Last week, I expressed my confusion at Spirit rejecting JetBlue’s offer, which seemed to be a clearly better outcome for shareholders than the offer from Frontier. At the time, all we knew from Spirit was the sparse detail put in its press release. Now, we know a lot more thanks to Spirit’s, ahem, spirited earnings call.
In last week’s earnings call, Spirit did not hesitate to address the elephant in the room. And wooo boy, it did not hold back. It really does not like this JetBlue offer, mostly because it says it doesn’t think the deal can be completed. Even if it can be, it won’t happen for a really long time and that reduces the value.
In case you were concerned the airline might mince words, allow me to point you the presentation it used entitled “Rejected Proposal from JetBlue is Illusory and Not Superior.” But how do you really feel?
I know I said last week that strategy didn’t matter since JetBlue was buying Spirit completely, and the shareholders could just go count their cash. But there is a caveat there. Strategy DOES matter if that’s what prevents the deal from getting approved by the government.
Spirit calls JetBlue a “high-cost, high-fare airline,” saying that half the so-called synergies come from cutting capacity and raising fares. That is probably right. After all, JetBlue is a higher cost and higher fare airline than Spirit without question. I talked about that when the offer was first made public.
Spirit also shoots holes in JetBlue’s so-called “JetBlue Effect” that it crows brings down big airline fares. I’m very skeptical as well. The first red flag is how JetBlue measures this effect in a pamphlet it sent around to media.
JetBlue is not looking at sold tickets but rather is just comparing the fares filed in the market. That says nothing about how many seats are sold at that fare or what the actual fares are. I can file a $1 fare in every market if I want, but I don’t have to actually sell it.
I also find it curious that JetBlue included Fort Lauderdale-Detroit in here since that’s a market it started in 2015 but left in January 2019. Apparently it was so good at lowering fares that it booted itself from the market.
Spirit pushes back on this with a slide saying that it is the one that keeps JetBlue’s fares in check.
And at least Spirit used actual DOT data which is far more useful. Though someone else may have coined the term the “JetBlue Effect,” when the one making the most noise about this is yourself, it sort of rings hollow.
Why does this even matter? Well, Spirit’s point is that it is an ultra low fare carrier, and if JetBlue buys it, that goes away by JetBlue’s admission. And Spirit along with its team of experts thinks that won’t pass the DOJ gauntlet.
The backdrop here is something I don’t think I appreciated when I first thought this through. Spirit has been one of the most vocal opponents of the Northeast Alliance between American and JetBlue. That lawsuit heads to court in September, and Spirit will be there cheering for its death, testifying along the way. So you already have this strange disconnect there, but Spirit also makes the fair assumption the merger review wouldn’t even begin until after the trial. And it expects that review will take a long time, maybe 18 to 24 months or more. If it does go through, it will take years.
There are all sorts of twisted plot points here.
Spirit obviously fully believes the NEA is anticompetitive, so it asked JetBlue to include a “hell or high water” provision saying it would do anything necessary to close the deal, even if that meant walking away from the NEA. JetBlue refused. Spirit sees that as JetBlue choosing the NEA over Spirit, and since both Spirit and DOJ view the NEA as horribly anticompetitive, that would seem to be a problem.
On the flip side, Spirit also takes into account the strategy when it comes to the Frontier merger opportunity. It’s right to do that since that deal will result in a stock swap. If the combined airline does well, the Spirit shareholders make more money.
In the end, it becomes a math problem. The question is, what inputs do you use? Spirit views it this way:
- JetBlue’s deal has a low chance of going through while Frontier’s deal has a high chance
- JetBlue’s deal is more in cash, but as successful combination with Frontier can see the stock price eclipse that value
- JetBlue’s deal would be lucky to be done in 18 to 24 months whereas the Frontier deal would likely be finished much more quickly, putting cash (and stock) in hand much earlier
I understand Spirit’s arguments, but I’m not so sure I agree. I still think JetBlue’s strategy here is bonkers, but I would think the deal would still be able to get through and that means cash in hand. There’s the old saying that one in the hand is worth more than two in the bush. This, however, seems more like two in the hand is worth more than one in the bush… if you assume the feds aren’t going to cut off your hand.
This whole thing is complicated, but bottom line is that Spirit thinks this deal can’t be done with changes that JetBlue won’t agree to. It doesn’t even think that would get it through, which is why it asked for a much bigger reverse break-up fee. At least, this is how it is presenting the plan to shareholders. We will see what those shareholders decide, probably in the next couple of months.