JetBlue reported a dismal second quarter of 2022 despite taking in the highest revenue in the airline’s history. Spirit Airlines had a greater market cap, will report a smaller loss (or gain) and better operation. Shouldn’t it be Spirit buying JetBlue and not the other way around?
If you are considering booking travel or signing up for a new credit card please click here. Both support LiveAndLetsFly.com.
If you haven’t followed us on Facebook or Instagram, add us today.
Note: A prior version of this post featured some incorrect financial data that has been corrected.
JetBlue Reports Dismal Quarter
JetBlue lost more money in the second quarter this year. How much? The company’s market cap as of Friday’s close was $2.8bn and they lost $180MM in the second quarter following up a billion dollar loss last year. For comparison, Delta made more than $700MM on $12bn in revenue, American Airlines made $500MM (because of their frequent flyer program) on $13bn. Southwest outperformed both Delta and American with $760MM in net income on $6.9bn in revenue JetBlue had significantly less sales, about $3bn, but spent more than $4bn leading to that staggering loss and dismal comparative performance.
The company reported revenue increases of 16% but an increase in costs of 34%. CEO Robin Hayes doesn’t seem overly concerned,
“We reported a record-breaking revenue result for the second quarter, and we’re on pace to top it again here in the third quarter and drive our first quarterly profit since the start of the pandemic.”
JetBlue has been the second-worst performing airline stock this year.
Spirit Could Buy JetBlue
Let me give some quick caveats before I dive into this. Market Capitalization refers to the market value of a company based on its total outstanding shares based on its stock price. On the surface, one could buy the company for the amount of shares times the share price. It doesn’t work that way in the real world and that’s why bidders like JetBlue and Elon Musk offer a premium for their acquisitions. MarketCap matters but it doesn’t mean that one company can buy another necessarily.
JetBlue had a smaller market cap than its $3.8 billion deal to acquire Spirit. The airline secured financing to buy Spirit Airlines that was greater than both its cash-on-hand and the value of the company as a whole. There’s nothing that would stop Spirit from buying JetBlue, however, in fact, it could be a great reversal in fortunes.
- Spirit, like JetBlue, will need flight crews, and equipment to grow
- Still accomplishes goal to get bigger, for the fifth-largest airline in the US
- Allows combined airline to deliver on “low fare” promise
- Switchover costs are cheaper
- Public will denounce but it doesn’t have to be the death of JetBlue
In order for Spirit to grow, they need access to more airplanes, equipment, and people whether that’s organic, or through a merger or acquisition. Banks that backed JetBlue to acquire Spirit should be even more enthusiastic about backing Spirit to buy JetBlue given the team has been more successful and is in a better financial position. The size of the carrier is nearly even, last week Spirit was worth slightly more.
JetBlue ran one of the worst operational performances in April of this year ranking last for on-time flights (this is before the busy summer season) with Spirit three spots ahead operating in many of the same airports. In February, JetBlue was the most-hated airline in America according to the Wall Street Journal. Spirit was only one spot ahead in the same survey. Many feel JetBlue’s superior hard product translates into fewer complaints but through the first quarter of this year, JetBlue and Spirit were essentially neck and neck with 8.4 and 8.8 complaints per 100,000 enplanements earlier in the year.
Why Would Spirit Buy JetBlue?
For one thing, Spirit has a lot of the same needs as JetBlue: equipment and people. They also have a desire for scale and want to build it in their own way. Management wanted that with Frontier because a customer of one was a potential customer of the other. But Spirit ran a better airline this year than JetBlue (though earnings come out for Spirit on Wednesday, August 10th, 2022) and we may find out that’s not the case in aggregate.
Integration costs would have been cheaper with Frontier, certainly, than with JetBlue, but Spirit has also positioned itself as more of a midpoint than Frontier. For example, it offers its Big Front Seat, something even JetBlue doesn’t offer on non-Mint routes. Its loyalty program is more robust too. Those are premium airline features at a ULCC. JetBlue might offer a better product but they can’t frankly afford to. Losing hundreds of millions while experiencing the highest revenue in the company’s history is not a great look. American Airlines tried offering “more room in coach” but found passengers weren’t willing to pay for it and based on JetBlue’s performance, that could too be the case for them.
Spirit has a need for more planes and people, a desire to get larger, and the executive abilities to deliver. It would also allow Spirit to play with premium market routes in a way that they have not done so heretofore, consolidate in Orlando and Fort Lauderdale, and elevate their brand though I’d argue the flying experience on Spirit has come a long way from their “Bare Fare” reputation from a decade ago.
It’s fanciful, certainly, to entertain the concept that Spirit would walk away from its acquisition offer by JetBlue to make one of their own. However, it’s the logical choice for many reasons. It won’t happen – I am confident that’s the case, but on paper, it probably should.
What do you think? Should Spirit reverse the offer and buy JetBlue?
Between this and the bankruptcy article, it’s clear you need to spend some time in the real business world, or go back to school.
We’re gonna get a BOGO on airline demises with this one…
Airlines should be utilities. That they are mostly loss making but sometimes can be extremely lucrative investment is what keeps private capital continuing to support it. This is good i think.
But there are some places where profits are too high even though they should be run as utilities. Railroads and health insurance are two such places where the corrupt Congress should think about america instead of their own pockets.
I’m an M&A lawyer who used to do a lot of deals in the utilities space. While there’s no way Kyle’s idea will ever happen for JetBlue and Spirit, something similar did happen on one of the deals I worked on. Because utilities are regulated by state regulatory bodies, any merger has to get approval from all of the states in which the combined entity will operate. For this deal, our client was the buyer even though the deal price for the target was bigger than our client’s total market cap. After a year of working with the state regulators, one of the states ultimately rejected the merger simply because the price was too high given our client’s market cap (which had nothing to do with management, just the relative sizes of each utility’s ratepayer base). Ultimately we had to completely renegotiate the agreement from a buyer-seller arrangement to make it a “merger of equals” and go through another year-long state regulatory approval process before the merger was approved.
Unlike utilities, the only regulatory hurdle airlines need to clear is HSR/antitrust. There’s no body at the state or federal level that has the authority over airlines to reject a merger based on the buyer’s low market cap. Since the Spirit sale has been messy enough thus far, there’s no way anyone involved would want to shake things up any further unless they were absolutely required to.
Kyle, you really tell it like it ain’t.
I’ve cut back on flying jetBlue during the past few months, because of the operational issues and the seeming contempt/indifference with which they’ve beet treating their employees (the latter apparently affecting the former) but I’ve moved to LCs, not ULCCs. If jetBlue gets their act together — and gets their conscience back — I’ll be excited about the additional routes this merger will offer, because bottom line: I will fly the jetBlue product anywhere, including across the Atlantic; I won’t fly the Spirit product on flights longer than 90 minutes. If Spirit were to buy jetBlue, I’d be almost exclusively on the legacies.
This is such a horrible opinion.
It is an intriguing (if somewhat impractical) idea that you put forward.
Fundamentally, a ULCC in particular is not able to benefit significantly from a major acquisition outside of its own sector. ULCCs grow primarily via market stimulation and product substitution. While FSCs spend their time battling for a larger share of an existing pie, ULCCs are instead trying to grow the pie (and rely on the new thicker crust for their traffic).
While strategically an acquisition of Spirit by JetBlue could theoretically make sense as it gives JetBlue more resources to compete in the FSC space where market share is key, the converse isn’t necessarily the case unless there were specific markets where Spirit were somehow constrained from organic growth to the extent that the value of the assets acquired to unlock that growth were worth the acquisition price.
Kyle’s take — not so much.
This so reminds me of the Pan Am and National merger of 1980. What was believed to be a stroke of genius turned into a nightmare due to the 1980-81 recession. Pan Am had to sell off precious assets (Pacific routes, London slots) just to pay the bills. All came to an end in 1991.
If B6 was smart, it should ride out the ensuing recession. In a year or two, it could pick over the carcass (NEO jets, gates, slots) of other airlines for pennies on the dollar.
This is what happens when you get a gaggle of MBA’s in the same C-Suite obsessing over obscure economic formulas. JetBlue needed an adult in the room to say, “Hey, wait a minute, back to earth”.
Don’t forget the Intercontinental Hotel chain and the iconic Pan Am building.
This is not a good merger either. These to airlines are totally opposite and it will be the demise of Jetblue. It took just 11 years to put the Worlds Most Experienced airline in the grave. Jetblue should have stuck to David Neeleman’s plan and grow organically.
You got it right in the end. Pure fantasy.
And you call yourself a journalist? Market cap isn’t the one all metric of one buying another. I can make a lengthy response in the massive amount of error in this article, but why even put energy into an article written by someone why put minimal effort in his part.
Btw I flown delta recently in the past few months and 3 out of my 5 flights were delayed over an hour and one cancelled.
@Dartagnan79 – Welcome! First, no, I am a travel writer/blogger, thank you. I agree that Market Cap isn’t necessarily relevant to an acquisition, but it becomes important with the acquisition when the target is 50% larger than the entire company, but there’s more. Some incorrectly assign undue value to JetBlue because of its market segment and product, and likewise some penalize Spirit based on its market segment and product. These are irrelevant in a business deal as well but many (over the last six months since this saga began) have assumed that JetBlue was bigger, ran a better airline and business which is false. Part of this post is about dispelling that myth and that from a business sense, product and segment aside, Spirit’s management has performed better, run a better operation, and are of similar size – they should be the aggressor in a hostile takeover of JetBlue.
Your anecdotal travel experience on Delta could be literally any carrier at the moment. It’s all trash at the moment.
As an employee, this would absolutely be preferred because the fear of JetBlue dragging everyone under and changing the things that make working at our airline great is very real. It’s one thing to be a consumer but if your employees are miserable, how much does that effect the operations?
As an employee, this would absolutely be preferred because the fear of JetBlue dragging everyone under and changing the things that make working at our airline great is very real. It’s one thing to be a consumer but if your employees are miserable, how much does that effect the operations? It’s more than just YOUR money involved.
Have you ever flown jetblue? The service is impeccable! I’ve flown them for over 20 years. There’s a reason why people continually go back time and time again. You get full sized snacks, you get to watch TV, you get a full sized drink and it’s all included. Whereas Spirit will nickel and dime you to death on everything. I find they were ranked most hated airline is laughable. Laughableeeee!!!
@Carline – Yes, I’ve flown JetBlue and love the product. That doesn’t mean that it’s a good business (as the numbers have shown) and I think you’re falling into the trap of confusing a better product with a better business. I stated:
“Many feel JetBlue’s superior hard product translates into fewer complaints but through the first quarter of this year, JetBlue and Spirit were essentially neck and neck with 8.4 and 8.8 complaints per 100,000 enplanements earlier in the year” including a link that points to that data from the governing body.
JetBlue’s product is undeniably better than ANY of the other carriers (when considering Mint) but it was respondents to the Wall Street Journal that ranked JetBlue last – that’s a key market for a premium product. And the whole point of the article is that in a business transaction, a better product doesn’t mean it’s a better business. I would rather fly in Mint over Spirit’s Big Front Seat, but for two businesses tat are essentially the same size, but one makes more money or loses less, the one that should be acquiring the other business should be the more successful one. But that’s the opposite here.
I prefer that Spirit remain independent. I like their culture.