Counterpoint: Spirit Torches JetBlue Offer

JetBlue, Mergers/Finance, Spirit

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.

35 comments on “Counterpoint: Spirit Torches JetBlue Offer

  1. My question to Spirit’s management… How big would the reverse break-up fee from JetBlue have to be (or how much higher would Jet Blue’s offer have to be) for Spirit to consider B6’s bid to be worth the risk, and for it to favor JetBlue over Frontier?

    Even if you want to argue that B6’s bid only has (say) a 25% chance of passing muster with the feds (the exact “chance” isn’t terribly important), if the payoffs for success (and/or the reverse break-up fee to help mitigate the risks of failure) are high enough, it should be worth going with that option.

    /Not that I expect anyone to provide an answer to that, let alone an honest answer, but at a certain point, that’s how you need to think of things, at least internally, if not publicly.

    1. Two Questions – 1. How does Bill Frankie’s influence with Spirit as well as with Frontier play out with all that is going on here. 2. What effect will this have on Allegiant & will this make them a take over target for Frontier as well or even JetBlue.

    2. Similarly, could Spirit demand a penalty fee for every month it drags on? That would be good incentive for JetBlue to get it done as fast as possible or give them reason to say no if they don’t have faith they can get it done in whatever timeframe is proposed.

  2. We all know that in presentations like this they only illustrate the negative issues of the other party while highlighting only the good things about their argument. These presentations are just fluff. Numbers matter. Find an independent party with just the numbers and that’s the true argument, for or against.

  3. Methinks Spirit doth protest too much. As I wrote last week, the real story here has to be the nature of Spirit’s past, current and future relationship with Frontier’s owner,
    Spirit’s PREVIOUS owner, Indigo Partners.

    The idea that JetBlue cannot close this deal is ludicrous, given Senator Schumer’s dominion. In fact, if Spirit and Indigo keep bad-mouthing JetBlue, they might find Senator Schumer a very real and very large obstacle to their planned merger. Senator Schumer gets what he wants: Look at the “new” LGA and how quickly it was completed as proof.

    I could go on and on here, but it’s all speculative. It will be very interesting to see how this all plays out. As Yogi Berra used to say: it ain’t over ‘til it’s over.

  4. The Spirit argument has a couple of flaws, or at least other factors that have to be considered:

    * Will JetBlue remove seats from the markets shown? If not, there’s no certainty that their prices would go back to pre-Spirit levels, as there’d still be demand at the lower price points that Spirit is offering tickets at.

    * Are the prices in the Spirit slide lowest prices in the market or average prices? If they’re the lowest, this doesn’t tell us that much. Context matters.

    * Are there barriers to entry for new competitors? If a new competitor in the markets shown would have problems getting gate space at BOS or EWR, that could be a consideration. But if not, there are possible new entrants or existing carriers that could add capacity. For example, right now Frontier is scheduled to end BOS-SJU on Jun 8th (if Wikipedia is correct). JetBlue drawing down combined B6/NK capacity in that market could lead them to reconsider. (Yes, I know the acquisition can’t happen this fast, it’s just an illustration.)

    The Spirit counter-argument depends on a lot of forecasts and more than a bit of conjecture…but if the combined airline can continue to grow and keep expenses in check, they could have a winning argument – the key here will be shareholders’ tolerance for risk vs. the sure-thing now.

    I also think a lot of your readers overestimate Sen. Schumer’s power. Airlines aren’t high on the Democratic Party’s list of concerns right now, and the Administration is at best very skeptical of M&A activity. If the Democrats lose control of the Senate in the midterms, Schumer is almost certainly out, and could be even if they were to hold the current ground.

  5. “Though someone else may have coined the term the “JetBlue Effect,”

    Ha! The “Southwest Effect” OG folks are smiling at that one

    1. Sammy – Oh, absolutely, but it was the MIT team that decided the JetBlue Effect was a thing as the Southwest Effect waned.

  6. These merger debates tend to bring out the best in convoluted logic, not necessarily good or bad logic, but interestingly creative “logic”. It’s my view that neither of these mergers will have much effect on the overall marketplace, even though we avgeeks seem to think otherwise. These airlines are simply too small. It’s not like American and Delta are proposing to tie up.

    To me, the bottom line is pretty simple. Under the JetBlue proposal, all of the current directors and management personnel at Spirit will probably be gone. In the proposed merger with Frontier, a number of them should retain their positions. This really isn’t that difficult to figure out.

    As for the merits of the arguments … I find it interesting how parties trot out their so-called “experts” who turn around and say things that are the polar opposite of each other, knowing that these polar opposites can’t both be true. But that doesn’t stop any of them. I’m a bit cynical when it comes to polls, surveys, studies, and expert testimony. More often than not, these so-called experts and organizations come to the conclusions they’re paid to reach 98% of the time. Funny how that works. My oft-quoted observation from Mark Twain still holds true, “There are three kinds of lies – lies, damned lies, and statistics.”

    I also think we get hung up on labels like “LCC” “ULCC” etc. Just because a carrier has extremely low unit costs from cramming 15% to 20% more uncomfortable seats onto comparable aircraft, it doesn’t mean it’s automatically going to charge lower fares in a particular market long term. Businesses aren’t charities. As I understand the process (and I could be wrong, so plese correct me if I am), the DOT looks at things like overlapping routes and the number of competitors on those routes to figure out if a proposed merger or marketing arrangement is going to be anti competitrive, not if a carrier is labeled as a “ULCC.”

    There’s no way to predict what judges or regulators will do in a given situation, so we’ll have to wait for the outcomes, but in the meantime, it’s fun to speculate.

      1. @Bick Rowen, I wouldn’t go quite that far. But self-interest usually impacts these kinds of decisions. That’s just human nature.

    1. Enjoyed your post, and I believe you’re right – the government is not going to base decisions on whether a party to a merger (or slot award) is considered a “LCC” or “ULCC”. Besides overlapping routes and number of competitors, they’ll also take a look at barriers to entry to new competitors now or in the future – if a merger in a two-carrier market resulted in only one competitor, but the airports on both ends have plenty of capacity for new entrants, this puts a natural limit on pricing power since higher fares will attract new service. They’ll also take connecting service into account.

      —————

      Just for fun, a side point, the Twain quote didn’t actually originate with him. Twain himself attributed it to British Prime Minister Benjamin Disraeli (later made Lord Beaconsfield), but some historians don’t think Disraeli came up with it either.

      If you want to see all the suspects, here you go: https://www.york.ac.uk/depts/maths/histstat/lies.htm

  7. The real irony of this story is that so many people were convinced that Delta was pulling the DOJ’s chains to get the NEA killed and yet it is clearly Spirit that now gets to play judge and jury for the merger which JetBlue desperately needs to not be marginalized as an unprofitable niche airline in the NE. Perhaps I missed it but I don’t recall ever seeing a filing against the NEA by DL but there were plenty against B6 by NK – who saw the NEA as an attempt to block competition by swapping slots which AA has not used to B6.

    Now that B6 and NK are both guiding to the highest fuel prices for the 2nd quarter (40 to 50 cents/gallon or 20-25%) compared to WN and DL which are at the low end of industry fuel prices, there will be a lot of leisure routes that won’t work if an airline has to pay much higher prices. the DOJ can complain about reduced competition and higher fares but high fuel prices – a direct result of administration policies- will do more to reduce competition than any other factor.

    Of course, it is possible that the NEA will be forced to scale back – esp. the ability to exchange slots between two domestic airlines – and B6 will have missed out on the merger but also have a scaled back NEA with a smaller network because of high fuel costs. It might be precisely because of merger testimony to the DOJ by F9 and NK that prove that the NEA is harming the ability of low fare carriers – to bring competition to the NE given that B6 by itself has so much larger of a share of flights at slot-restricted NE airports than any other low fare carrier. Competition isn’t fair “if the gangplank is pulled up behind you” but only if anyone that wants to provide service to slot restricted airports has a reasonable means to do so.

    To say that JetBlue is between a rock and a hard place is an understatement.

    1. Disagree with your assertion that higher fuel prices are a “a direct result of administration policies”. Oil is a global commodity and prices are up everywhere, except in countries that are major producers but can’t export at this time. Much of the current policies (e.g. toward Venezuela) are carryovers from previous administrations, and even if the Biden Administration was to totally abandon any climate change goals and go for all-hogs-to-the-trough “drill, baby, drill!” policies, major new domestic production would take years to come on line. Short of total capitulation to Russia over Ukraine (and convincing our European partners to do the same), options are limited, especially with OPEC maintaining production discipline.

      As for “pulling up the gangplank”, JetBlue went into JFK at a time when slots were readily available. If Southwest had had the imagination to go into JFK when the Sundrome was empty and the slots were there, JetBlue probably wouldn’t exist today. Should JetBlue have to give up slots at JFK because it was successful? And JetBlue’s market share at LGA is (slightly) smaller than Spirit’s, so I don’t think it’s accurate to argue favouritism there either.

      I do agree that the NEA needs a closer look, though.

      1. @Craig, The NEA is getting a closer look. The DOJ has filed a lawsuit to stop it. The only reason Tim thinks the NEA deserves scrutiny is so his beloved “perfect airline” only has to face fragmented competition east of the Hudson River in New York. It seems he has little faith that his beloved Delta can compete with more focused competition. On the other hand, I’ve observed the opposite. Delta has consistently shown that it’s more than capable of effectively competing in New York.

        Virtually everything I’ve seen informs me that the NEA has enhanced competition. But as I’ve written before, I do think the consolidated and concentrated competition the NEA produces will result in a settlement that has American (not JetBlue) divesting or leasing some slots at LaGuardia to so-called “low-cost” airlines. Southwest, LCCs, and ULCCs seem to have little interest in JFK.

        As for fuel prices, this inflation is a global problem. It’s not confined to the United States. I find it more than amusing that some people think one person, the President of the United States, with his limited constitutional powers, can manipulate the global oil market. Based on Tim’s obviously partisan accusation, If Biden was a Republican, he would be defending the president, as party label tends to be all that matters when debating the issues. But that’s the nature of our hyper-partisan politics nowadays. Party loyalty has become far more important than being loyal to the country. That’s why I’m an independent. George Washington was right when he wrote, “The common and continual mischief’s [sic] of the spirit of party are sufficient to make it the interest and the duty of a wise people to discourage and restrain it.” Sorry to get political, but partisan politics is playing a major role in the whole NEA / merger situation.

        1. It is pretty apparent for anyone that wants to see it that US energy policies have reduced the supply of oil in pursuit of green energy policies even while failing to remove bottlenecks that would get more energy into the market. Russia’s invasion of Ukraine has cut off some global oil but oil prices were well above pre-covid levels even before Russia invaded Ukraine.

          Yes, the President of the United States has enormous power in multiple arenas.

          Understanding both realities is not partisan.

          As for the NEA, you got right that DL does compete well. You have repeatedly tried to connect challenges to the NEA with Delta when it has repeatedly been shown that it is NK that is the NEA’s biggest thorn in the side and NK is also on the verge of putting B6 permanently as an also-ran with a merger to F9 which just about everyone makes a whole lot more strategic sense and is a whole lot more likely to happen.

  8. 1. I don’t get why NK hates the NEA. The NEA is totally anti-competitive, reducing capacity on competitive routes while spreading capacity to higher-fare, lower-demand routes — the former is NK’s domain out of the northeast, not the latter. So what’s the problem? Keep fares high and let NK feast.

    2. Really enjoyed this take on JetBlue. Getting to Jeff Smisek-level disfunction. Completely rudderless, terrible technology and operation, with clueless management. https://www.linkedin.com/pulse/jetblue-why-do-you-make-so-hard-us-love-dean-constantinidis/

    1. It makes B6 more powerful in the region and increases the utility to the market, thus making it more difficult for NK to compete. Mainly, it’s about LGA and EWR access. NK would rather see AA be forced to choose between giving up slots or losing a lot of money flying them. At EWR, B6 and NK are competing for gates, so more B6 flights and land grabbing makes Spirit’s objectives harder to achieve.

  9. One has to give credit where credit is due. Tim Dunn raises an extremely valid and compelling point above, which I think is quite right. Based on everything I’ve seen. I agree with his assessment that Spirit, not Delta, has been the main airline driver behind the DOJ’s lawsuit over the NEA. The reason is pretty obvious. Spirit wants more slots at LaGuardia.

    One way or another, I’m guessing Spirit will get some slots at LaGuardia regardless of the outcome of any of these potential transactions and lawsuits. Some of American’s LGA slots will probably go to Spirit (or the combined Spirit/Frontier if that merger goes through) regardless of the outcome of all the gyrations. And I’m guessing that some will probably go to Frontier if JetBlue acquires Spirit.

    I’m not sure about the regulatory outcome of either of the potential mergers, but I still tend to doubt the NEA case will ever go to trial. That’s because neither side knows for sure what a judge will decide. But the venture will probably end up forfeiting LaGuardia slots to a ULCC as a condition of any settlement that’s reached (and I’m guessing Delta will be happy with that outcome). A number of years ago, I was ready to go into a trial as a potential juror, and just as we were about to go into the courtroom, the lawsuit was settled. That kind of brinksmanship isn’t uncommon.

  10. “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.”

    Trying to build a connecting bank with all 1x markets, timing flights too late to capture any local demand may not have been the best strategy. Another example of B6 incompetence and trying too hard to be something it is not.

  11. > We will see what those shareholders decide, probably in the next couple of months.

    Shareholders won’t get to vote on the JetBlue proposal – they’ll just get a simple yes/no vote on the Frontier merger. Even “no” wins, that doesn’t obligate the Spirit board to go back to JetBlue.

    1. Spirit’s shareholders will ultimately **decide** either way. They’ll just do it differently. In the case of Frontier, they’ll **vote**. In the case of Spirit, they’ll **sell** their shares to JetBlue. But either way, Spirit’s shareholders will **decide**.

      1. > In the case of Spirit, they’ll **sell** their shares to JetBlue. But either way, Spirit’s shareholders will **decide**.

        As far as I know, JetBlue isn’t attempting a hostile takeover – they haven’t made a tender offer. Until they do, Spirit’s shareholders don’t get to decide anything about the JetBlue offer – it’s 100% up to the board.

          1. The board would likely adopt a “shareholder rights plan” (aka “poison pill”) which would effectively prevent anyone from actually selling to JetBlue until it is removed. So either way the board would still need to change its mind, the hostile offer is just a noisy and public way to put pressure on their board. There is no situation where the shareholders get to directly override the board.

        1. Spirit’s annual stockholder meeting (virtually held) was yesterday, so unless this drags on for an entire year there won’t be an opportunity for dissident stockholders to do anything. I don’t know if the NK/F9 merger agreement was announced so close to the meeting as to make it impossible for dissidents to take any action if another bid came out, but if they did it was a nice touch.

          So unless the Spirit stockholder lawsuits are successful, JetBlue’s going to have to resort to a hostile bid and risk paying too much (not an attractive proposition) or give up and pursue growth without a merger or acquisition.

          1. All JetBlue has to do is make a public offer to buy Spirit’s shares. If enough investors tender their shares, JetBlue will have effectively bought Spirit. There doesn’t have to be a vote.

          2. JetBlue can always buy Spirit stock on the open market, but it has to file with the SEC once it accumulates 5% of the total.

  12. My biggest issue with all the rhetoric is the idea that low fares are the number one issue.

    By that logic Walmart could buy out Nordstrom‘s, and the only thing people would care about is the cost of items in the store.

    We need to be protecting service, not just price.

    1. You can’t protect service ‘quality’ or even price (however you’d measure it) is that it is a free market and there’s no way to protect, regulate or ensure that it doesn’t change. JetBlue or Spirit or any other airline could decide to change their onboard product tomorrow and that’s completely fine.

      The DOJ might have legitimate anti-competitive concerns regarding flight pricing and potential monopolies, but they don’t seem to care about protecting service.

  13. Sorry to be late to comment.

    With regards to B6/AA NEA and B6/NK, I believe the DOJ/FTC will apply their long-time tools based on “market segments” and “market concentration”, specifically the Herfindahl-Hirschman Index (HHI, https://www.justice.gov/atr/herfindahl-hirschman-index). This will be done on a city pair (eg JFK-TPA) basis as this is the defined “market segment”.

    I do not believe they will segment by either Fare Type (High, Low) or Cost Type (High, Low), but these may be an added qualitative factor. It likely be done on Gate# and Gate% at capacity constrained Airports.

    I assume that any Airline M&A leads to DOJ/FTC “conditions” around Segments and Gates and will leave it to others to comment on previous outcomes.

    Balance Sheets are key tools during Industry Consolidation and B6 is in a better position. I question the Fiduciary Duty of the NK Board as they must have a 3rd Party Diligence Assessment from a Credible Financial Advisor and Legal Counsel.

    Eliminating the duplicative overhead of two independent firms has decades of Case Law around pro-competitive outcome.

    This will be interesting and enjoyable to observe.

  14. Spirits all about bringing forth data, they should dig into what the NEA has done since it began. Just look at the slew of new routes added by delta and united in response, prices have come down and more choices and more routes have come about. Good luck with the case, JetBlue/American just needs to show the result and its anything BUT anti-competitive. There is some shady backroom self interest with spirits deal and it has BF name on it. The coming weeks will be interesting, i doubt Jetblue will idly sit back and let certain things go unnoticed. Also, F9/NK overlap on 40% of their routes, Jetblue /spirit is half that, that will be a bigger negative for F9/NK vs NK/B6 in the eyes of the DOJ. Also your going to tell me they want to merge to “keep ticket prices low”? Yeah sure, consolidating industries has never led to lower price points, so its disingenuous for spirit to say “Frontier/Spirit is better because it will bring even lower fares and more choices”. That Spirit slide has a bunch of fluff.

  15. Your analysis is incredibly flawed – try adding up the total fare customers spend after adding on bags, wifi(non-existent on Spirit), even water(again non-existent on Spirit), etc. Many customers are getting surprise billing added to their fare which equates out to some legacy fares.

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