The Frontier Airlines-Spirit Airlines merger has been withdrawn and JetBlue Airways’ acquisition offer has been accepted. Ok, but what happens now?
When Will They Combine?
When will JetBlue Airways and Spirit Airlines cease to compete and join together? Not for a while and maybe never.
“The companies expect to conclude the regulatory process and close the transaction no later than the first half of 2024.” – JetBlue Airways.
That’s nearly two years from the acceptance of the deal late last week. For now, the two carriers operate independently and legally cannot collude on pricing, scheduling, or any commercial terms. JetBlue and Spirit will continue to fight each other in Fort Lauderdale, and Orlando International airports where they have the biggest overlap.
JetBlue’s $3.8. billion deal was accepted following a Spirit shareholder vote last week to approve or deny a merger between Frontier Airlines and Spirit Airlines. That vote came as a result of an intense bidding war.
The combined airline (if consummated – more on that directly) will create the fifth-largest airline in the United States.
One of the most concerning issues for the Spirit board was that the JetBlue offer was unlikely to pass regulatory approval, the DOJ is currently suing JetBlue over its Northeast Alliance codeshare deal with American Airlines. As the DOJ would preside over this acquisition as well, the board felt the likelihood that the JetBlue acquisition deal closes – ever – would pose too much risk to shareholders who, if a deal wasn’t approved, would then lose an opportunity to merge with a carrier on the terms they’d agreed with Frontier.
From a regulatory perspective, it makes sense that Spirit had apprehensions about even attempting a deal despite the premium paid and initial distribution to shareholders. They were probably right. From a competitive landscape perspective, a bigger Ultra Low Cost Carrier probably places more pressure on the Big 4 carriers than a larger JetBlue, simply because JetBlue is not nearly as inexpensive as the Frontier and Spirit.
The Biden DOJ has not taken specific action against mergers of this size yet, but are already on unfriendly terms with JetBlue, asking for their permission to further expand could be difficult.
My one qualm with DOJ’s involvement in the manner, is that this is not to take out a competitor nor change the US airline industry. This is a deal for aircraft, pilots, and crew. If JetBlue were to hold a hiring event that brought in thousands of pilots, crew, and service personnel who already had the training and were ready to start today, the DOJ would have no basis to block the company from taking on new employees. If Airbus had hundreds of aircraft on the ground, ready to fly tomorrow – the DOJ would have no basis to block the acquisiton of those aircraft either. So why then does the DOJ have any place in the matter? Because the acquisition in this case removes part of the competition. Had Spirit suddenly gone out of business overnight and JetBlue purchased Spirit planes and all of their assets, and hired all of their pilots, the net result would be the same and (aside from any collusion claims in that scenario) the DOJ would, again, have no place in the matter.
JetBlue will pay Spirit shareholders $33.50 per share in cash with some of that coming upfront in case the deal never passes regulators. That’s good for Spirit shareholders – frankly, it could end up being free money. Despite the hubris of JetBlue CEO Robin Hayes that the deal will be approved without shedding the Northeast Alliance, it could end up being a $400 million boondoggle with Spirit shareholders taking home the extra cash and leaving the airline to again attempt a merger in a year.
What happens now for Spirit shareholders is another vote, this time to approve the acquisition. If so passed, shareholders will receive $2.50 per share owned right away, and then beginning in January of 2023, another $.10/share every month the deal does not close up to $34.15/share if not closed by July of 2024.
What Happens To The Fleet And Crews?
There are two major steps that have to take place before planes are painted blue and staff changes uniforms (shareholder approval, and regulatory approval.) Pilot groups from both carriers are from the ALPA (Airline Pilots Association) though a unified contract may be tough to achieve (how did that go, American Airlines?) However, the flight attendants for JetBlue are represented by TWU (Transport Workers Union) while Spirit FAs are represented by AFA-CWA. Those groups will have to reach an agreement too.
What Does The US Domestic Market Look Like?
The biggest question is really what the US domestic air market looks like after either a successful combination or an unsuccessful one. If JetBlue were to pass the hurdles outlined and bring Spirit on, they would quickly find themselves in a position to cut costs instantly. A bigger airline pays less for supplies on a per unit basis. That savings extends from cans of coke to check-in desks where instead of having four (two for each carrier), the new JetBlue can better utilize staff and space with just three total. This will lead to better utilization of gates and reduced cost for the combined entity.
Does that translate into lower costs for US consumers? Probably not. Some pundits are quick to say that the bigger airline with some of the best service in the industry will have no inclination to drop prices to ULCC Spirit’s level.
The US is officially in a recession, inflation is at a 40-year high (perhaps higher when factoring in food and fuel costs which have been excluded over those same 40 years) and the insane levels of demand currently in place may wane. If business travelers don’t return to buy business class space and fill in the leisure gap, JetBlue might need to adopt some of Spirit’s lower pricing techniques for survival.
I’d also point out that some of the overlapping routes, especially in Florida, will lead to consolidation (four flights with fuller planes rather than five from the two separate carriers.) Those surplus aircraft and crew could find themselves expanding into new markets which does create competition against the Big 4. That will ultimately drive down prices in a way that Spirit couldn’t do on its own while also giving the benefit of some of the best service in the industry. Medium-sized markets may find more options on existing destinations or new ones altogether.
If the deal is not approved, Spirit is in a position to try another merger. Depending on the market position of competitors at that point in the future, Spirit may find itself as the lead in that deal as Frontier was in the proposed merger. Spirit was already one of the fastest growing airlines in the US with more than a hundred new A320s on order, it could continue to grow, strengthen and improve its stand-alone position without any adverse effect on travelers.
The Frontier deal is dead, and the JetBlue offer has been accepted, but it’s far from over. What happens now? Lots of lawyers push papers and Spirit and JetBlue continue to compete until there is a definitive “yes” on the deal. For travelers and crews alike, nothing happens right now and possibly ever. Time will tell. Consumers would benefit from a more premium experience but it will most likely cost more.
What do you think? Will the deal go through as written? Will Spirit remain independent after all?