JetBlue, Frontier each make case for Spirit takeover

Industry:    

JetBlue Airways Corp on Wednesday mounted a vigorous defense of its unsolicited $3.6 billion bid to acquire ultra-low-cost carrier Spirit Airlines, saying the company is “highly confident” of securing regulatory approval for the deal.

The New York-based carrier on Tuesday surprised Wall Street with a $33 per share cash offer, potentially derailing a $2.7 billion merger plan between Spirit and Frontier Group Holdings Inc.

Frontier on Wednesday said it remained committed to its merger with Spirit as that would create the country’s “most competitive” airline and offer more ultra-low fares to consumers.

JetBlue’s proposed deal is widely expected to attract close antitrust scrutiny from President Joe Biden’s administration, which has taken a tough stance against mergers that may reduce competition and increase prices for consumers.

The carrier said while it expects a lengthy regulatory process, it is counting on its track record of lowering fares and increasing competition to get the nod.

“We are convinced… that average fares come down more when JetBlue flies into a legacy market than when an ultra-low-cost carrier does,” JetBlue Chief Executive Robin Hayes told investors on a call.

Some analysts, however, are not sure the administration will buy the argument that the acquisition would translate into lower consumer costs as JetBlue’s fares are higher than Spirit’s. JetBlue also has plans to remove some seats on Spirit’s planes.

White House National Economic Council Director Brian Deese on Wednesday declined to comment on JetBlue’s bid, but said the Biden administration takes “very seriously” the impact of industry consolidation.

JetBlue and American Airlines Group Inc are already facing a lawsuit from the U.S. Department of Justice over their Northeastern Alliance.

The partnership, announced in July 2020, allows the carriers to sell each other’s flights in their New York-area and Boston networks and link frequent flyer programs in a move aimed at helping them better compete with United Airlines and Delta Air Lines in the Northeast.

Hayes said the company would not sacrifice the Northeastern Alliance in order to secure regulatory approval for the Spirit deal.

COSTS & BENEFITS

Analysts are also questioning the benefits of JetBlue’s Spirit bid.

Raymond James downgraded the company’s stock, calling its offer for Spirit an “indecent proposal.”

While both carriers have fleets dominated by Airbus SE, any potential cost savings from the deal will be diluted by JetBlue’s need to bump up the pay of Spirit pilots, who are on a lower band, Raymond James analyst Savanthi Syth, said, adding that execution risk is higher in JetBlue’s proposed deal than for the potential Spirit-Frontier merger.

JetBlue does expect higher labor costs as a result of the deal. But it said the transaction would result in certain economies of scale, producing savings of $600 million to $700 million within three years. It also expects the transaction to be accretive to its earnings in the first year.

The company committed to maintain compensation and benefits for Spirit employees for at least 12 months.

Shares of Spirit were off 1.7% at $26.45 in afternoon trade, suggesting investors were skeptical of the deal going through. JetBlue stock was down 8%, while Frontier was off nearly that much.

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