Spirit Airlines has an upcoming stockholder vote to decide whether to merge with Frontier or take a competing buy-out deal from JetBlue. But why isn’t Allegiant the belle of the ball?
Spirit Airlines (SAVE) Upcoming Shareholder Vote
Spirit Airlines (SAVE) has announced that while management has rejected the JetBlue Airways offer for acquisition, it will put the matter of accepting the Frontier merger to a vote. If Spirit and Frontier merge, the combined company values Spirit Airlines stock at $2.9 billion, but Spirit shareholders would receive 48.5% of the new company. Doubt has been cast whether JetBlue buying Spirit would encounter regulatory restrictions and become unlikely to close, a move that JetBlue answered with a $200MM breakup payout if the merger wasn’t approved. That was also rejected by Spirit management. Spirit Airlines has an extensive network throughout Latin America, attractive to both suitors.
Why Isn’t Allegiant A Target
While Spirit Airlines appears to be the belle of the ball in the American air transport market, why isn’t Allegiant getting invited to dance? Its stock has outperformed others in the sector, and its equipment has been renewed and aligns with both Frontier and JetBlue.
Yet Allegiant is all dressed up with nowhere to go. Here’s why:
The carrier has built a steady business primarily in secondary markets, and bringing travelers to leisure destinations. Allegiant flies from four airports in North Dakota, and two airports in Nebraska, for example. Even many of the sunny leisure destinations that Allegiant delivers travelers to are secondary airports like Punta Gorda, standing in for Fort Myers but a solid 40 minutes north, St. Petersburg for Tampa, Florida, and Mesa, Arizona for Phoenix.
JetBlue just started service to Kansas City and hasn’t added Omaha or Des Moines to the map yet. In fact, JetBlue has vast swaths of the country missing from the map and until Kansas City was added, a thousand-mile hole along I-80 from Denver to Chicago demonstrated the company’s focus.
Frontier shares some of the same smaller markets that Allegiant thrives from, but not to the same degree. Spirit is focused almost exclusively on major market airports but with a somewhat wider focus. For JetBlue, those stations, landing slots, and employees are far more useful (especially in Orlando and Fort Lauderdale) than Allegiant could be.
Frontier flies into a mix of secondary airports like Trenton, NJ, but couldn’t make Punta Gorda work when it tried a few years ago. Adding an airline to the mix that already aligns with its customer behavior but does something Frontier hasn’t been able to do would seem to be a good candidate for a merger. However, in the case of Frontier, it appears to be more about the bigger airline Frontier wants to be rather than the airline it already is.
For JetBlue, there’s very little value in these secondary markets which would no doubt lose service entirely.
As An Equipment And Personnel Acquisition
JetBlue has been crystal clear that its proposed acquisition of Spirit comes down to equipment (aircraft) and personnel. Looking first at the equipment Allegiant Airlines operates, it’s a mix of Airbus A319s and A320s. JetBlue already flies a mix of A320 family aircraft and Embraers, adjusting for Allegiant Air’s A319 would require almost no additional accommodation.
When JetBlue talks about personnel, yes, this includes baggage handlers and ticketing agents but it’s really about the pilots. That’s not to shortchange the flight attendants, but there is a perpetual line out the door flight attendant jobs. Pilot qualification requires expensive, employee-provided training and the accumulation of hours needed for flying passengers.
Nonetheless, a JetBlue acquisition of Allegiant if solely for pilots and aircraft could make sense for JetBlue. Allegiant is set to operate 127 aircraft by year-end compared with Spirit’s 177. If considering a per aircraft price (much like hotel sales are valued per room key), the Spirit deal would have paid just over $20.338MM/aircraft. However, airline stocks (like the rest of the market) have taken a beating as of late and Allegiant has a market cap of just $2.4bn. If JetBlue were to offer a 20% premium ($2.88bn) that would elevate the price per aircraft to just $22.677MM, and while this price is less attractive than the Spirit Airlines acquisition would have been, it’s also better than being left with no options for growth and requires less cash to complete the transaction.
Further, if the JetBlue acquisition were to be rejected by Spirit stockholders and the Frontier Airlines-Spirit Airlines merger was permitted to proceed, would the regulatory concern about JetBlue acquiring a ULCC go away with the creation of a much larger ULCC in the new combined airline? Could this be JetBlue’s last, best chance to grow quickly?
Whether Spirit shareholders vote to approve or decline the Frontier merger on June 10th, the JetBlue acquisition, it still begs the question of what happens to Allegiant Travel. As the JetBlue buy-out has already been rejected, it seems unlikely to proceed and Allegiant may be a less attractive option but all the same, a viable option to add aircraft and pilots to the mix. Buying Allegiant offers reliable intermittent income from existing Allegiant flights while the airline integrates aircraft and pilots into the JetBlue system. That said, perhaps the lack of instant integration that JetBlue would find with Spirit cities and aircraft is the reason why Allegiant hasn’t been offered a deal.
What do you think? Is there another reason why Allegiant hasn’t been considered an option for either Frontier or JetBlue?