JetBlue confirms on purchasing Spirit Airlines

• JetBlue will acquire Spirit Airlines, creating the fifth-largest airline in the United States.
• Spirit CEO made no indication that it had any reservations about a partnership with JetBlue.
• Shares of Frontier changed little in premarket trading.

On Thursday, JetBlue Airways announced that it would acquire Spirit Airlines, creating the fifth-largest airline in the United States. A day after Spirit called off talks to merge with Frontier, the news was made.

Even as Spirit sought shareholder approval for a more affordable agreement with Frontier, JetBlue was pursuing a hostile takeover bid for the airline. Spirit had frequently voiced doubts about whether regulators would agree to a transaction with JetBlue. But with JetBlue’s all-cash bid on the table, stockholders had resisted accepting Frontier’s less desirable cash and stock offer.

According to JetBlue CEO Robin Hayes, both investors and customers will benefit from the agreement.

In a statement, he added, “We are thrilled to deliver this compelling combination that turbocharges our strategic expansion, enabling JetBlue to bring our distinctive blend of affordable fares and excellent service to more people, on more routes.

Greater fares

However, industry analysts have warned that the agreement may result in increased rates for all passengers. In contrast, a merger between Frontier and Spirit would have combined two airlines with extremely cheap base fares. There are no first- or business-class seats on either carrier.

Larger airlines like American (AAL), United (UAL), and Delta (DAL) often have to provide more seats at their comparable basic economy fare when Spirit or Frontier operate on a route. Although JetBlue may claim to price less than the more established network operators, Spirit and Frontier offer lower tickets. And if JetBlue buys Spirit Airlines, it intends to add first-class space by modifying the aircraft.

Even if you never fly either Spirit or Frontier, they have a significant impact on the fare you pay, according to Scott Keyes, the creator of Scott’s Cheap Flights, a website that aids travelers in finding lower airfare. “When Delta introduced the basic economy fare in 2012, they called it a “Spirit-matching fare” to investors because the world’s budget airlines were stealing their food. Neither merger appeals to me, but I like the JetBlue option much less.”

Because of this, it’s probable that the US Department of Justice will conduct a thorough antitrust investigation into the JetBlue acquisition of Spirit, especially if the department believes the acquisition will affect customers.

The proposed JetBlue Spirit merger is smaller than many airline alliances that have taken place in recent years, which have resulted in four mega-carriers controlling 80% of US air traffic, replacing the top ten US airlines. However, the Biden administration has adopted a much tougher stance on antitrust law issues and promised to encourage more competition within the aviation sector.

The Justice Department of Biden filed a lawsuit to stop American and JetBlue’s partnership, which permits each airline to accept reservations for the other’s flights. When Spirit argued that a JetBlue deal wouldn’t receive the required permission, it cited the legal action.

Competition rise

But in Spirit’s remarks on Thursday, there was no indication that it had any reservations about a partnership with JetBlue.

CEO Ted Christie remarked, “We are excited to join forces with JetBlue through our enhanced agreement to establish the most appealing national low-fare rival to the leading U.S. carriers.”

In a CNBC interview on Thursday, Christie was questioned about his earlier criticism of JetBlue’s offer and his skepticism over the deal’s regulatory approval.

Over the past few months, “we’ve learnt a lot,” he said. “They’re using an aggressive approach to close this sale. It’s beneficial to our group, therefore we’ll be right there by their side to see to it. According to some of the storylines, the Big Four will soon have a serious national rival.”

According to JetBlue’s Hayes, the greatest justification for regulators is that this transaction will add a significant national carrier and increase competition rather than decrease it.

He remarked on CNBC, “We’re focused on closing this deal. “We’re focused on bringing more airplanes in, giving more amazing products and inexpensive rates to passengers in more geographies than JetBlue or Spirit could do alone,” the statement reads.

Even though Spirit and Frontier provide affordable rates, most customers did not enjoy the quality of the service. According to the US Department of Transportation, Spirit had by far the most passenger complaints in 2021, with 11.45 complaints for every 100,000 passengers. On that basis, JetBlue had the second-highest number of complaints with 6.38, followed by Frontier with 5.78. When Frontier recorded 49.31 complaints for every 100,000 customers in 2020, it had by far the worst complaint rate.

The Deal

In the deal announced on Thursday, Spirit shareholders would receive $33.50 in cash per share, along with a prepayment of $2.50 per share in cash due upon the transaction’s acceptance from Spirit investors even before the deal closes.

In the event that the transaction is postponed past December of this year, JetBlue will compensate Spirit stockholders an additional 10 cents every month, bringing the price to $34.15 per share. Additionally, Spirit will receive $70 million from JetBlue, and its shareholders will receive an additional $400 million if authorities reject the transaction.

Spirit will be required to pay Frontier $25 million to compensate for expenses incurred by Frontier during the acquisition negotiations. Spirit will owe Frontier an extra $69 million if JetBlue is successful in completing its acquisition of Spirit within the next 12 months.

Frontier expressed disappointment Wednesday night when its agreement with Spirit was ended, but claimed it would still be able to expand even without a merger.

With JetBlue attempting to turn Spirit Airlines into a high-cost carrier, it was stated that Frontier would be the undisputed leader in the ultra-low-cost sector.

If JetBlue completes the transaction this year at $33.50, it will represent a $1 billion premium above Frontier’s offer and a 38 percent premium over Spirit’s closing price on Wednesday. As a result of the announcement, Spirit (SAVE) and JetBlue (JBLU) stock prices increased by 4% and 1%, respectively, in premarket trading. Shares of Frontier changed very little.

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