JetBlue was aggressive again in its quest to acquire Spirit and block its creation of a ULCC mega-carrier with Frontier. However, the carrier is now taking shots in this hostile takeover that is souring its image.
JetBlue Calls Out Spirit Board, Offers A Maybe To Stockholders
This week, representatives of JetBlue Airways called out Spirit Airlines Board of Directors after the airline rejected JetBlue’s buyout offer. Prior to the unsolicited offer from JetBlue, Spirit announced a merger with Frontier to form the nation’s fifth-largest carrier and the largest Ultra Low-Cost Carrier (ULCC) in the country.
The first offer (when frankly, the stock market was in a different place just weeks ago) was for $3.6 billion to outright buy the carrier and bring on its pilots, employees, aircraft, and stations from Spirit. The airline would simply be a larger JetBlue, not a merger of equals. After unanimously rejecting that offer, JetBlue countered back with the same offer plus a $200 million breakup clause paid to Spirit if the deal wasn’t approved by regulators.
Spirit announced it would put the deal with Frontier to a vote with Spirit shareholders on June 10th. If shareholders decline the deal that would give them 47.5% of the combined Frontier-Spirit airline, it would be a nod that shareholders either want the airline to remain independent or earn a premium on their Spirit shares.
JetBlue publicly condemned the Spirit board for not taking a fair look at its offer, advised Spirit shareholders that they should vote no, but then revised their offer down. Kind of. The new offer was for $30/share (lower than its prior offer of $33) but if the shareholders do as JetBlue asks and vote down the Frontier merger, the company will do its best to get back to a $33/share offer. That’s cold comfort to shareholders of Spirit (SAVE) despite a Friday close of $18.99/share.
Spirit Management Has A Point
Spirit’s board worked hard on the Frontier deal and carefully considered the risks, pros, and cons before they approached the deal. They’ve been clear that they think a bigger ULCC has a better chance of disrupting the network airline system, than two smaller ones competing against each other and a better opportunity than a premium(ish) North American carrier in JetBlue.
JetBlue won’t necessarily be the same JetBlue we have known. For example, the DOJ is still suing the company over its Northeast Alliance (NEA) with American Airlines. While I personally haven’t reviewed enough of the DOJ’s case to state whether I think the NEA will remain in place or be struck down in court, it’s certainly possible that this won’t be allowed to continue.
Further, the acquisition is contingent on receiving antitrust clearance from the same DOJ that is suing the carrier. Spirit management outlined as much in its letter to JetBlue which appears to be a rational determination.
Spirit management has significant doubts about both encounters with the DOJ and they have a point. Another issue is whether JetBlue management, which has not been publicly gracious during this process, will operate the airline in the best manner for stockholders and its employees, let alone its customers.
JetBlue has alleged that while Spirit has taken into account regulatory difficulties with an acquisition, it has not equally weighed regulatory difficulties with combining two of just three ULCCs in the US.
I’ve Soured on JetBlue’s Spirit Acquisition
Initially, before the JetBlue announcement was made, I wasn’t enthusiastic about the Spirit-Frontier merger because:
- I don’t believe in a merger of equals, especially with a 7-5 board split (Frontier-Spirit); it will be Frontier with some Spirit employees and planes.
- The two ULCC operations are very different with Frontier operating irregular schedules and zero frills
- Spirit just rolled out its renewed Free Spirit frequent flyer program and for domestic flyers it has nearly all of the benefits of top tier status on Delta, United, or American Airlines.
- The Big Front Seat is the second-best deal in domestic travel with more room than first-class seats of the three big carriers but is sold for just $50.
- Spirit flies business routes, Frontier is almost exclusively leisure.
- Spirit just added wifi to their aircraft (fast and cheap), a move Frontier still has yet to make.
However, even considering how much of a mismatch those two carriers might be, JetBlue’s interest has probably shown that Frontier that Spirit should have a pretty equal seat at the table and that encourages me. I agree with Spirit and Frontier management that a bigger ULCC does more to keep costs low and more travelers flying than a bigger JetBlue.
JetBlue started this hostile takeover a bit dismissive of the actual airline Spirit built – they made it clear they just wanted the planes and people. Then, when Spirit rejected their initial offer, they issued a second offer, the same but with a $200 million breakup clause. JetBlue announced that second offer on the same day that Spirit was getting the word out they had already passed on it. It made it appear as though Spirit had not considered this at all, even though they had days prior, again, hostile.
It’s also worth mentioning that for Spirit, the merger with Frontier Airlines is not likely to come around again if they walk away from it, so if the deal isn’t approved by the Department of Justice (something many doubt) then $200 million is far less than the carrier stands to lose for shareholders.
In essence, I found Spirit to be the best among the ULCC category with more amenities, regular flights, and business routes in addition to leisure. Out of the options available at the moment, the Frontier option seems to be the best option to retain the soul of that airline and service model.
JetBlue management showed itself to be dismissive, callous, and subversive. Even the JetBlue flight attendants are telling Spirit workers that it’s not a good situation for them.
JetBlue has put a particular emphasis on “hostile” in this takeover bid. In my opinion, the last decade (or two) of airline consolidation has everyone worried about being left without a chair when the music stops. Before the discussions began with Frontier, Spirit might have been able to stay independent as all of the carriers could have, but now that several combined airlines have been proposed, it won’t be possible to put the toothpaste back in the tube. So, when left with the choice of Frontier or hostile JetBlue in this instance, I have reversed my opinion and support the Frontier merger.
What do you think? Do you agree that JetBlue is acting particularly hostile for a company that intends to close a deal and take on Spirit employees? Do you disagree with Spirit’s management regarding Frontier being a better long-term deal for the carrier?