It looks like Breeze’s effort to buy JetBlue has been thwarted… by something that surprisingly isn’t also an April Fools’ joke. The world learned on Tuesday that JetBlue is making a move for Spirit. Yes, that’s the same Spirit that is working on a merger with Frontier, but JetBlue clearly got jealous. Did someone spike the blue Kool-Aid? I flat out do not understand why JetBlue is doing this. It clearly has decided this is the best growth option available to the airline, and that is a scary thought.
JetBlue’s offer is for $33 per share in cash. That would allow the airline to acquire Spirit and merge it into JetBlue for a mere $3.6 billion in cash. Frontier’s offer was for 1.9126 shares in Spirit plus $2.13 in cash for each share held. So, call it around $24 or $25 depending upon the fluctuation, but that’s cash and stock. The offer pales in comparison to JetBlue’s, and if I were a Spirit shareholder — and I was convinced that a merger with JetBlue would pass antitrust review — I’d be more than happy to take JetBlue’s money and never look back.
Sure, Frontier could raise its offer, and maybe it’ll come up a little. But it’s hard to imagine that the architect of the Frontier/Spirit deal, Bill Franke, would get into a bidding war. He’s not going to chase a deal with stupid money; that’s just not how he operates. Besides, Frontier should be celebrating the possibility of JetBlue taking over Spirit. It’s one of the better possible outcomes for Frontier, as strange as that sounds.
Why do I say that? Well, let’s talk about costs. In the press release, JetBlue CEO Robin Hayes is quoted as saying “While JetBlue and Spirit are different in many ways, we also have much in common, including a focus on keeping our costs low….” They may both have a focus on keeping costs low, but only one of the airlines is good at it. (Hint: It’s the yellow one.)
Costs are choppy these days thanks to pandemic-related capacity cuts, but Spirit has charged ahead while JetBlue has remained in the middle. Just take a look at this chart.
Adjusted Unit Costs Excluding Fuel by Airline
Stage Length Adjusted to 1,000 Miles
JetBlue’s costs are high for a ULCC and low for a legacy airline. Yes, some of this is due to high airport costs in JetBlue’s primary airports, but much of it is structural due to JetBlue’s whole model as the ultimate tweener. Having more legroom, more frills, less density… it’s just a different model than what a ULCC puts out there.
Of course having higher costs means you need to get higher fares.
Adjusted Unit Revenue by Airline
Stage Length Adjusted to 1,000 Miles
JetBlue certainly does that, but it’s the opposite of what Spirit wants to do. These are fundamentally different airlines with networks and products catered to their core markets. If JetBlue was going to run Spirit as a separate standalone ULCC that just has connectivity with JetBlue, well… I probably still wouldn’t like it, but it would be more easily understandable as part of a growth plan. But that’s not what’s happening here. As JetBlue said in a letter to employees…
The combined airline would fly under the JetBlue brand and be based in New York City. We would retrofit the fleet to a common JetBlue experience on all aircraft. That’s not to say we can’t learn from Spirit and incorporate things they do well into JetBlue. We would conduct a full review of Spirit’s product offering and Customer technology to bring together the best of both airlines.
It seems pretty clear that JetBlue likes being JetBlue, and that means costs are going to rise significantly for Spirit. How do you think all those people looking for cheap tickets to Florida or Vegas or wherever are going to feel about that when fares climb? They’re going to run right into Frontier’s arms. Maybe Allegiant’s too for that matter. The opportunity in this merger is greatest for those who aren’t involved and will instead benefit from Spirit abandoning the ULCC space.
What makes it even worse is the delusion that JetBlue will continue to be able to be a part of the Northeast Alliance (NEA) with American in anything like its current form. JetBlue is spreading the gospel far and wide on this point, suggesting that it can have it all. But it just can’t. The Department of Justice has been looking for a way to kill the NEA, and by entering into a merger agreement that requires federal review, JetBlue just opened the door further and gave the feds leverage.
If the merger does go through, it’s absolutely going to require some major give on the NEA. It could be the end of the NEA entirely; that wouldn’t surprise me in the least. Even if it survives in some form, JetBlue has just royally pissed off its important partner, American. I asked American for comment, but it unsurprisingly had none. I’m guessing that’s because it’s hard to put a red face with steam coming out of your ears into an email. JetBlue making this move puts American’s entire New York strategy in jeopardy… not to mention JetBlue’s.
And what about the rest of the network? Will this even be able to pass muster with the feds? Probably. After all, DOJ had positioned the NEA as big, terrible American destroying the cute, cuddly, and helpless JetBlue. If something doesn’t involve the big guys, it’s far easier to get it pushed through. But that doesn’t mean this will go through without concessions being required.
I point to this chart showing market concentration via a well-titled Raymond James report on JetBlue called “Indecent Proposal — Downgrading to Market Perform.”
The feds probably won’t like that change in Fort Lauderdale one bit. There could be a required gate divestment for this to be approved since gate space is scarce. And you know what that means, right? Frontier and Allegiant win once more.
So again, what will JetBlue really get out of this? Yeah, yeah, they have fleet commonality, and they will get more pilots, but it’s hard to see how this is a good strategy. JetBlue seems to be struggling to find a way to expand on its own, so more pilots and more planes only help if the airline gets a strategic benefit from a merger. Since JetBlue’s plan is to erase Spirit’s advantage, it’s unclear what JetBlue will even do with all these airplanes, especially when much of Spirit’s network becomes loss-making as costs rise.
JetBlue says “The combination of JetBlue and Spirit would create the fifth largest domestic airline, better positioning it on a national level as a customer-centric, low-fare alternative to the dominant ‘Big Four’ airlines.” No, stop it. This is not what you want to say. Spirit has for years proudly said it is skimming off the top. It is not trying to compete with the legacies. That is how the ULCCs do their greatest damage. Yes, sometimes they feel the wrath of the big guys, but they prefer to avoid it. What JetBlue is saying here is that it wants to challenge them head on even though it will have nothing resembling a network that makes for a compelling offer. That is a losing strategy.
Spirit is an airline that works. JetBlue is one that sits in the middle and works in its limited geography… but going beyond that is tough. Now, JetBlue wants to take Spirit and create a larger airline that works worse. (To be clear, I mean commercially. I haven’t even talked about JetBlue’s poor operational abilities… that’s a whole different issue.)
I’ve spent the last two days trying to find a story that supports this merger. I still haven’t found it.