The Battle for Spirit Escalates As the Vote Draws Closer

JetBlue, Mergers/Finance, Spirit

It’s big week for those of you who care about the future of Spirit Airlines. The shareholder vote on the Frontier merger comes this Friday, so the jockeying for position has really stepped up. First, Frontier sweetened its bid and now JetBlue is back doing the same, each getting more and more clever as they go. It’s like watching the horses come around the stretch, but like, there are two horses holding hands and the other is chasing behind. Ok, so maybe it’s not like horse racing at all.

For a little while it looked like we were going to get to the Spirit shareholder vote approving or rejecting the merger with Frontier this Friday without much changing in the two offers. But last week, things escalated quickly.

A proxy advisory company called ISS put out a recommendation that Spirit shareholders turn down the Frontier deal. Effectively, ISS asked shareholders the important question… “are you insane?”

This wasn’t great news for Spirit. It quickly responded saying that the Frontier deal was still the best option. Further, it said that “ISS appears overfocused on the absence of a reverse termination fee in that deal.” Spirit also focused on the fact that even if a JetBlue deal gets done, it would take up to 2 years or more for the approval to come through, so the shareholders wouldn’t see money for a long time… if ever.

Do you want to guess what happened next? Oh, you already know. Frontier and Spirit magically came out with an amended offer that included a $250 million reverse termination fee, or $2.23 per share. That’s $50 million above JetBlue’s reverse termination fee. Problem solved, right? That was the biggest objection, so now all is well? Hahahahaha, no.

JetBlue is really just not willing to give up on its dream of dressing all those pilots in blue, so yesterday the airline put out an amended offer sweetening the deal. JetBlue has now upped its reverse termination fee to $350 million, or $3.20 a share. That’s a big increase, but what about that whole timing issue? Well, don’t you worry about that. JetBlue is now offering to give $164 million — $1.50 a share — of that fee right up front. If they take the deal, shareholders will get it as a special dividend right after voting to do the deal with JetBlue.

Of course, Spirit shareholders aren’t even voting on that offer on Friday. They are simply voting on the Frontier deal. If it’s a yes on that, the JetBlue deal is dead. If it’s a no, well, then everything is back on the table again. JetBlue is just trying to make it interesting enough that people will vote no on Frontier.

With this latest offer, JetBlue is really going with the full court press. In its press release, it included a letter to the Spirit board which said “don’t be dumbasses, people.” I mean, it more or less said that. The letter actually ended with (emphasis JetBlue’s):

Accepting our Improved Proposal is in the best interests of your stockholders, and we urge you to immediately engage with us in good faith to finalize definitive documentation with JetBlue reflecting the terms of our Improved Proposal.

But that’s not all. JetBlue also is now trying to do an end-run around the owners and go straight to the people… the employees… or crewmembers… or castmembers? I can’t remember what JetBlue calls them. Anyway, not only did it send them an open letter, JetBlue CEO Robin Hayes also did a little video.

Basically, Robin says “be cool, my babies. We aren’t gonna kick you to the curb.” In other words, Robin is telling them they will grow together, they won’t furlough people, and all will be great in the land of Spueit. Also, you can nonrev to London and Peru! (I’m not kidding, that’s in there.) Maybe some of those employee shareholders at Spirit will be swayed. Or maybe not.

With three days to go until the vote, Spirit’s board says it is reviewing the offer, but it seems highly unlikely that a new conclusion will be reached. I look forward to seeing who makes the next move in this game of chess. Yeah, chess… that seems like a better metaphor than horse-racing.

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21 comments on “The Battle for Spirit Escalates As the Vote Draws Closer

  1. This graphic deserves immediate entry into the Cranky Hall of Fame! Bravo!

    1. I’ve flown Spirit, it’s not so bad. The Big Front Seat can be a pretty good bargain – I bought the upgrade flying TPA-LAS and was very happy with it.

  2. The SAVE saga certainly will go down as one of the more contentious airline acquisitions in history – and it will be an acquisition, not a merger if JBLU wins.
    The continued developments also show the desperation of JBLU to win the deal; appealing directly to employees doesn’t really accomplish much because employees own at best a very small part of any airline. The majority of airline stock is owned by institutional investors that hold their stock. There are actually two proxy services that have different opinions about who should win SAVE’s hand so it isn’t clear that either opinion really matters.
    What is clear is that JBLU and SAVE are about the only U.S. airlines that are not expected to be profitable in the 2nd quarter while the big 4 – American, Delta, Southwest and United are nearing their pre-tax margins and Alaska is expected to finally overcome the financial drag of its Virgin America acquisition.

    High fuel prices are a lot harder for low fare carriers to overcome; legacy carriers’ ability to charge higher fares helps offset high fuel prices while Alaska and Southwest hedge crude oil and Delta’s refinery strategy is saving it 10% or more on its final fuel bill. All of the big 3 are benefitting from a surge in international demand that is accelerated as Japan and S. Korea slowly reopen.

    The current fight for SAVE by Frontier and JBLU is literally a shootout on the open ocean with those three on life rafts as the big 4 plus ALK are in ocean liners.

    The longer term implications for the structure of the airline industry are significant if smaller carriers exert an even smaller influence in the industry while the nationwide big 4 are more financially stable relative to the industry as a whole than they have been since deregulation.

  3. This site is becoming hotter and hotter post after post.

    After the guys in leather, brokeback mountain!

    This is hot!


    PS: I am told in the ear flap this site is about airlines…
    Hah. I like it anyway.

  4. There’s really not much that can be written about this transaction. We’ll know more on Friday. It’ll be interesting to see what happens if Frontier doesn’t get enough affirmative votes. But I have a suspicion (and only a suspicion) that it will.

  5. Frontier needs to just let JetBlue have Spirit at this point. As JetBlue kills off NK marketshare to make a bigger B6 network. F9 should Pivot and make a merger play with Allegiant air. They would instantly still become the biggest ULCC in the Country and thanks to JetBlue killing off NK they would control the lowest unbundled prices in almost every market. A Frontier Allegiant Air merger gives F9 bigger market pricing power foothold in many of the top Leisure markets like LAS,PHX(AZA),MCO(SFB),TPA(PIE),FLL and RSW(PGD).
    Yes Allegiant Air has a order with Boeing for MAX jets but none are on property and the orders can easily be cancelled.

    1. The best play for Frontier might be to let B6 have NK; there clearly is a price which F9 is willing to pay and B6, for whatever reason, B6 is willing to go well beyond what F9 is willing to pay.
      And, even if NK stockholders go for a merger with B6, there WILL be a lengthy approval process from the DOJ, and even if they get past that, the cost of retrofitting NK’s fleet to B6 standards will be unlike the costs for any other merger.

      There is a point where you have to walk away from a deal – just like what B6 did in the bid for Virgin America – and you end up watching your competitor struggle with the deal they agreed to.
      Alaska’s profitability was depressed for years after the Virgin America merger and Virgin America was much smaller and “less different” than Spirit is to JetBlue.

      1. Tim,

        You raise an excellent point. As the old baseball saying goes, “There are times when the best deals you make are the ones you don’t.” Apparently, JetBlue’s management wants to accelerate its growth and sees a merger as the best way to accomplish that. Only time will tell who turns out to be right. And it could be everyone. The best way to get a good deal is to be willing to walk away from a bad one. It’ll be interesting to watch this whole thing play out.

        Wall Street tends to focus on this quarter’s earnings. Good managements tend to focus on the long term as well as the short run. From what I understand, Delta, your “perfect airline,” did that in New York. It lost money for years as it built up its customer base, but that patience is now paying off. Same with its oil refinery. Southwest’s success has been largely due to its entrepreneurial attitude – that is, focusing on the long term while being mindful of the short term. New business owners tend to realize that today’s losses will be temporary if they invest in the right places.

        1. first, airlines only provide margin guidance one quarter at a time.
          second, Delta has managed to make enough money elsewhere to lose money in NYC – if it did. Investors don’t care what specific hubs do – and hub profitability isn’t even reported; it is at best just guessed at by analysts.
          JBLU and SAVE are not expecting to make money – by what they have told investors – this quarter while just about all of the other airlines including the big 3 are expected to be profitable.
          When American makes money and low cost and ultra low cost carriers do not, the world is not the way it used to be.
          and, Delta’s refinery has always contributed a small contribution to lower fuel prices except for during covid; the refinery does not and never has existed to be profitable on a standalone basis but rather for what it contributes to Delta’s fuel cost.
          And Southwest, which has hedges that are now paying off handsomely, lost about the same amount in bad hedges per gallon for years as Delta gained from the refinery. Both Delta and Southwest fully disclose their bottom line fuel costs including hedge and refinery gains and losses.
          Delta and Southwest reported operating margins within 1/10 of a percent pre-covid and are guiding to do the same thing this summer and likely beyond.
          This time, Alaska will be joining the double digit margin party after jettisoning what hasn’t worked from the Virgin America acquisition which itself is a pretty good guide to what JetBlue faces – except magnified many times.

      2. I’m not sure that Frontier or JetBlue really see it this way, but I’d agree that the best course of action for one of both of them at this point (or at some point soon) may be to walk way and leave the other guy holding the bill.

        I see this as similar to two high-rollers bluffing each other at an auction by trying to bid up the price of an item, just so that the other guy will have to pay more… The strategy can work (if your goal is to weaken the other guy and enable yourself to more easily compete by making him overpay and saddling him with debt, or to try to keep him from bidding as much for another item later in the auction), but only if you know when to walk away, and only if you don’t focus on the auction so much that you divert too much attention away from your own (other) financial & operational affairs.

  6. This is completely anectodal but in the markets that I see (most predominantly BWI), Spirit and Frontier serve exactly the same customer. JetBlue’s is different. Frontier / Spirit = dollar stores, Southwest = Walmart and JetBlue = Target.

    On another note, why does Sun Country even exist? Seems like the modern day equivalent of Midway Airlines. Not sure how they can make a go of it with such low economies of scale.

    1. Maryland,

      I like your analogies. As for Sun Country. it’s been around for quite a while (about 40 years). Size isn’t always the best indicator of success.

    2. I haven’t flown with Sun Country, but to use your analogy, I’d almost equate them to seasonal pop-up stores, like “Spirit Halloween” (no relation to the airline) and similar, or to the guys who set up shop selling fireworks or Christmas trees in parking lots.

      They know their business model / niche extremely well (in Sun Country’s case, enabling pasty white Minnesotans to get sunburned in warm places during the harsh winter), they know how to flex their capacity up and down very significantly (and, during times of slow demand, know how to make the most of the assets they absolutely have to own directly), and don’t try to be everything to everyone.

      /Just my quick take as an outsider.

  7. So this girl is being pursued by two guys. One of them says baby, we fit together like peanut butter and jelly. We have so much in common, and you’ll be so happy being with me forever. The other one pulls up in a Lambo, opens the door, and says come on baby, enjoy the fine life!

    The first guy ups the ante and says I have a good job too, and you can keep yours. We will make pretty babies. This guy is just using you, and he’ll dump you. Or maybe he’s lying and he’s really married.

    Then the second guy pops open a bottle of Crystal, and says, let’s go hit my private jet and go to New York for dinner.

    She finally tells the first guy she will decide by Friday.

    Well…it’s Friday, and now she tells the first guy that she can’t decide yet. Let’s wait a few weeks more, she says.

    Hmm…it ain’t looking so good for the first guy now.

    1. Good analogy.

      I would add that the girl is doing her best to resist the pressure from her elders (parents) to go with guy #2 instead of guy #1, but postpones the decision because she has yet to find a good excuse to choose guy #1 that won’t make her parents really angry with her, and she has to be careful about how much drama she creates with Mom & Dad.

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