JetBlue Twists Itself in Knots Trying to Create a Rationale for Buying Spirit

Frontier, JetBlue, Mergers/Finance, Spirit

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.

71 comments on “JetBlue Twists Itself in Knots Trying to Create a Rationale for Buying Spirit

  1. Agree with your assessment on this, Brett.

    Spirit and JetBlue are just on opposite ends of the ULCC spectrum. Even ignoring costs, revenues, and fleets, I don’t see how they can be integrated from a product, culture, and marketing perspective, unless you run them as two separate brands/entities (at least from a branding and pax experience side), with perhaps codeshares and some shared crew and back office staff. That’s not a compelling reason to buy a company, unless you think the underlying assets (slots, planes, crew) are really undervalued, which I have yet to see anyone make a good case for.

    So then what’s the value for B6 here?

    **Hypothesis:** This is a move by B6 to eliminate a “competitor”.
    **Argument against:** Do B6 and NK really compete that much for similar pax? Maybe to a certain extent for flights to FL & the Caribbean, but elsewhere? And does B6 really WANT to compete for NK’s pax, other than those who buy the Big Front Seat? To Brett’s point, if this were to go through at all in the way that B6 portrays, it would open up huge opportunities in the market (which Spirit itself has proven to exist), and Allegiant, Frontier, and likely others will eagerly devour, so what’s the point in eliminating a competitor?

    **Hypothesis:** B6 doesn’t REALLY want to buy NK, but rather wants to bid up the costs of the Spirit/Frontier merger (both before and after it occurs), and/or to delay or derail the Sprit/Frontier merger, without B6 wanting to buy NK.
    **Argument against:** This strategy could potentially work, but comes with high risks… You can try to bid up the other guy at an auction with an eye towards dropping out of the bidding before he does, but you better be willing to open your wallet and cut the check if you wind up winning by accident. Also, remember that the costs for B6 to bid for NK (both direct, in terms of what Wall Street and consultants get, and indirect, in terms of distracting management from operating the airline) are not insignificant.

    In a way, this feels slightly reminiscent of Alaska’s purchase of Virgin, in the sense that IF it goes through, it sounds like not much of one of the original airlines will really remain after a few years. I’m not sure that B6’s offer will go through, but whether it does or not, I’m sure that outside experts in the finance, legal, and consulting areas will make a killing off of it.

    1. Kilroy – great thoughts / hypotheses – I am going to go with hypothesis #2, in that I don’t feel that JetBlue can really absorb another airline into its system, without a very large number of integration issues. If JetBlue doesn’t have the integration expertise in house, this could be very ugly in the first couple of years. It would make sense to me that they are trying to up the overall cost of the merger to put some additional financial strain on the merged airline. This is not a bad strategy, particularly if they are trying to figure out a long term growth strategy themselves.

      1. Thanks. At this point, I’m not sure if JetBlue is “crazy like a fox”, or just going “full tilt” (to use a poker term) and trying to bluff out others, but I have yet to be convinced that JetBlue really wants to buy Spirit.

        If my crystal ball were perfect, I’d be working at a hedge fund (and I’m definitely not). Nonetheless, playing the “armchair airline executive” game, it still seems to me like the best outcome for B6 would be if they can inflate the price of the Spiritier merger so as to saddle it with enough debt/strife/etc that the combined Spiritier airline remains relatively weak (or capital-constrained) after the merger, leaving JetBlue more freedom to what it wants. If B6’s bid for Spirit accomplishes that, it has the potential be a very, very smart piece of strategy when looked at 10 or 15 years ago.

        Another possible goal by B6 may be to drag out & delay the merger of Spirit & Frontier.

        1. > If B6’s bid for Spirit accomplishes that, it has the potential be a very, very smart piece of strategy when looked at 10 or 15 years ago.

          correction, should read: “…when looked at 10 or 15 years FROM NOW.”

    2. JetBlue’s Pilot and FA CBAs Prohibits them from operating Spirit as a separate airline or separate brand.

      Once ALPA is AFA files Single Carrier Status with the NMB it starts the process of seniority integration negotiations and JCBA negotiations.

  2. From the outside, this looks like an antitrust nightmare.

    If B6 and NK were 1:1 competitors, I’d think differently. But the end result here is going to be the disappearance of a ULCC, and I have a feeling that DOJ—especially under this administration—ain’t gonna like that one bit. And that’s before we even get to the NEA.

    Perhaps this just a gambit to make F9 spend a little more money…

      1. Everyone but AS… which is probably why AS bought VX at the price they paid. Oh, and maybe UA, because they might have a more formidable competitor at SFO. Or two.

  3. Good assessment. JetBlue has no business buying another airline. It neither has the finances nor the operational stability and know-how to integrate a carrier into its own. The company has a product that is definitely several notches higher than the average US airline, but it can’t run a clean operation, has frequent delays, staff shortages (a problem long before COVID and the current national employment situation), and has had that problem since inception. The merger of NK and F9 makes a lot more sense on paper. What would solve JetBlue’s chronic issues is that it would merge into another airline. My guess is that it would AS at minimum, and more likely, American.

  4. This all makes me wonder if the new management team at WN will wade into the mix in some way. Not necessarily with a bid for Spirit, but in some other M&A move.

      1. Ya, Sun County would work pretty well under Southwest’s model. Fills a MN-sized hole in WN’s network too. But maybe Sun Country’s costs are too low…and they’re too flexible…to be worthwhile when absorbed into WN. But hey, AirTran was the same way.

      2. Why would SWA have an interest in Sun Country? They are not really a competitor to SWA in any way, nor would their very small fleet / route system really add anything to SWAs.

        1. A lot could depend simply on quickly acquiring aircraft for growth. SWA did this with the purchase of Morris Air in 1993 for approximately 30 compatible 737-300’s, access to valuable Orange County CA slots, and operations in the Pacific NW. . .

  5. Cranky,

    Do you see this as a “Hail Mary” by B6? It just doesn’t make any sense to me. Their latest 10K shows the airline having a negative Daily Cash Burn (again). But what I would be concerned with is their Adjusted Debt to Capitalization Ratio. It’s quite high. Most of this debt is highly leveraged which in turn means a greater risk will be associated with the firm’s operation.

    1. TWA – I don’t know how to view this. Cash burn and all that isn’t really a concern for a longer term strategic move. I just don’t see how this fits in.

  6. With new interiors/paint the new company will be a 100% JetBlue product not a ULCC. Whatever loan they have to take would be worth it to double the size of the company, and is small compared to the liabilities some other airlines have.

  7. Wild speculation: JetBlue knows they are stuck strategically – what if this is just a play by JetBlue to try and force AA to buy them?? (or AS? or SWA?) Start a free-for-all where everybody is in play and see if they can get acquired to get out of their strategic jam?

  8. At first blush, I had the same reaction as most people: What? But as I looked at the possibilities more closely, and checked out JetBlue’s presentation. I’ve warmed up to the possibilities of this proposal. That doesn’t mean I completely disagree with the “conventional airline blog armchair CEO wisdom.” It simply means that there’s more than one way to look at the situation.

    First, the areas of agreement. I agree that the biggest beneficiary of this combination would probably be Frontier. It would remove a strong competitor from the ULCC space. But fear not, there seem to be plenty of new companies (i.e., Avelo and Breeze) that are eager to fill the void. They should also be helped by this proposed merger. The other obvious beneficiary is Allegiant. It was pointed out here that Frontier and Spirit’s business models differ significantly in one important area – schedule frequency. Frontier and Allegiant wouldn’t have that conflict if they decided to merge to create a larger competitor. The sheer number of airlines isn’t the sole determinant of a marketplace’s competitiveness. Size and scope also matter.

    Then there are the areas of mild (repeat mild) pushback. The biggest: Low unit costs aren’t everything. Many of the standard airline financial metrics are incomplete and need to be looked at in context. Businesses aren’t charities. They tend to charge what the market will bear. Low costs simply mean that it’s easier to produce better margins – which is the name of the game. If the JetBlue/Spirit combination can generate better margins, even with higher unit costs, then the merger makes sense.

    Then there are the regulatory questions. The conventional wisdom is that this merger will automatically be rejected out of hand. The other is that it automatically dooms the NEA. As the song from Gershwin’s “Porgy and Bess” suggests, “It ain’t necessarily so.” This merger would definitely increase the concentration at Ft. Lauderdale, but almost all of the pundits seem to ignore Miami. Then there’s the overall competition along the east coast and in Florida. This proposed merger won’t affect that dynamic. Is the NEA automatically doomed? I’m not sure. Spirit’s presence in New York is paltry, and it seems to be the biggest airline pushing against the NEA. This merger would make that opposition pointless, as Spirit’s limited presence in New York would be addressed. Anyone can file a lawsuit. Winning in court is a different matter.

    Space is limited (which is good), so I’ll only add a couple more thoughts. Spirit’s Big Front Seat is more compatible with JetBlue’s model than with Frontier’s. And there’s this irony: The large amount of liquidity most airlines have makes them easier takeover targets. Their cash literally becomes a part of the acquiring carrier’s financing.

    1. If low costs aren’t important/“everything”, then clearly Mr. Franke and Mr. Parker should trade places (for roughly the last 4.5 years) when ranking chairmen within the U.S. passenger transport industry. After all, it is “not a crime” to have for-profit businesses to be managed differently.

      1. Kishoreajoshi,

        Please don’t misquote me. I have no problem with reasoned disagreement, I welcome it. But I do have an issue with being misrepresented. I didn’t write the word “important” when I referred to airline costs. You added that. I also included the word “unit” when referring to costs. A point you ignored. Delta has relatively high unit costs, but it effectively competes with ULCCs. Hence my overarching point about margins. One of the most common logical fallacies is to take a point out of context to inadvertently (or deliberately) misrepresent an argument. It’s “not a crime” to have different views – or different business models. But please, don’t rebut what I didn’t write. Thank you.

    2. > If the JetBlue/Spirit combination can generate better margins, even with higher unit costs, then the merger makes sense.

      The concept of “penny profit” from retailing comes to mind to illustrate your point.

      As an analogous example, if a supermarket buys a generic can of peas for $0.75 that it sells at $1.00, it may earn a higher % margin (25%) than the fancy can of peas that it buys for $1.20 and sells at $1.50, but it earns a higher “penny profit” (absolute gross margin per unit sold) on the premium product.

      It doesn’t always work that way, obviously, but it’s a worthwhile (if simplified) way to think of things, and it shows that numbers do need to be put in their proper context.

      1. To that point, many of the lowest-priced items in stores have the highest margins and markups. I worked in music stores at a couple of points, and the highest margin items were strings, reeds, woodwind key pads, valve and slide oil, cork grease, sheet music, music stands, drum sticks, and other similar accessories one needs to play a musical instrument.

        1. It’s the same in electronics. That fancy $50 cable may have a $40 gross margin, while the $800 TV may only have a $20 gross margin. Accessories and add-ons for expensive items tend to have very high margins and markups, often more than the expensive items they are sold with, hence the pressure on salespeople to push the add-ons.

          In contrast, items that “everyone knows the price of” and that many people purchase regularly (bananas, regular gas, milk, eggs, bread, etc come to mind) tend to be more commoditized and have much lower margins, especially if the perishability of the items or difficulty storing them makes it hard for stores & consumers to buy months’ worth at a time when prices are low.

    3. Ghost – Excellent. I was hoping somebody would come up with rationale.
      I’m not swayed, but I appreciate the thoughts.

      > Then there are the areas of mild (repeat mild) pushback. The biggest: Low unit costs aren’t everything. Many of the standard airline financial metrics are incomplete and need to be looked at in context.
      > Businesses aren’t charities. They tend to charge what the market will bear. Low costs simply mean that it’s easier to produce better margins – which is the name of the game.
      > If the JetBlue/Spirit combination can generate better margins, even with higher unit costs, then the merger makes sense.

      Low costs aren’t everything, but that’s why airlines with higher costs need a different model. JetBlue has much higher fares than Spirit. Some of that is there’s less ancillary opportunity on JetBlue so it’s baked in the fare, but more is that there is a structural difference will all that inflight entertainment, more legroom, etc. Higher fares will be required. That works in places like New York and Boston, maybe, but it’s a much tougher sell throughout much of the Spirit network. I couldn’t stop laughing at how JetBlue mentioned new markets it’ll enter like Atlantic City. That is a low fare market. And much of Spirit’s network is oriented that way. So with higher fares, JetBlue needs to find new ways to use those airplanes to fit in a higher cost, higher fare structure.

      > Then there are the regulatory questions. The conventional wisdom is that this merger will automatically be rejected out of hand.

      I didn’t say that, so I’ll skip to the next one.

      > Is the NEA automatically doomed? I’m not sure. Spirit’s presence in New York is paltry, and it seems to be the biggest airline pushing against the NEA.
      > This merger would make that opposition pointless, as Spirit’s limited presence in New York would be addressed. Anyone can file a lawsuit. Winning in court is a different matter.

      Since it’s a merger, the feds can block it if they want. The airline can sue the feds, but it’s not like the NEA is set up now where the feds have to sue the airline. It just gives the feds more leverage.

      > Space is limited (which is good), so I’ll only add a couple more thoughts. Spirit’s Big Front Seat is more compatible with JetBlue’s model than with Frontier’s.

      I don’t know. Frontier has a lot of extra legroom seats while Spirit has none and instead went with BFS. It would be a great opportunity to pick and choose, but both have a premium upsell strategy.

      1. I’m not sure how good my rationale is, but I tried to come up with something that runs counter to the conventional wisdom. I hope I got the point across that I don’t necessarily agree with this merger proposal. But I’m not prepared to totally write it off as sheer folly.

        There’s a negative I didn’t get into – the generally duplicative traffic flows of the two networks, especially on the east coast and in Latin America. This looks a bit like a “parallel merger” a la the proposed tie-up between Delta and US Airways. Those usually don’t work as well as “end-to-end” mergers that combine complementary networks, a la Delta/Northwest. From that perspective, Frontier would probably be the better acquisition target, but Spirit is bigger and its fleet is more compatible with JetBlue’s from what I understand.

        Maybe Bill Franke will surprise everyone and try to acquire both JetBlue and Spirit. That would be a shock. I’m guessing this whole exercise may be JetBlue’s way of driving up Frontier’s acquisition costs. It’s not like JetBlue hasn’t done it before.

        As for the Big Front Seat, I’m a bit more interested in seat width than seat pitch. JetBlue’s Mint seat is wider than a normal coach seat. Even though an extra legroom option offers more space between rows, it’s still the same uncomfortable seat.

        I’m not familiar with the entire airline merger approval process, but didn’t the DOJ have to sue to stop the American/US Airways merger? I seem to remember reading that DOT can’t stop a merger, but maybe I misunderstood what I read.

        https://www.transportation.gov/policy/aviation-policy/competition-data-analysis/mergers-acquisitions

        1. Since the NEA isn’t a merger, the review process is probably quite different. Again, I don’t know, but that should be mentioned. The current NEA lawsuit is still pending, and both sides seem pretty hunkered down. But since no one knows how a judge will rule, I’m guessing there’ll be a settlement – if JetBlue remains separate. If this proposed merger gets accepted and approved, it’ll change the whole dynamic. I’m guessing Frontier will take Spirit’s place and complain the loudest – and it probably has a compelling case. Under that scenario, Frontier will probably get Spirit’s slots at LaGuardia. One other possibility is that Frontier will get a few more slots at Reagan. It only has its three pairs to Denver, and might want some more. This may turn out to be much ado about nothing, but airline news has been slow lately.

        2. Ghost – DOT has levers it can pull, including the transfer of international routes. Here’s a speech that talks about it.
          https://www.transportation.gov/testimony/role-dot-review-proposed-american-airlines-us-airways-merger

          But as I understand it, when there is a merger, that is subject to an antitrust review. It may have to go to court if DOJ decides to challenge.
          But with the AA/JetBlue thing, one of the arguments is that there isn’t even an authority for this to be reviewed since it’s not a merger. There are a lot of technical arguments on that one, and I don’t remember all the spec ifics. But either way, this makes it easier for the feds.

          1. You and I seem to be on the same page. Both of the documents we linked mention that the DOJ does the actual enforcement. The reason I used the term “automatically be rejected” in my original comment is that a number of the posts I’ve read here and elsewhere gave me the impression that the authors believe the government has the direct power to stop mergers under the Clayton Act. That’s apparently not the case. The DOT doesn’t have the authority to stop a merger. It does the competitive analysis. The Justice Department has to sue to stop the merger. The DOT administers the directives of the court or the terms of a settlement – overseeing the divestiture of slots, for instance.

            It’s not like the CAB days, when airlines were essentially regulated monopolies a la public utilities.

            I saw both of our linked documents as I wrote my above comment, but linked the one I did because it seemed to sum things up more succinctly. The one you cited went into more detail.

            The NEA is a unique situation since it’s not a merger. There have been extensive domestic codeshare arrangements in the past (Northwest, Continental, and Delta back in the early 2000s and US Airways/United prior to the American merger), but those were smaller scale airlines. I don’t remember an arrangement with this level of schedule coordination. It’ll be interesting to see what happens with the pending lawsuit – if it gets that far.

            https://www.justice.gov/archive/atr/public/press_releases/2003/200645.htm#:~:text=Under%20the%20proposed%20alliance%20agreement,continue%20to%20compete%20for%20passengers.

  9. Whats baffling me is how anyone thinks this is a “headscratcher”
    It makes total strategic sense to do this from a airline business perspective looking into the future. I don’t understand why the NEA is contingent on this. Lets refresh what NEA stands for “Northeast Alliance” Spirit is what like 2% market share in the northeast? It wouldn’t really add much to jetblue in that area. As the NEA agreement clearly says, outside the Northeast they compete. I work for jetblue, they said very clearly to us after they build the northeast they will be growing aggressively in South florida and LA basin and elsewhere. They accomplish that 1 of 2 ways, you buy hundreds of airplanes and build it up over a decade, or to do it quickly to keep up with the competitors which also have hundreds of airplanes on order, you buy another airline and get all that quicker and a little cheaper. So if jetblue doesn’t get Spirit, they will still build up all those focus cities over time in direct competition with AA and the other guys.
    Also, I don’t think AA is too concerned about it outside if the DOJ maybe having them give up a part of the NEA, that I can see. But if I was AA and a carrier with costs that better able to compete with AA, even tho JetBlue has much lower costs than AA and does better, I would rather be competing with JetBlue over Spirit/frontier which will be a big thorn on AA’s side as they build up Miami. I can’t see how AA would rather want the new Frontoer/Sprit airline building up DFW/MIA/PHX
    As for Culture, listen, no airline has similar cultures. Continental was a darling and had great culture and great operation, and United was the pits, bad customer service and angry employees, and they merged. Yes jetblue has frills on their service, but in the end both are both all economy, with jetblue having a subfleet of premium offering on 20% of the fleet and spirit has a premium-ish big front seat across their fleet which jetblue doest even have, unless you count jetblue’s even ore space seat but its still all 3×3 throughout the aircraft. As for fares, and markets, jetblue will still hold its own, others will come in like Avelo and G4 breeze etc that are now coming up and offer those low fares as Jetblue focuses on where most Americans are willing to pay and travel. So the market will do fine.
    If your looking for an article supporting this, they are all wall st articles, and they aren’t airline execs, they just are keenly focused on capex and ROIC. Not how an airline should be run, but this guy here seems to think its a smart move..and I think he is someone in the airline world one would not ignore! https://www.cnbc.com/video/2022/04/05/frontier-rebukes-jetblue-offer.html

    1. Most of the business news articles on JetBlue’s offer to buy Spirit, along with most of the comments from Wall Street analysts, have been skeptical of the idea at best. (I’m not going to link, but a quick search on Google News will pull up plenty.)

      > I work for jetblue, they said very clearly to us after they build the northeast they will be growing aggressively in South florida and LA basin and elsewhere. They accomplish that 1 of 2 ways, you buy hundreds of airplanes and build it up over a decade, or to do it quickly to keep up with the competitors which also have hundreds of airplanes on order, you buy another airline and get all that quicker and a little cheaper.

      If Spirit is undervalued relative to its hard assets (planes etc), or if JetBlue believes that it needs planes yesterday to capitalize on opportunities that will quickly disappear if it can’t expand ASAP, then JetBlue buying Spirit for the planes may make some sense. However I have yet to see an argument along those lines that is supported by numbers and analysis.

      I’m not trying to argue the point, and I would honestly LOVE to see more arguments in favor of JetBlue’s big for Spirit, so that I can consider them with an open mind, but at the moment I remain skeptical that B6’s offer is a good idea or even anything other than a strategic move to try to weaken the future combined “Spiritier”.

      1. Maybe this would be a good place to ask this. A lot of people seem to think this will help B6 grow at LAX but I am not sure how that happens. Both airlines use gates at T5 which AA will be using more of as they rebuild it. As that happens were will the new B6 get gates for the growth? Haven’t found the LAWA lease for either, if I find that maybe I will answer my own question

        1. Greg – AA has a limited number of gates. I know that Spirit picked up more space in the last year or so and JetBlue has dedicated space as well.
          Combine the two and they’ll both combine gates. They may not be able to fly more compared to what they both fly today, but for JetBlue it will be growth.

    2. SLCblueSKY – Thanks for chiming in as well. I’m still not moved, but it’s great to see you have so much faith in your company.

      > It makes total strategic sense to do this from a airline business perspective looking into the future. I don’t understand why the NEA is contingent on this.
      > Lets refresh what NEA stands for “Northeast Alliance” Spirit is what like 2% market share in the northeast? It wouldn’t really add much to jetblue in that area.
      > As the NEA agreement clearly says, outside the Northeast they compete.

      This is more of a procedural issue. DOT has already approved the NEA, but DOJ hates it and is suing because that’s all it can do. Now, with a merger case, it has a whole lot more leverage than it would have otherwise. I don’t think anyone is suggesting this gives JetBlue too much share in the Northeast, but since DOJ already hates it, it just makes it easier for them to fight it. (And it pisses off American too.)

      > But if I was AA and a carrier with costs that better able to compete with AA, even tho JetBlue has much lower costs than AA and does better, I would rather be competing with JetBlue over > Spirit/frontier which will be a big thorn on AA’s side as they build up Miami. I can’t see how AA would rather want the new Frontoer/Sprit airline building up DFW/MIA/PHX

      Except that JetBlue tries to be much more of a threat than the ULCCs. So American will feel more compelled to compete with JetBlue. Sure it likes competing with someone that has higher costs, but JetBlue also has higher revenue which means it’s more competitive with American’s main market segment. The problem is, in much of Spirit’s network, there isn’t a need for that kind of capacity. It’s the cheap stuff that people crave, and Frontier has hundreds of airplanes on order which will be easy to fill if Spirit is gone.

      > If your looking for an article supporting this, they are all wall st articles, and they aren’t airline execs, they just are keenly focused on capex and ROIC.
      > Not how an airline should be run, but this guy here seems to think its a smart move..and I think he is someone in the airline world one would not ignore!

      I have to say that Gordon Bethune is sounding more and more out of touch each day. He says you’re “only as smart as your dumbest competitor,”
      suggesting that those putting low fares in the market are dumb. But that misses the point entirely. It’s the low costs those airlines have that make a low fare strategy work. And they have great margins. It’s really hard to suggest that they are the dumb ones when they are making great money with low fares.

      1. Gordon Bethune has used the line “only as smart as your dumbest competitor” for a number of years. I first saw the quote when he was referring to Southwest when its fuel hedges gave it a huge advantage over the other carriers during the 2008 recession.

    3. SLC – appreciate your comments re: Continental and United, especially growing up in the ‘Continental family.’ I will still never know why they chose to keep the United name, when the incoming management team was from Continental. Most unfortunate to see that brand die!

  10. Here’s one thing I’d love to see:

    How much of Spirit’s business would simply be unprofitable at JetBlue’s unit costs? Whether in terms of routes, seats, ASMs, etc.

    Seems like half of Spirit would be shut down within a year with ULCCs eagerly backfilling most of that service and B6 using the aircraft for (theoretically) more lucrative routes. But I find it very hard to believe B6 is sitting around thinking there are THAT many routes they could serve profitably if only they had another hundred or more aircraft.

  11. I can see how this merger makes sense. B6 wants to grow rapidly in the mid-west where they are weak & they need a base to do that. It just so happens that NK has such a base in DTW where growth would be possible & could have the added benefit of competing with the fortress hub that DL has there, bringing fares down. Will that work? Only time will tell if DL would be willing to dump a whole bunch of capacity just to defend a hub that lost a huge amount of international connectivity since the pandemic.

    As for FLL, I don’t see the issue as AA dominates MIA & has done so for decades without so much as an eyeblink. So why now are there such concerns with the DOJ & the NEA?

  12. You are right on with this article, CF.
    I would add that the reason why JBLU is going after Spirit is because they are trying desperately to grow not only to a larger position on the national stage but also to grow beyond their intensely competitive east coast markets that have become less and less profitable for them.
    Remember they pulled a similar stunt w/ Virgin America but this time, JBLU is in much worse financial shape relative to the industry. When even Alaska recognizes that the industry is divided between ALK DAL and LUV on one side with respect to profitabililty and AAL JBLU and UAL on the other side, JBLU finds itself on the wrong side of the profitability grouping in the airline industry after years of being an industry outperformer on margin.

    Right now the biggest threat to JBLU’s future is the price of jet fuel in the Northeast. As a result of tight refinery capacity, jet fuel in the Northeast US is hitting $7/gallon although that price is not being seen throughout the US. JBLU is most exposed to higher prices. And, it is necessary to say that Delta, as JBLU’s largest competitor, is best positioned as a result of its refinery strategy which specifically addresses high jet fuel crack spreads – the difference between crude oil and jet fuel prices – which is what we are seeing now.

    You are also right in your assessment that JBLU will not be able to keep the NEA and do a merger with Spirit. The issue with the DOJ and the NEA is less about JBLU plus AAL in the NE and then adding on SAVE (Spirit)

    So, JBLU faces a number of existential threats related to its size, competition, and cost structure that explains why it needs to change its long-term strategy. If JBLU wins in the bid for Spirit, it has a change of breaking away from strategies that don’t work any more – or at least like they didn’t in the past.

    1. are you honestly suggesting that high fuel prices right now are due to Crack spread? Delta owning a refinery that no oil company (and still doesn’t despite repeated Delta attempts to sell the refinery) wanted won’t protect them from the price of Crude. lol

      1. well, yes, Julie. high jet fuel prices on the east coast right now are SPECIFICALLY because of the jet fuel crack spread which is due to refinery shortages . Google it.
        Delta’s refinery strategy is designed to provide the airline with the maximum amount of jet fuel possible from the crude they buy and to control the refining process.
        Crude oil prices have been stable and have actually come down since the Ukraine war started. Refined products have not come down as much. Refiners margins are very high right now.

  13. Operating Spirit as a ULCC subsidiary that feeds the JetBlue network wouldn’t be the worst idea. I think JetBlue is currently in worse shape than just “in the middle” between ULCC and Legacies – its gotten lost and is basically now offering a ULCC product at legacy prices.

    Outsource all the economy minus crap to Spirit and get the JetBlue offering back to the better-than-Legacy experience it used to be. That’s the only way this might make any sense. Otherwise, its the exclamation point (or maybe nail-in-the coffin) on JetBlue’s multi-year identity crisis.

    1. They offer a ULCC product at legacy prices? Huh? Most legroom, free wifi/snacks and live TV and lie flat best in class business seat on transcontinental and transatlantic service…sounds like every ULCC product! Like….uhhmm…wait…ZERO of them!
      Seriously, did you even do a cursory research before commenting?

      1. I used to be a frequent JetBlue flier for all the great reasons you listed above, but they’ve lost me in recent years as they race to the bottom.

        I’ve got four trips this year from CHS to NYC or BOS – in the past I would’ve taken B6 for all 4, but every single one this year, their Blue Minus product (which is excessively restrictive in my opinion – no carry-on bags is really the killer) was actually more (or equally) expensive than a legacy’s regular economy.

        For example, today I’m booking CHS-NYC today for June 22-24. United economy minus to EWR is $180, JetBlue economy minus to JFK is $238, and Delta regular economy is $243. I my mind, that is the definition of ULCC product at a legacy price. I usually wouldn’t read too much into a single anecdote, but this is a very common situation I’ve seen in recent months/years.

  14. I have seen commetary on this ranging from reputable industry analysis to certain industry fanboy sites that traffic in conspiracy theories and the common theme is that B6 management feels they need to grow BIG …and NOW. .to survive. Ok…the aqusition oh NK accomplishes that…. but to an extent….and even then it could be short lived. Let’s look out 12-18 months of this moves forward:

    NK is plump with pilots in the coveted late 20s to late 30s demographic. They are in their “late phase of the early career” cycle. They have put their time in at regionals, been whipsawed and traded like cattle at auction.
    Having been through the merger rodeo myself, it’s A matter of time before QOL suffers as networks become integrated. What happens when lifelong Floridians, who chose to work at NK because of it’s Florida footprint, start getting displaced to BOS or JFK? What happens when (HYPOTHETICALLY) popular and senior domiciles like DFW, ACY or DTW are closed due to redundancy forcing commutes to the Northeast or LAX? Those people in the early/late cycle of their careers are going to jump ship and run for the Big 4 where short term pain leads to numerous upgrade opportunities, serious income growth potential and rock solid work rules. So now you end up with a bunch of shiny new planes and a nice order book and no one to fly them.
    Oh and a ton of debt.
    Hmmmmmmmmmmm

    1. First time I’ve seen this thought: “NK is plump with pilots in the coveted late 20s to late 30s demographic. ”

      probably the most valid thought I’ve seen on the topic (I get the pilot one overall, but this is a unique thought) for a long term view

    2. Interesting point about pilot demographics at NK vs B6. It would be fun to see a deep analysis on that with solid numbers, perhaps starting with the differences in pilot payscales between NK and B6.

      I guess the big question would be, if B6 were to acquire NK, and if it were forced to offer NK pilots better wages, would those wages be enough (or, alternatively, how much MORE would B6 have to offer in terms of wages) to get NK pilots to stick with the combined airline, especially if some NK crew bases in (relatively) lower cost of living areas (like DTW) got cut back or shut down?

      To your point, even if wages are higher, it would presumably take a bit of a pay bump to entice many pilots domiciled in Texas or Florida (without state income taxes, and with relatively low costs of living) to switch to a BOS or JFK base.

  15. Its going to be a sad day when the JetBlue customers miss their connecting flight on Spirit because their JetBlue flight was late and Spirit was on time!!

  16. I don’t think JetBlue is acquiring what everyone thinks they are.

    They are buying pilots in a pilot shortage and planes for them to fly.

    All the acquisition costs, training costs, higher wages, extra paint, new seats and other items discussed above will be paid for with future tickets when they have more product to sell than their competitors.

    Pilots are the most constrained resource. Planes are second. JetBlue is buying both.

    1. BINGO!
      I laugh at those talking about debt…Airlines are always incurring debt then slowly paying it down…AS built up a voluminous debt acquiring over prices VX, but alot of it has been paid off after several years. Then there is AA…has anyone been privy to their debt? But B6 incurring 25% of annual revenue in debt…really?

    2. There’s a catch to buying pilots, though, and that is you don’t get any staffing benefit unless you shrink the combined fleet. Mergers also tend to lead to more attrition, not less, especially among the very junior who see their time to promotion increase substantially. The price is silly high for pilots, too, for whom you could train ab initio for about $250k per person. For $50k per pilot you could finish the time building of everyone who has over 1000 hrs already and have them available by Fall, and it amazes me that the big 3 aren’t doing exactly that to staff their regionals.

      Growing organically is hard for a small company though. Alaska has increased ASMs by about a quarter since their merger and you’d hardly notice it looking at their relative size in various hubs. Alaska or JetBlue growing 5% annually is still smaller than if Delta added only 2%, making it difficult for them to grow beyond their niche. Maybe JetBlue just doesn’t see a viable long term future in being a niche player and this is a hail Mary attempt to escape?

      1. I completely agree. When growing by acquisition 2+2 often equals 3.

        I assume JetBlue will pay the pilots more than Spirit, but there are reasons people leave other than pay.

        This appears to be a gamble on quick growth, but inflation driving prices higher may allow them to retire their debt faster. Post acquisition… if they are 40+% biggest in fleet size, 50+% bigger in revenue, and are able to grow in markets outside their traditional geographies, the gamble may pay off. Of course the devil is always in the details….

  17. I think that your analysis has one critical flaw. It doesn’t take into account the constrained pilot market.
    With the legacy airlines huge hiring wave, the ULCC’s and ULC’s are struggling to attract and keep pilots. NK,F9 and B6 are all felling this acutely.
    As it stands, there are not enough pilots to fly the airplanes that each company has on the books, which will make organic growth difficult. With NK and F9 individually being half the size of B6, they haven’t been a real threat to JetBlue business model. Should Spirit and Frontier merge, that would put JetBlue’s back against the wall, especially in the Florida market which the company relies on heavily.
    Should JetBlue and Spirit merge, it will certainly make Frontier the only real player in the ULCC market, but will they be able to capitalize on that if they can’t find the pilots to fly the airframes they have on the order books?
    Certainly the DOJ may want them to divest some of the overlap between the two rout structures. This could be accomplished by hastening the retirement of the E-190 and 319’s. Additional aircraft orders could be converted into long haul 321’s allowing for an earlier expansion into Europe. Having more of a presence in the westerly part of the US and the push into Europe would certainly make B6 more competitive against the big three.

    1. $3.6 billion to acquire pilots that might not stay because of other factors is not a valid reason for a merger. JBLU could easily increase pay and attract more pilots cheaper than they will spend on the merger. JBLU’s entire labor costs for 2019 was $2.3 billion and it was slightly higher in 2020.
      There is no shortage of aircraft available and Airbus will certainly build more for them.

      JBLU is counting on being able to diversify its network beyond its major hubs/focus cities in NYC, BOS and FLL and that can most easily be done via an acquisition (this is not a merger as proposed).

  18. Late comment: I just read an article that mentioned that Spirt and JetBlue have started discussions. That’s totally normal, as Spirit’s board has a fiduciary duty to get the best possible terms for its shareholders. From what I understand, regulators don’t concern themselves with the market space an airline occupies. They’re only concerned with preserving competition. Frontier and Allegiant may be better potential merger partners, and JetBlue’s offer could trigger that.

  19. The entire reason for the merger is to: A) Eliminate a competitor which overlaps in FL, and has signaled growth ambitions in NYC, and B) grow the fleet to execute the myriad strategies B6 is constantly chasing. JetBlue has already stated that Spirit will cease to exist and the airline will operate as all JetBlue, but I don’t know where they will put all those planes once the NEA gets killed and B6 loses all the AA slots in JFK and LGA. They will likely grow LAX and SFO and start Hawaii service, as well as adding more LAX to secondary transcon markets, but B6 isn’t strong from the west coast to anywhere but its hubs, and LAX is gate constrained. I’m sure MCO and FLL capacity will have to be rightsized with the combined carrier as well. Makes sense from a growth perspective but all the places B6 wants to grow are too constrained to absorb all these new aircraft. I assume they’ll have to maintain a presence in NK focus cities such as: ORD, LAS and DFW.

    1. I assume they’ll have to maintain a presence in NK focus cities such as: ORD, LAS and DFW.

      All the more reason to swing for the fences on this merger. LAS may have lower yields per passenger then LAX let’s say, but it also costs less to operate from there.

  20. I agree with you Brett that Franke should be happy to see JetBlue overpay for Spirit and disband it. It could arguably be better for Frontier than a merger! Why? I don’t think there’s unlimited demand for ULCC product in America. Let’s face it: it’s not a good product. There’s only one reason to purchase it: the alternatives are bad. Either too costly or too time consuming. The major US airlines are pretty lean these days: they can provide a product that most Americans prefer at a price point they’re willing to pay. So this means that Spirit is Frontier’s PRIMARY competitor. They go away and Frontier has the USA ULCC market to itself. Frontier’s expansion opportunities will increase dramatically, and it won’t have to worry about Spirit’s competitive pricing. I see no downside to Frontier from JetBliue’s offer. They should b eloving it.

  21. ANECDOTAL STORY: so take it for what it’s worth.
    Had early dinner with an old friend who is in the right seat at NK in ATL. She confirmed that because of their recent growth a bulge of pilots are between 30-40… although didn’t have numbers off the top of her head. She started flying turboprops for a Florida based feeder and moved up to RJs for a large “lift provider” for a few majors. Her take on this:

    She started with the regionals in the darkest of dark times where the HR philosophy was “you’re lucky to have a job”. Used her parents home address in Stuart because she was bounced around from domicile to domicile. “Bases open bases closed displacement happen…deal with it. ” Her credit profile took a hit because she was terrified to sign a lease knowing that she could be displaced in the matter of 3 to 6 months. Lived out of extended stay hotels so obviously put off starting a family. She said NK is not paradise but at least it’s stability. She is bidding for an upgrade to the left seat in May.

    BUT….. If this turns into the usual merger slop where she gets displaced she will leave in a heartbeat. Even with a recession looming the Big four need to backfill retirements just to maintain status quo.
    You have a generation of pilots who have taken more than one “for the team” and are NOT in a giving mood. Her son is young but she is willing to pay for an au pair and commute to NYC if it leads to bigger metal(pay) and more days off down the road.
    She said her views were shared by the majority of her flying partners.

    I’m just saying they need to tread carefully. Dropping a few bill to buy the golden goose when you may drop the eggs is going to require a focus (I have yet to see) from B6 management.

  22. Y’all are forgetting the main purpose of this acquisition: playing defense/offense in Florida. Robin and Ursula made that clear during the investors call last week. JetBlue was leading in MCO up until a few years back when it had to send the airplanes back to the NE due to the NEA and battling in LGB/LAX, West Coast transcon and FLL expansion. Along came Frontier and Spirit and scooped JetBlue routes in Orlando and opened routes that JetBlue should’ve been operating – had the resources been there to do so -. The merged JBU/NKS would make JetBlue the #1 airline in MCO with 130 daily flights. #1 in FLL with 170 flights. And a formidable #1 or #2 competitor in Tampa, Ft Myers, Jacksonville markets. Not sure what position it would have in Miami, perhaps a #3. But the 800lb gorilla in South Florida would still be American Airlines. And plus, support the expansion in the Western USA with the LAS and LAX hubs. Some reshuffling here and there, but it would certainly work. This deal, unlike what a lot of you think is not revolving around New York, Washington and Boston.

  23. When B6 was trying to Buy VX it’s long term strategy was to gain a western foothold in LAX,SFO,LAS and DAL. They would have still killed off LGB to refocus those aircraft assets to grow SFO/LAX and LAS. But AlaskaAir killed that plan.
    B6 still killed LGB with the hopes to double down on LAX but Covid killed the momentum.
    Spirit brings in a much need work force and aircraft. It also brings back an additional amount of opportunity to double down in building up a west coast marketshare again in LAX and LAS.
    Will they increase SFO? Possibly but unlike the VX deal the NK deal brings more access to airports like DEN,DFW,IAH,AUS,ORD,DTW,PHL,PIT,EWR and a few other Midwestern cities to the B6 network.
    I see B6 eliminating a lot of Florida overlap and refocusing those assets to build up a National network that’s not solely connected to JFK/BOS.

    I can see B6 building up LAS into a western HUB with 3 waves of connecting flights. Mid morning,Mid afternoon and Evening Red eye bank similar to the old HP days.

    This merger will put B6 in minds of more consumers throughout the entire US than before. They have a lot to gain from this if they add a lot of new flying to other places than just JFK,BOS & FLL.

    The killing off of Spirit is a WIN WIN for everyone else in the industry.

  24. My guess: All the Operating Strategies may be wise. But I believe these Company combinations are purely ing, Operational and Ownership considerations of which any or all can make sense. The Ownership, Management, Investors, Bankers know each other. Even the Operating Managers have common background. All the Companies would become one and be led Ben Baldanza. All with common European Aircraft and U.S. Engines and those Manufacturers would assist in the Governmental approval process.

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