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?
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?