I’ve moved up my usual Thursday post to Wednesday instead… since there was no reason to wait to talk about what just happened yesterday.
It was never easy to predict what the courts would say, but now the guessing games are over. In a 100+ page ruling that used some colorful language, William G Young blocked the acquisition of Spirit by JetBlue. Now, both airlines have some serious work to do. This isn’t great news for Spirit, but it should be good news for JetBlue in the long run if mangement gets serious.
Unlike the JetBlue/American Northeast Alliance (NEA) ruling, this one did not suggest that the airlines really blew their case. In fact, the judge says the airlines were just trying to maximize profits, as they’re supposed to do. He also said expert witness testimony was evenly matched, a far cry from the evisceration of the airline testimony in the NEA case. After quoting Les Misérables at one point and actually evaluating the merits of the case, the judge ended with this:
Spirit is a small airline.
But there are those who love it.
To those dedicated customers of Spirit, this one’s for you.
Because the Clayton Act, a 109-year-old statute requires
this result –- a statute that continues to deliver for the
It was clear where this was going when the judge decided that the “relevant markets” in the case were each origin and destination instead of the broader airline industry at large. JetBlue arguing that this merger would help it compete on the national level with the big carriers was considered a valid concern, but it was also not enough since each individual market had to be evaluated.
Even worse for the airlines, the definition of relevant markets used a very broad net:
The Court accepts as relevant markets the following routes:
nonstop overlap routes that both JetBlue and Spirit currently
fly… “connect routes”, which are the routes on which
both Spirit and JetBlue fly connecting service; “mixed routes”,
which are the routes on which one of the Defendant Airlines
flies direct service and the other provides connective service,
and “Spirit-only routes”, which are routes that Spirit currently
flies, but JetBlue does not.
With that kind of definition, it would be hard to NOT find harm. And so, harm was found. But the judge did also say that the airlines successfully countered many of the concerns. They problem is, they couldn’t completely eliminate them.
Although the Defendant Airlines provide ample evidence at
the rebuttal stage that the anticompetitive harms of the
proposed acquisition will be offset, both by new entries into
the harmed markets and potential pro-competitive benefits, this
evidence fails to establish that the proposed merger would not
substantially lessen competition in at least some of the
In the end, the real issue is that JetBlue would pull seats out of Spirit airplanes and reduce competition in overlap markets. To replace all of that lost capacity and competition within two to three years, the remaining ultra low cost operators would have to grow at insane and likely impossible rates. It can’t be done, so, the merger is blocked.
There’s a lot to take in here, but my first observation has nothing to do with JetBlue or Spirit. My first thought was that this was probably good news for Alaska and Hawaiian. Those airlines have much less overlap, and there are no real airport constraints at any of the impacted airports that can’t be addressed. Other airlines could quite easily fill in the void. Using this logic, the Alaska and Hawaiian merger may actually make it through, if the government decides to sue to try to block it.
But this is not a post about Alaska and Hawaiian. This is about JetBlue and Spirit. We don’t know if JetBlue will appeal, but it wouldn’t surprise me since it does have $470 million on the line here. It was so confident that it would be able to push this merger through that it agreed to pay a reverse termination fee of $470 million if it didn’t make it through anti-trust review. That’s a whole lot of money for nothing, though to be fair, most of it has already been paid out since it promised Spirit shareholders $2.50 a share up front and then 10 cents a month per share starting in January 2023. This is a sunk cost. It’s time to move on.
Assuming JetBlue does move on, what comes next for the two airlines? A whole lot of soul-searching, that’s for sure.
Wakey Wakey Time for Spirit
For Spirit, the airline has been sitting and waiting while the merger went through the courts. It has been relatively stagnant over the last year, even though the airline continues to rack up the losses. Its future survival is in doubt. Helane Becker, analyst with TD Cowen said in her initial note on the ruling yesterday:
We believe Spirit is likely to look for another buyer (maybe private equity?) but a more likely scenario is a Chapter 11 filing, followed by a liquidation.
So, Spirit management needs to wake up fast and start making big changes to put the airline back together again and create a lasting opportunity. Otherwise, JetBlue might be able to just buy those assets in a liquidation. It’ll be a lot cheaper.
JetBlue Needs to Turn Inward
The path for JetBlue isn’t nearly as clear. Robin Hayes departs as CEO in less than a month, so it’s on new CEO (and current President) Joanna Geraghty to figure out where to take this airline.
I haven’t ever viewed the Spirit deal as an actual, useful strategy for JetBlue. Just saying “we need to get bigger so we’re gonna buy an airline with a lot of planes and gates” isn’t a plan. That’s just a delaying tactic. Now, the airline needs to create an actual strategy to fix its many woes.
JetBlue has to fix the operation. It needs to walk away from bad ideas (like the LAX focus city) and double down on the places it has neglected (Boston). Maybe it should think about getting in on that appeal of the NEA with American. The airline should rethink the European operation, and it should look for new US-based opportunities where it can put a growth plan in place when it has the airplanes.
To make this happen, Joanna needs to bring in some new (or, perhaps… old?) blood to really jump-start this thing. In the end, this should make JetBlue a better airline. It may be smaller, but it makes the airline face its demons now and clean the place up.