away in one fell swoop. They get pilots, flight attendants, stations, and equipment in a time where all of those things are at a far greater premium than 20% over market cap. Those who disagree with JetBlue on this acquisition do so because they are still calling it a merger. As a purchase, it’s the only way to grow right now and it’s smarter than anything else they could do.
What do you think? As an acquisiton does the JetBlue-Spirit tie up make sense? Will it pass regulatory hurdles? Will Frontier come back to the table with a better offer?
B6’s CASM ex-fuel is about 1/3rd more than NK’s (F9’s is about the same as NK’s, which is why their merger is likely to be additive, while B6’s merger is likely to destroy much of the value of the NK network).
If you push B6’s costs over NK’s network, the obvious thing that will happen is a bunch of pmNK flights will suddenly be unprofitable (you can’t just jack up prices to B6 levels and not have it affect demand). Basically it’s going to be the B6 experience at LGB all over again (or what appears to be failed expansions at EWR/LAX)- they will flail for a while and then kill off routes. I would expect a lot of that Florida/Vegas flying B6 will inherit to implode, which is a lot of that midcon strength in PIT/MCI/elsewhere. I’d think this is a great opportunity for F9 and G4, they get a competitor taken out.
So, I wonder what happens when you combine an airline notorious for operational meltdowns (NK) with one that is fighting operational meltdowns on the regular (B6). I guess we’ll maybe get to find out?
Also, lol at B6 being called a ULCC. No. They are an LCC. Their comps are AS and WN, not NK/G4/F9. Costs are significantly higher.
Oh, and I imagine Avelo and Breeze will have a party too if B6 drops chunks of NK’s route network.
I’d expect B6 to add NYC/BOS flying, and keep some of NK’s network, but lose a lot of it. Oh well.
I do think that it creates an opportunity for Avelo and Breeze, but this post was so long that I split it in two (next one going live this afternoon) and that discussion prompts a whole new section of “what is a ULCC” and “how fast can Breeze scale?”
@Eponymous – great comment, really detailed. Without getting into every specific of it, B6’s CASM would adjust both due to airport choice (and concessions made for Spirit), volume, and fleet age (maintenance costs will drop with Spirit’s newer fleet.) The view you describe of pre-merger Spirit (pmNK for the lay) suddenly going unprofitable will happen in a few years when the fleet has been refurbished to B6 standards. For a couple of years, while that process takes place, it’s my view that Spirit will continue to operate as normal, and the profitability Spirit has demonstrated will continue making B6 more likely to expand its low fare options rather than convert everyone higher.
For what it’s worth, Spirit operates so much point-to-point that even a modest increase in price to basic economy price levels on United or American for example, they still offer an advantage over Southwest (far cheaper) and over the legacy carriers who force connections. A good example in my home market, PIT, is the Fort Myers route I take all the time. Southwest is usually $300 roundtrip for nonstop flights, two daily in-season, one daily year-round. American Airlines is about $200 on the route as is United with a stop in Charlotte, Newark, or DC. That doubles the flight time and adds inconvenience, even on the occasion where Spirit is the same price. Spirit is usually about $70 cheaper than those competitors so B6 has room to grow the fare without shutting out passengers that want a reasonable price, select service, and a non-stop.
I’d add that using an ex-fuel CASM is also a bad metric purely because of how fuel-efficient Spirit’s fleet is (and will be with orders arriving.) Excluding fuel excludes a huge advantage. In a recent interview with Ted Christie, he cited that Spirit is $5 per seat flight hour cheaper to operate on fuel alone than the Big 4. That doesn’t include B6, obviously, but if they are even half as high, that fuel number will matter especially as this conflict in Ukraine drags on and the world ramps back up. When fuel is the largest cost and it’s not even just because of cost as consumption is the key factor, then suggesting the costs will remain the same in the new B6 seems to ignore key aspects.
Finally an article written with common sense and logic! I especially agree with the point about a larger JetBlue competing better with the Big 4 due to similar on board services and networks when compared with a combined Spirit+Frontier. As a Delta flyer, I would never fly Spirit or Frontier no matter the cost, but ai would fly JetBlue if the price was similar or cheaper than Delta.
I’m not sure Frontier is a loser in this. If as everyone expects, the bigger JB raises prices, it provides Frontier an opportunity to be the main low cost airline and an opportunity to raise prices as well.
As for this line “ Spirit Airlines is an easy target for late night talk show hosts and lazy bloggers”. I think it’s a knock on other bloggers for some reason, which I don’t care about, but Spirit has made it easy. The negative Spirit headlines don’t come out of nowhere and this is coming on the heels of another week where they stuck passengers for days. Spirit is garbage operationally and has earned all the hatred and jokes.
@Dave Edwards – You could be right on this being an opportunity for Frontier but see my next post, the airlines really aren’t the same at all so Spirit going away does create a vacuum but Frontier doesn’t really like to fly that way so I’m not so sure.
Would be intersting to see what B6 keeps post-acquisition. The “big front seat” concept is one that would be nice to see stick around. For non-mint (and even mint routes) it would be nice if B6 offered something similar in the first row or two of economy.
I Totally Agree..I’m a flight Attendant with B6 and agree with the idea. Better service options for the consumer.
Never understand why “regulatory” issues would be raised with this merger when the Big 4 are all allowed to control over 80% of the seats in certain markets.
Wikipedia is really stupid because they are stooges of companies. They fight to write “merger”. Wikipedia is wacky because any bozo can write in it. Just try!!!
Merger? Acquisition? It’s a distinction without a difference as far as the DOJ is concerned. This transaction will still be subject to regulatory scrutiny, if JetBlue’s offer is ultimately accepted. The only real difference is that Spirit’s shareholders will receive cash, not stock. Spirit’s own cash will end up being a part of the financing. That’s a downside of having extra liquidity on a company’s balance sheet.
As I pointed out to Matthew, JetBlue, like Southwest, serves a much broader portion of the overall aviation market than Spirit or Frontier. The ULCC market is generally an extremely specialized, limited, price-sensitive one. A JetBlue/Spirit merger will bring more competition to the overall marketplace. Extremely low fares that cater to the cheapest of the cheap will be Frontier and Allegiant’s job. I find it odd that Allegiant gets left out of these conversations so much of the time. Europe doesn’t have the equivalent of Southwest, JetBlue, or Alaska. So comparing the U.S. aviation market to Europe’s is flawed.
Mergers and acquisitions, in and of themselves, aren’t bad, as long as healthy competition is preserved. It won’t surprise me to see Frontier and Allegiant merge to gain critical mass. It also won’t surprise me to see Alaska and Hawaiian combine. As Gordon Bethune pointed out on CNBC, there always seems to be room for new competitors to appeal to unserved and underserved markets. Avelo and Breeze are doing that now, just as Southwest, PSA, AirCal, and America West did in the ‘70s and ‘80s. And just as Spirit, Frontier, and Allegiant have done in more recent times. Mergers don’t automatically lead to higher prices. The post-deregulation airline industry is ample evidence of this. Air fares are still about half of what they were pre-deregulation when adjusted for inflation. Consumers don’t lose as long as there’s healthy and robust competition. And there’s no law that defines what form competition must take.
Then there’s this interesting fact. The link below is to a CNBC report on the proposed merger. At the end of the clip, it mentions that Spirit and Frontier’s market overlap is about 46.4% measured in ASMs. That compares with a 29.2% overlap between Spirit and JetBlue. I’m pretty sure the DOJ doesn’t get worked up about an airline’s perceived market segment when looking at mergers and partnerships. Its main focus is preserving competition. And competition, not low costs, is what keeps fares down. Just my opinion.
As a little preview for the next post, the acquisition angle is interesting with regard to whether the airline is a going concern or not. If we looked at this differently – if there was a world in which Airbus had 100s of planes on the ground ready to fly, and JetBlue bought them (and gates, and napkins, and so on…), and then held a hiring event and were able to hire 9,000 employees instantly – there would be no discussion. That’s the same thing as what they will get in this acquisition. I do understand the need to weigh in on buying an active competitor, but when an identical procedure could take place with the same result, I am struggling with how the acquisition would face headwinds. You say it’s a distinction without a difference, but I postulate that all acquisitions aren’t even viewed the same. There is distinction in this situation, even if the other word could have been subbed in its place.
From a regulatory perspective, this proposed transaction is a distinction without a difference. As I noted above, the main difference between this proposal and Frontier’s is that Spirit’s shareholders will get cash, not JetBlue stock, From a going concern perspective, you have a valid point – one I didn’t contest. In fact, I reinforced it. An enlarged JetBlue will have more impact on the overall air travel market than a “new FrontierSpirit” would.
This post, respectfully, is so long and scattered that I have trouble finding what you are after, Kyle.
If you think JetBlue operating a second airline that’s focused on the Spirit model is a good one, well, history is your friend. Continental Lite, MetroJet, Song…the highway is littered with these over the years and it’s never worked.
The bottom line is that grown men love to start airlines. Airlines are like sports teams. Airlines are rarely profitable. They are ego driven. It’s empire building. And to quote Richard Branson, “The quickest way to become a millionaire is to be a billionaire and start an airline.”
The U.S. can’t withstand 12 airlines all fighting for the same market. Yet every decade is marked with new ones that come along and the absurd mergers that result afterwards (i.e Alaska and Virgin…completely ridiculous). It’s the definition of insanity. I give JetBlue some credit for surviving this long. But buying Spirit is not an answer. Continuing with organic growth as they have done is the best for the brand. Let the others fight it out and preserve your vision. Long game. Stay true, blue.
How about this, an airline in the U.S.that just works to build a better product, better technology, connect with customers better? Is that so hard? JetBlue has been known for this and by buying Spirit they are basically throwing up their arms and saying, “We want to be just like them.”
@Stuart – It is long and kudos for making it through. There’s another set of reasons why the Frontier-Spirit merger shouldn’t happen coming up but that’s less scientific.
But to one of your points, specific: “How about this, an airline in the U.S.that just works to build a better product, better technology, connect with customers better? Is that so hard?” If you fly Spirit and took a hard look at their changes over the last three years, you would see this. They just led the market in cheaper wifi, they match JetBlue’s speed (though not free) but have fast enough wifi to stream for as little as $6-8.
If flying domestically below top tier with most carriers, you’re not likely to secure an upgrade. If excluding those domestic upgrades, Free Spirit bests most of the carriers in the US because in addition to a snack box, free changes to tickets within 24 hours of your flight, free checked and carry-on bags, exit row seating, etc. it also earns faster for ancillary purchases, something none of the other airlines match and is available at a lower spending threshold. When I couldn’t get a snackbox in the back on United as a 1K, Spirit had one for me the same week. There are questions of reliability but the carrier performed in the top 4 in the last few quarters, so it’s better most for on-time and reliability (one quarter it finished second behind just Hawaiian, if I recall.) Their aircraft are newer, and the bad rep is undeserved. It’s from a bygone era and doesn’t represent the carrier we find today any more than a carving cart going through coach is relevant to United.
Who did Hawaiian merge with? Multiple attempts with Aloha but none ever closed.
Interesting analysis on the acquisition. So many takes on it. Brett over at Cranky Flier said Frontier would be a winner out of a B6/NK combination. The months (years?) ahead will be very revealing!
If Spirit and Frontier merge, it will not just be the merged airline and Allegiant. It will be those two plus Sun Country plus Avelo
I have to disagree on this. Spirit is a fairly successful airline who’s costs are much lower than JetBlue’s. They both target much different customer segments, and their brand propositions are completely different. If you are correct that it is an acquisition and JetBlue is taking over Spirit, then the wrong airline management group will be in charge. JetBlue is the weaker of the two. This has the merger mess of Delta/NWA or United/Continental written all over it, only larger.
More like the merger mess of US Air/PSA
Someone asked a good question.
”How about this, an airline in the U.S.that just works to build a better product, better technology, connect with customers better? ”
I believe that is what Southwest has done. Few companies in any industry “‘connect better with a customer”.
20 years ago people said their motto was ”We’re not happy ’till your not happy”.
Today their fares are fair, not the cheapest, and people like me will pay a little more to have a very good consistent experience, and let those of you who can’t imagine not having an assigned seat, a chance at first class, and a “‘meal”‘ fly the ”majors”.
On Southwest we enjoy a flexible flight change policy, free bags (checked or carry-on), a comfortable seat with adequate leg room no matter where you sit, free movies and live TV. If you travel for business and pleasure there is a fully refundable option and a ”Companion Pass Program” that has saved my wife and I at least $15,000 over 3 years.
Oh! They have the best quarter to quarter profit history in the Airline industry.