JetBlue’s Spirit Purchase All But Certain Before 2024

Closing arguments in the government’s case against JetBlue’s purchase of Spirit Airlines have concluded. It looks all but certain the two are combining before the end of the year. 

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Disclosure: As I see the acquisition now as inevitable, I purchased a small amount of Spirit stock this week anticipating the deal will close, something I have heretofore doubted significantly.

Judge, Concessions

Arguments have closed and District Court Judge William Young is expected to rule before the end of the year on whether JetBlue Airways can proceed with its acquisition of Spirit Airlines. What makes this particular case interesting and difficult to predict the outcome, is that the Justice Department has rejected concessions in the $3.8 billion deal in the form of selling gates in key markets while JetBlue and Spirit have made that option available. The judge suggested this option:

“Young raised the prospect of further divestitures by JetBlue, which has already agreed to sell-off gates and slots at airports in New York City, Boston, Newark, New Jersey and Fort Lauderdale, Florida, to try to address U.S. regulators’ concerns.” – Reuters

“Young said he had “seen cases where a court has decided the divestitures were close but not sufficient and then has proceeded to say this would pass muster if there were this divestiture or that divestiture.”

However, the Department of Justice has rejected any settlement based on such concessions.

What makes this especially tough to read is that the judge has been clear that he feels the JetBlue-Spirit merger would inevitably lead to price increases with the elimination of this Ultra Low-Cost Carrier in the US airline industry.

That all feels like the judge would be set to deny JetBlue’s attempt to buy Spirit except for one key detail.

“But the judge, who will decide the case in the non-jury trial in Boston, told both sides that he was having “trouble” with the Justice Department’s request for a permanent injunction blocking a deal in a “dynamic industry facing unique opportunities and challenges in the post-COVID environment.” – Reuters

Judge Young has a challenge ahead of him. If the DOJ accepts the divestitures, and/or additional concessions made by the carrier and settles or drops its case, consumers would receive competition from those who adopt the vacated gates putting downward pressure on the carrier lawyers have suggested will raise prices by 30%.

At the same time, Judge Young categorically rejects the only remedy the DOJ has offered which is a permanent injunction. To me, that suggests that US Attorney, Edward Duffy, and the United States government are not only likely to lose their case, but fast. The judge has wanted to avoid a prolonged verdict period as the process has already been long.

JetBlue has a legal commitment to pay $.10/share every month to Spirit shareholders until the deal closes or is withdrawn. If JetBlue is unsuccessful, it will write Spirit a check for $400 million in a breakup fee.

As such, I believe that the acquisition will be approved with the Judge writing in required divestitures without the approval of the DOJ before the end of the year as he has stated was his goal. For the rest of this post, I will assume that this is the case and the acquisition moves forward.

What To Expect In The Short-Term

Some divestitures will require route rationalization immediately. Looking at the New York metro first for Saturday service:

• JetBlue operated (7) flights from New York JFK to Fort Lauderdale (JFK-FLL)
• Spirit operated (4) flights from New York LaGuardia to Fort Lauderdale (LGA-FLL)
• Spirit operated (5) flights from Newark to Fort Lauderdale (EWR-FLL)
• JetBlue operated (5) flights from Newark to Fort Lauderdale (EWR-FLL)

Will the new JetBlue be able to pare down 21 daily departures from the New York metro to its mutual Fort Lauderdale hub? Probably. The market would see this drop to perhaps 15-16 departures with fuller planes. Newark is likely where the most consolidation would take place on this route as there would be little need to operate 10 independent flights throughout the day, especially with United Airlines competing on a further nine departures of its own. This completely ignores Miami and American Airlines or Delta Air Lines at JFK.

The pair combine for eight daily departures from Boston to Fort Lauderdale too, this again would be a spot to drop a flight or two and fill planes fuller.

In the short term, I’d expect to see mostly this, a reduction of departures (though not necessarily seats) on routes picking up planes to be used elsewhere as they redeploy assets. Routes operated by smaller E-190 equipment that JetBlue has decided to extend beyond its prior retirement date in 2025 might be replaced by A320s for routes like New York JFK to Buffalo which JetBlue alone couldn’t fill but combined would be able to.

That opens smaller markets or routes the carrier doesn’t currently operate. JetBlue runs a massive amount of its connecting traffic through both Boston and New York JFK, though for the latter it focuses on more O&D (origin and destination) traffic if possible. Looking at my hometown airport, Pittsburgh, JetBlue doesn’t fly to JFK and frankly, that’s fair enough because there is lift on the three flag carriers plus Spirit to Newark that makes that flight a loser. But with a lower capacity E-190 and less risk, a freed-up Embraer might open an opportunity for PIT-JFK flights with the notion that JetBlue is losing connecting traffic it could otherwise seize.

Initially, independent Spirit routes on Spirit equipment will probably remain that way as the fleet is refurbished to JetBlue aircraft inside and out. As those aircraft come out of the paint shop and a true differentiated product from what Spirit flew to what JetBlue is offering will initiate price hikes. Again, using Pittsburgh as an example, flights that JetBlue doesn’t operate like PIT-RSW (Fort Myers, Florida) will stay Spirit’s model, look, and product, until the aircraft can be swapped out at which point the entire offering will be different.

What’s To Come In Years Ahead

Spirit has a very young fleet and will help JetBlue grow to new places in two key areas. The West Coast was an experiment for JetBlue with its Long Beach base that has been mostly abandoned at this point. But there are certainly customers for JetBlue that may make West Coast flights attractive crossing the country back to the East Coast. Southwest Airlines proved that its customers are happy to fly trans-continental flights even without redeyes or power at the seats because they like the brand. While Alaska Airlines owns the West Coast for the moment, and may even strengthen its position further following its potential acquisition of Hawaiian Airlines (subject to its passing of Antitrust laws), JetBlue may be able to make a go of it.

Ultimately, the additional expected Airbus equipment will play a factor too. JetBlue will likely convert some of the Spirit aircraft orders to A321-LR to expand its European operations where the carrier believes it can grow in a meaningful way.

Like a commercial airline Nostradamus, I wrote this in April of 2022 (nearly two years ago):

“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.” – Me

At the time, just London had been announced. The airline added Paris, Amsterdam, and seasonally Dublin, Edinburgh. We know Lisbon is achievable as well as other carriers are operating A321-Neos from other points on the eastern seaboard. Azul flies A320-family equipment from Fort Lauderdale to northern Brazil, so further options await the carrier from its southern hub as well.

The midwest has been fertile ground for Southwest as it expanded over the last two decades and I can see an opportunity for JetBlue to fill in the map and make flyers loyal to its product.

Conclusion

JetBlue and Spirit seemed to doubt the case challenging its acquisition would go to trial at all and then once it had begun, seemed stunned it actually made it through to closing arguments. The judge presiding over the case concedes that he believes the acquisition will lead to higher prices for consumers, but that the government is offering him little alternative to rule against them citing its position is commercially unstable. He feels strongly that concessions should be made, despite the DOJ’s unwillingness to give any path toward its support of the merger, and may include them himself in his ruling. He has indicated he intends to decide before the end of the year leaving little time to wait for the DOJ to change its stance. I believe that the acquisition will be approved and that 2024 will be the start of a new era for JetBlue and flyers around the country.

What do you think? Will the judge approve the acquisition? Is there room for appeal? What routes do you think JetBlue should open? 

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