This week marks the beginning of the trial in the Department of Justice’s lawsuit to block JetBlue from buying Spirit. After the numbers Spirit put up this week, JetBlue might want to think about rooting for DOJ here. It was not pretty.
Spirit’s Q3 numbers were staggering, and I don’t mean that in a good way. The airline lost nearly $150 million excluding special items on revenue of nearly $1.26 billion. That’s an operating margin of -14.2 percent. To be fair, Spirit warned us this was coming in a September update, but that doesn’t make it any easier to stomach.
The culprit according to Spirit is “softer demand for our product and discounted fares in our markets.” I will actually touch on that more tomorrow when I look at Frontier, but suffice it to say for now that there is a ton of capacity in Las Vegas and Florida where the ultra low cost carriers are concentrated, and demand is just not there to support it all.
In Q3, Spirit’s unit revenue plunged 17.4 percent to 9.14 cents vs last year. Overall total revenue per passenger dropped 13.5 percent, but it was only that good because ancillary revenue stayed fairly flat. Actual fare revenue dropped a shocking 27.8 percent year-over-year.
As you’ll see tomorrow, this impacts Frontier as well, but the difference is that Frontier says it sees things stabilizing. Spirit says otherwise.
We continue to see discounted fares for travel booked through the pre-Thanksgiving period. And, unfortunately, we have not seen the anticipated return to a normal demand and pricing environment for the peak holiday periods.
Gulp.
Nobody else is seeing this level of weakness right now, or at least that’s not what they’re saying. So, what gives? I wish we knew.
Since Spirit is currently in the process of being gobbled up by JetBlue, the airline decided not to have an earnings call this quarter. Instead, it is presumably hiding in a bunker and stockpiling for the end of the world, which appears to be rapidly approaching based on this mess of a quarter.
It’s not just the profitability that’s a problem here. The wheels seem to be coming off completely. During the quarter, the airline had only 67 percent of flights arrive within 14 minutes of schedule, and Spirit canceled 1.6 percent of all schedule departures. It blamed this on weather and ATC delays, but really I assume Spirit is just trying to make its operation worse so it can match JetBlue’s standard poor performance. (JetBlue in Q3, if you’re curious, only had 57 percent on time with a similar cancel rate.)
As if that’s not enough for Spirit to deal with, it is being hit very hard by those Pratt & Whitney engine problems. In Q4 of this year, Spirit expects to have 10 of the impacted A320neo family aircraft sitting on the ground. In 2024, it will start around 13 but spike to a whopping 41 by the end of the year. What’s even worse is this buried gem:
Pratt & Whitney recently notified the Company that all the geared turbofan (GTF) neo engines in Spirit’s fleet, including the engines slotted for future aircraft deliveries, for a yet undetermined period, are in the potential pool of engines subject to the inspection and possible replacement, of the powdered metal high-pressure turbine and compressor discs
Say what? P&W said that this was limited to just older engines and newer ones did not have issues. This would certainly suggest otherwise and that the problems are spreading. Oh my.
Now, you might be tempted as I was to say, “well, Spirit can probably make more money on compensation from Pratt than from actually flying these airplanes considering its current revenues.” That may very well be true, but the problem is that Spirit has the infrastructure (read: fixed costs) in place to operate all these airplanes. So the cost savings are not nearly as great as you might hope. And without growth, cost creep happens quickly. But maybe this will help Spirit to bolster revenues to some extent.
Overall, this is about as a bad of a result as you can imagine. So, how do you think JetBlue is feeling right now?
To be fair, JetBlue says it is buying Spirit for the pilots, airplanes, and presence in congested cities where it can’t grow on its own. Spirit airplanes will go into the JetBlue model. So maybe Spirit’s woes now don’t really impact JetBlue’s plans. But the weaker the airline gets, the more JetBlue has to be getting anxious about the whole thing.
At this point, Spirit has to just be hoping to get to the finish line in that merger. Then it’ll be JetBlue’s problem on top of all the problems JetBlue already has. In the meantime, it’s worth watching that trial closely.
43 comments on “As the Merger Trial Begins, JetBlue Watches Spirit Falter”
Cranky- your take on Spirit / JetBlue is, full of insight as always…. And the picture, well, is BRILLIANT!
When I saw the graphic of Snoopy I for some reason thought of “Underdog” & it’s catch phrase “there’s no need to fear… Underdog is here!
Missed opportunity to exclaim “good grief” though ;-)
Smartass – I thought about that… but that’s a Charlie Brown thing so I opted to skip
Here’s a thought….Spirit’s potential customer base is dwindling. Their reputation precedes them now even amongst infrequent flyers.
Is it truly softening demand for all carriers or just for Spirit?
Spirit and Frontier seem to be seeing the worst of it since, as Brett points out, they both have a lot of exposure to both Las Vegas and Florida. He’s described Florida as a “bottomless pit of demand” before, but it looks like there’s a bottom after all.
Allegiant is exposed to LV/Florida too, but their model is sufficiently different that, so far at least, they’re still doing fine.
One big question here is how much of the Las Vegas operation did JetBlue want to keep as a focus city to expand their West Coast operation and reduce dependence on the Northeast? If they had planned on keeping a good chunk of LAS, that might have to chance.
Otherwise, the main change would be that after they get control of Spirit they have to unpick what’s left of the unwanted parts of the Spirit network faster than they may have originally planned on. using Spirit’s non-P&W Neo planes for selective growth and/or maintaining a separate, much smaller Spirit network until the non-P&Ws can be retrofitted with JetBlue interiors, keeping all the pilots, even if it increases costs in the short run if they have to pay relatively idle pilots (“employee hoarding”, the latest labor trend), lay off the unneeded flight attendants, and shed unwanted ticket/gate space as fast as they can.
This possible response might lead the court to lean against the merger if they take a short-run view of “maintaining competition”, even if the anemic demand continues and Spirit continues to lose money by the truckload (and suppressing fares for everyone else in the domestic economy market in the process, possibly affecting Frontier and the smaller niche players, Avelo and Breeze.)
I forgot this part: eventually, they’ll get the P&W planes back, and in the meantime can just sit there and take the compensation instad of flying weak pre-merger-Spirit routes. And they can use Spirit’s non-P&Ws to fill in for their own, smaller, group of P&W-Neo planes too.
All of that is dependent on how fast the court moves and how fast they can take effective control if the court rules in their favor.
These so-called ULC and LC carriers end up being more expensive once you consider all the fees, hit and miss schedules and service failures. Jetblue should have stuck or merged with AA, much better deal for them, the traveling public and their shareholders. What a mess that combined company will be.
If JetBlue and American weren’t even allowed the NEA there’s no way a merger of the two would’ve been allowed.
Based on Southwest’s moves, their demand picture isn’t so hot either. Seems like if you can’t cater to international premium leisure you’re going to have a hard time keeping fares up in this environment.
Maybe B6 *does* stop fighting as hard, the merger fails, and we see F9/NK come back up, with terms a lot more amenable to F9 than last time. F9 could pull underperforming routes since people know their route planning process involves a blindfold and a dartboard, and lease (with some degree of moisture) their Airbii (including new ones being delivered to Indigo) to shore up the GTF issues, if those issues persist for long enough.
Yes, it’s consolidation, but it shouldn’t be as much of a shock fare-wise for Vegas and Florida as B6/NK.
https://onemileatatime.com/news/frontier-airlines-transform-business/
That may be true today, but F9 is addressing several operational issues and will be an improved model *hopefully* next year.
I like “airbii” a lot!
Here’s an interesting take… as NK fails the DOJ could look at this & say you know what, we’re no fans of B6. So if we allow the merger to go through then NK becomes a millstone around B6’s neck.
Now of course that’s not the way courts work, but I think you get my point.
One wonders if they wanted to show a big loss, to influence the trial. If you dont allow the merger NK will just collapse?
Just a thought.
I agree some what.
While I don’t think their intentionally posting big losses to put pressure for this merger to go through.
The losses do help paint a picture that whether it’s B6 or F9 Spirits model post Pandemic if failing and needs to be absorbed by someone. If they DOT stops the merger Spirit could become the first airline to start the bankruptcy car wash again to shed debt and employees cost to fight another day. That always ends up costing the consumer and employees in the long run.
As for too much capacity in LAS and not enough revenue to keep it up. That’s gonna be huge problem for JetBlue because they have a vision of LAS becoming their western mega Hub. A lot of JetBlue peeps envision bringing back the old HP late night Red Eye departure bank that cater to the LAS crowds.
I’ll be one to admit flying JetBlues seats on a LAS Red Eyes will be less painful than NK seats.
I miss the HP late night hub in LAS.
Me too! But I don’t miss sitting on the floor in that overcrowded, decrepit old terminal waiting for said redeye to begin boarding.
Average fare per passenger AND load factor were down year over year.
NK might benefit in getting the merger approved by having a big loss but there is no way they tried to do that.
I really wouldn’t mind if F9, NK, and B6 all went down, especially B6. I want us Chicagoans to be able to shout out to Noo Yawkers, “We have a hometown airline and you don’t.”
Very nice of you to hope for the demise of thousands of livelihoods. Stay classy.
It doesn’t affect me, so ask me if I care.
As someone who almost exclusively flies UA in Chicago, I welcome the competition. AA’s pullback at ORD is concerning to me, not because I ever fly them but because it means higher prices and fewer choices for the rest of us.
Could it be that the Spirit target market is softening because the money this target group had available for travel as a result of all the COVID relief subsidies has dried up? Add to that the inflation on everything else and perhaps the core Spirit target simply can’t afford to travel, period.
Dog whistle much?
Yeah… could it be all those PPT “loans” lead to record private jet sales?
https://www.theguardian.com/world/2023/may/01/private-jet-sales-likely-to-reach-highest-ever-level-this-year-report-says
:)
This is great news for B6! If the acquisition goes through, they now have justification for slashing all the service they promised Justice they wouldn’t slash.
Apparently Florida is not a bottomless pit able to absorb unlimited air service. Thank God for that.
I am very interested to see Brett’s analysis on F9. Because I think there might be something to the notion that a large portion of the US ULCC bubble might be bursting. Due to the big 3 adding flights as well as upgauging planes, the ULCC “skim a flight or two a day between two major markets” strategy might be evaporating.
The folks at Indigo Partners must be thanking their lucky stars they didn’t win this battle for Spirit.
JetBlue is now left, a year+ on paying roughly double what the market thinks NK is worth and they can’t even get out of the deal without a hefty withdrawal penalty (which, if I worked at B6, I’d be looking very hard at whether the withdrawal penalty might be worth it at this point). It’s looking like a rough time in the business cycle to execute a merger on a weak balance sheet.
Do they have to pay the penalty if they lose the lawsuit?
If not, maybe the Kraken lawyer team needs a new client :)
Oliver – Not only do they have to pay but they’re already paying it! They agreed to pay a ticking fee to Spirit shareholders in the lead up to the merger, so Spirit shareholders are already making money.
You really have to wonder if NK will make it ex-bankruptcy to any merger with B6. After they announced no new pilot hires and a near halt on their plane deliveries last week, that definitely doesn’t sound good. A big part of the NK Business model was crazy capacity growth that helped them hire pilots to gain seniority faster and to keep a low weighted average pilot wage. If things are that bad at NK, today and looking forward, that they’d forego that part of their business model, it definitely makes you wonder how dire things might be.
That, and you have to imagine that the big airlines like AA, DL, UA, and WN are going to go after the Spirit pilots even more from a hiring standpoint and their pilots might be a bit scared to stay at NK with this kind of news. You have to figure you may start seeing some pilots flee a sinking ship, or what they may view as a sinking ship. Why be the last one to jump ship from NK if you’re a pilot when you know your seniority won’t be increasing, at all, for at least a year and certainly less than you thought over the next few years given decreased plane deliveries?
I don’t mean to be overly dire and dramatic, but I think the news that NK is halting new pilot hires is really big given their business model and how it could impact their current pilots today.
MaxPower – I think that news is mixed. I mean, they are going to have a LOT of airplanes parked next year that weren’t supposed to be parked thanks to the P&W issue. I would stop or slow down hiring as well knowing the full extent of what’s going on there. So it’s maybe not as dire as it sounds. Still, it does make it sound like the pilot shortage is quickly ending though, huh?
But ultimately, it does feel like Spirit is managing toward the merger and not looking to do anything overly aggressive. It’s a sharp contrast to Frontier (which I’ll cover tomorrow) which is not waiting at all to make changes.
Good points and an interesting twist in the pilot shortage, for sure.
I’m excited to read the F9 article tomorrow! Thanks for your work on these!
Me too. I’m going to SAVE some time in the morning to read it.
I’m not sure what is being said in the courtroom but SAVE (Spirit) stock is down nearly 9% today when the rest of the industry is up because of lower crude oil prices; SAVE stock is near its 52 week low and is down 73% over the past 5 years, near its lows shortly after air travel collapsed in early weeks of covid.
Spirit is the victim of a hostile takeover which JetBlue is vastly overpaying for in the midst of a dramatically changing business environment.
All of the low cost and ultra low cost carriers are at risk of collapsing but let’s not forget the legacies were all in the same or worse state at multiple points including post 9/11. Certain carriers will fail – whether SAVE Is one of them remains to be seen including whether they take down JBLU or whether the latter walks away even if doing so is legally costly.
And let’s keep in mind that United execs specifically said on their earnings call that they are adding basic economy seats for sale – undoubtedly the result of United Next and upgauging, meaning they need LCCs and ULCCs to fail in order for UA Next to work.
UA’s biggest competitor by metro area is Southwest and WN is a high-value LCC, very different from the rest of the pack, and LUV has a deep war chest they can use while they get their strategies figured out.
The low cost and ultra low cost sector will figure out how to adapt. LUV will be a powerful force while the US may really only have two ULCCs – Allegiant (which is also a non-airline travel company) and Frontier in some form.
I think we will know Spirit’s future before long; the trial will make clear whether the DOJ can win its case and whether SAVE has to figure out how to stand on its own or whether JBLU will bail them out with the real risk of JBLU imploding as well.
United doesn’t “need” the ULCCs to fail but they, along with Delta and American, will certainly have something to do with whether that happens. Because, all other things being equal, the vast majority of the flying public is going to grab a basic economy fare on UA, DL or AA before buying on NK or F9.
That’s why I said in an earlier comment that the “skim a daily flight off the bottom of major routes” ULCC strategy might be over since the majors FINALLY figured out how to make basic economy work in the same tube as all of their other classes of service. Basic economy on any of the big 3 is, all other things being equal, a much better value proposition than any ULCC itinerary.
Agreed entirely. Basic economy on the big 3 is far better than a ULCC base fare, and I think that the “occasional” fliers (e.g., leisure fliers who do 1-3 roundtrips a year to visit family or a beach) are finally realizing that.
The big 3 also have an advantage, as when demand is higher they can shift fares & fare buckets to drive pax towards regular economy and higher classes of service, while still using BE to help eek out a little marginal revenue on seats that they might not have otherwise sold… Sure, the ULCCs have their own pricing models, but it’s less of a bitter taste for pax to see “basic economy is sold out, economy or economy + fare is $500 roundtrip” from the big 3 than it is for them to see the ULCCs charge relatively high base fares (without the add-ons) when demand is high.
United specifically said they are increasing the number of basic economy fares which is opposite of what other airlines including American and Delta say is the case for them.
UA’s upgauging will increase the need to sell seats at a discount because they simply won’t get the high revenue passengers necessary to fill that number of seats.
Given the amount of new aircraft that UA is supposed to receive, they have the potential to be adding enormous amounts of deep discount capacity which will have a very negative impact on ULCCs.
United will likely wield “the power of the ability to dynamically flex capacity between “products” to best compete.”
As does another airline that flew a “CR9 from LGA to CLT on Sunday with 23 basic economy passengers.”
These strategies do not sound dissimilar.
The antitrust lawsuit will be judged on the merits of the case, not the stock market. I could be wrong, but the ULCC market, while it’s been growing the last few years, is a niche and appeals only to a small segment of the population. It could be that there are simply too many players and too much capacity in that space, and the herd needs to be thinned. Domestic-heavy airlines such as Southwest and Alaska, which have various hybrid business models (quite different ones to be sure) seem to be doing okay. The more specialized carriers seem to be the ones that are struggling. The airline industry is cyclical. This could be one of those times when the cycle is changing, and the companies that can adapt most quickly and seamlessly will be the ones that survive.
I think it’s a bunch of BS that you’re putting Spirit on the hot seat. JetBlue is really at the horrible airline. It’s OK Spirit doesn’t need JetBlue. It will recoup stop thinking about the money, jet blue and spirit spirits. Fine without you I hope the merger doesn’t happen if it happens to happen, JetBlue will be no more. I guarantee it in about a year to two. I don’t care what anybody says about JetBlue. I do care what other people say about Spirit if they don’t like Spirit, they shouldn’t take spirit, but every time I’ve been on the spirit flight flight was packed to capacity.
Capacity doesn’t equal profitability. Just because a plane is full doesn’t mean that flight is making $$$.
Given the DOJ/DOJ Trial over B6+NK has started, I will repeat a statement from my participation in these comments from the post earlier this month on the UA ULCC Thesis (aka Kirby Thesis):
“I find The UA (Kirby/team) Thesis especially interesting in light of The Agency and The Courts work on B6+NK across TAM, SAM, and relevant market. It would be beyond great if The Agencies looked at HHI for each fare class across each City-Pair for B6+NK. Clearly this will reduce Basic Economy (NK) seats but should increase all other fare class seats.”
Will the DOJ/DOT define “Relevant Product” as each IATA Fare Bucket? This will be an interesting analysis based on ala-cart (eg NK) as compared to all-bundled (eg WN). If not the DOT/DOT, then does B6+NK Legal Counsel do this analysis and submit it to the Court?
Today’s CF post certainly implies that NK currently has “…too many seats to too few places…”. and other Comments have shared the viability (eg Big3) of having multiple “products” (fare buckets?) in the “same tube”. Seems like B6+NK could take the same logic and add-or-grow an ULCC-like lowest fare class to their BIGGER NETWORK than NK had prior to the merger.
I will add it to my never-finished list to see what files are on the Legal PACER system pertaining to the B6+NK case and see what filings have been made by The Plaintiff and The Defendants.
Per my comments in previous threads, there is lots of existing Law and more importantly Case Law that can be applied to B6+NK by both Plaintiff Counsel and Defendants Counsel.
For those interested, below link is PLAINTIFFS’ PRETRIAL BRIEF (DOJ, DOT, various States, aka “Govt”) from earlier today:
https://storage.courtlistener.com/recap/gov.uscourts.mad.254267/gov.uscourts.mad.254267.326.0_1.pdf
It is 40 pages but here is my quick read on how HHI is being calculated
1. Govt is running HHI analysis on “Any-&-All PASSENGERS” between City Pairs (Footnote 3, document page 22 of 40, labeled as “Page 16”) with text below:
“3 These shares and HHIs are calculated using passenger counts for service offered between the third
quarter of 2021 and the second quarter of 2022. Passenger counts are a better measure of market
concentration than revenue in this case because “one unit of a low-priced product can substitute for one
unit of a higher-priced product.” U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger
Guidelines § 5.2 (2010) (“2010 Guidelines”); U.S. Dep’t of Justice & Fed. Trade Comm’n, Draft Merger
Guidelines Appendix 4, § B (2023) (“2023 Draft Guidelines”). But even if shares and market
concentration statistics were calculated using revenues instead of passenger counts, the acquisition is still
presumptively illegal in at least 138 markets.”
2. Seems to me that Q3CY21-Q2CY22 period was during a period of COVID Disruption to Supply:Demand Curves.
More recent (eg Q3CY22-Q2CY23) data would be more relevant given the market is further into “return-to-normal”.
Better yet “most recent” data for Q4CY22-Q3CY23 that includes both PASSENGERS (demand) and SEATS (supply)
3. My 100% personal opinion is that Govt (DOJ, et al) manipulate the definition of “relevant market” based on whatever better supports their point-of-view. Sometimes they widen it (eg this case where Any-&-All Seats/Fares are in the same Relevant Market, complete opposite where Product Category #1 is not considered in same Relevant Market to Product Category #2 despite evidence of direct substitution by The Market).
4. I am interested how Counsel (Plaintiff, Defendant) play the Govt-imposed Capacity Controls (eg slot limitations) as Govt-Agency owned Assets (eg JFK, etc)
These are NOT classic “Free Markets” with easy entry-&-exit.
5.. I am especially interested how any of these legal arguments can be used in cases involving other Fortress Hubs that have material concentration
* Example: reallocate Gates/Slots due to Carrier(n) having Concentration above HHI limit
This will be an interesting Trial as it develops….