Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Frontier Emerges as White Knight

When JetBlue and Spirit announced their $3.8 billion merger last July, it seemed like a done deal. The two low-cost carriers appeared poised to create the nation's fifth largest airline, with a fleet of 458 aircraft serving more than 1,700 daily flights.

But the deal quickly encountered turbulence, as rival Frontier Airlines swooped in with an unsolicited $2.9 billion bid for Spirit in February. Frontier argued that a merger between the two ultra-low-cost carriers made more sense than bringing JetBlue into the mix.
While Frontier's offer was financially smaller than JetBlue's, Spirit's board ultimately determined it was the superior proposal "after consultation with outside financial and legal advisors," the company said in a statement.
A key factor was the likelihood of regulatory approval. Antitrust regulators expressed concerns about JetBlue's Northeast Alliance (NEA) with American Airlines, questioning whether JetBlue could sustain the NEA while simultaneously eliminating Spirit as a competitor in the region.

Frontier, on the other hand, doesn't have the same antitrust issues as JetBlue. Regulators appeared more open to a Frontier-Spirit merger, which wouldn't reduce competition in the Northeast to the same degree.
Additionally, a survey by the Association of Flight Attendants (AFA) found 84% of members opposed the JetBlue deal, concerned about how it would impact their contracts, scope clauses and overall job security. The AFA saw Frontier as the lesser evil.
While both suitors promised no furloughs because of the transaction, Frontier's ultra-low-cost model was seen as less of a threat to working conditions. JetBlue has long prided itself on offering superior service and amenities compared to bare-bones Spirit.
Ultimately, Frontier's offer proved too good for Spirit shareholders to pass up. And JetBlue investors reacted positively when the deal was called off, relieved the airline wouldn't take on a massive integration risk.

What else is in this post?

1. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Frontier Emerges as White Knight
2. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Regulators Not Swayed by Low-Cost Argument
3. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Labor Unions Opposed Tie-Up
4. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - JetBlue Shareholders Saw Deal as Risky
5. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Spirit's Future Again Up in the Air
6. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - JetBlue's NAV Alliance Now in Jeopardy
7. Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Consumers Lose Out on Low Fares

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Regulators Not Swayed by Low-Cost Argument

JetBlue and Spirit argued that by combining forces, they could offer consumers even lower fares through greater economies of scale. But regulators at the Department of Justice (DOJ) weren't convinced.

The DOJ expressed concerns that eliminating Spirit as a competitor would reduce incentives for JetBlue to offer discounted fares. The regulators argued that the Northeast Alliance (NEA) had already removed a key competitor in American Airlines from competing with JetBlue in parts of the Northeast.

Acquiring Spirit would consolidate JetBlue's dominance of major airports like New York JFK even further. Without an ultra-low cost carrier nipping at its heels, JetBlue would have little motivation to keep driving fares down.
Spirit tried assuring regulators that its bare-bones business model was here to stay under JetBlue management. But the DOJ feared JetBlue would hike ancillary fees on Spirit passengers while limiting the Spirit brand to a few select markets.

JetBlue's pledge to keep Spirit as a separate low-cost entity was met with skepticism. And the DOJ worried JetBlue would reduce Spirit's growth potential by limiting fleet expansion and cutting off access to major airports where JetBlue dominated.

Regulators noted that previous airline mergers claiming to expand low-cost options, like Alaska-Virgin America, failed to deliver on those promises long-term. Fare data showed consumers ended up paying more once the competitive incentives to keep prices low disappeared post-merger.
The DOJ lawsuit made clear that adding Spirit's ultra-low cost network to JetBlue's strengths was not essential for robust competition. There were concerns JetBlue was trying to eliminate an inconvenient competitor rather than expand options for price-sensitive travelers.
Spirit Airlines wasn't buying the DOJ's stance. "A lawsuit to block this transaction is surprising and disappointing, given that more competition and lower fares are precisely what consumers need," Spirit declared.
The demise of ultra-low cost carrier PEOPLExpress after a 1986 merger was cited as a cautionary tale. Regulators argued the same fate would befall Spirit's low-cost brand in this proposed merger.

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Labor Unions Opposed Tie-Up

One of the major forces working against the JetBlue-Spirit merger was organized labor. Key airline unions came out strongly against the proposed tie-up, seeing it as detrimental to their members. This opposition created an additional hurdle for the deal, already facing an uphill battle with regulators.

The merger threatened to upend union contracts, leading to worse pay and working conditions. JetBlue has long prided itself on providing superior compensation and benefits compared to ultra-low cost Spirit. But unions worried bringing Spirit into the fold would drag standards down.
The Association of Flight Attendants (AFA) was particularly vocal, with 84% of surveyed members opposing the transaction. The AFA warned that Spirit management would push for scope clause changes, putting limits on the number of aircraft flown by JetBlue crew members. This could lead to more aircraft being operated by cheaper contractors.

Additionally, the AFA feared aligning with ultra-low cost Spirit would encourage JetBlue to slash costs by cutting back on amenities and support staff that contributes to the airline's premium service reputation.
Bringing together two very different corporate cultures was seen as a recipe for labor tensions. The AFA believed the prudent path was "providing security and stability for JetBlue's Flight Attendants by focusing on the business it currently conducts.”

The two largest pilots' unions, the Air Line Pilots Association (ALPA) and the Southwest Airlines Pilots Association (SWAPA), echoed similar concerns. In a joint letter, they accused JetBlue of embarking on "a path to undermine wages, benefits, and job protections” through the merger.
Pilot groups worried the Spirit deal would threaten scope clause protections, with regional subsidiaries gaining access to more JetBlue routes. Bringing in Spirit pilots under more budget-friendly contracts was another point of contention.

JetBlue CEO Robin Hayes tried assuring workers, "The New JetBlue will be built on our crewmembers’ ideas, innovation and collaboration.” But those promises clearly failed to sway skeptical labor leaders.

Ultimately, the AFA threw its support behind the Frontier bid for Spirit, seeing it as the lesser evil. While not ideal, Frontier was at least another ultra-low cost carrier, making integration appear less disruptive.

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - JetBlue Shareholders Saw Deal as Risky

While JetBlue's management team pushed hard for the merger with Spirit, claiming it would lead to $600-700 million in annual savings and boost earnings per share, shareholders had their doubts about the risks involved.

This skepticism proved well-founded, as evidenced by the positive market reaction when JetBlue announced it was terminating the agreement in October 2022. JetBlue's stock jumped 7% on the news, signaling investors' relief that the airline wouldn't be taking on the massive challenge of integrating two wildly different business models.
Many shareholders questioned the logic behind JetBlue buying an ultra-low cost carrier when its own branding emphasized superior service, legroom and amenities. It seemed an odd fit with JetBlue's reputation for trying to "bring humanity back to air travel."

There were also concerns about the price tag. JetBlue agreed to pay $3.8 billion for Spirit, a significant premium over the target's market value. Shareholders balked at overpaying for a budget airline, especially when JetBlue itself was still struggling with profitability coming out of the pandemic.

Shareholders saw potential distractions from executing JetBlue's core strategy, like expanding routes from its new bases in Los Angeles and London. There were fears management would be bogged down trying to integrate Spirit rather than focused on JetBlue's existing opportunities.

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Spirit's Future Again Up in the Air

Spirit's future is once more shrouded in uncertainty now that its planned merger with JetBlue has been abandoned. The ultra-low cost carrier finds itself back at square one, with its path forward entirely up in the air yet again.

This isn't the first time Spirit has seen a major merger fall through. Back in 2020, a proposed tie-up with regional carrier Frontier also ended up getting scrapped after months of negotiations. So this latest JetBlue deal collapsing arguably shouldn't come as a huge shock, given Spirit's troubled history of failed mergers.

Yet you still have to feel for all of the Spirit employees and shareholders who have now been taken on this rollercoaster ride for a second time. Just when a potential suitor seemed to promise a more stable and prosperous future for the airline, the rug got pulled out from under them once more.
For passengers, it means the ultra-low fares that Spirit is known for could be sticking around awhile longer. JetBlue would likely have raised ancillary fees and restricted Spirit's growth had the deal gone through, as a way of recouping its hefty purchase price. So budget-conscious travelers can count this as a small win, at least in the short term.

But without the scale, network breadth and resources of a larger carrier, Spirit still faces substantial challenges going it alone. The airline has posted losses in three of the past four quarters, as high fuel costs and staffing challenges have taken a toll. Its share price had fallen nearly 50% over the past year even before the JetBlue deal collapsed.

Spirit will now have to redouble its efforts to differentiate itself from fellow ultra-low cost carriers like Frontier and Allegiant. Finding new ways to drive down fares even further is one option, though hardly an easy one given how bare bones Spirit's product already is.

Expanding into new markets could help ignite growth. But Spirit has found it difficult to make inroads on the West Coast, where competitors already have strong footholds. And finding new opportunities probably would have been easier with JetBlue's resources.
Partnerships with major carriers could be another lifeline, providing the feed traffic and fare connectivity that Spirit currently lacks. But after two failed merger attempts, Spirit has few prospects left among the large airlines looking for tie-ups.

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - JetBlue's NAV Alliance Now in Jeopardy

The collapse of the JetBlue-Spirit merger could have major implications for JetBlue's Northeast Alliance (NAV) with American Airlines, potentially jeopardizing the partnership. The NAV allows JetBlue and American to coordinate schedules and share revenues on flights in and out of four major Northeast airports, including New York JFK and Boston Logan. It has provided an important edge for JetBlue against rival Delta in the key Northeast market.

But regulators viewed the NAV as anti-competitive from the start, believing it reduced incentives for JetBlue and American to compete on fares and services. Their preliminary OK of the alliance in 2021 came with the stipulation that the carriers maintain independent growth and decision-making. However, DOJ argued the subsequent Spirit merger proposal violated the terms of JetBlue's NAV approval.
Acquiring Spirit would have fortified JetBlue's dominant position in the Northeast established by the NAV. It also could allow JetBlue to restrict American's future growth opportunities at constrained airports like JFK and LaGuardia where the alliance partners coordinate. Regulators feared JetBlue could leverage its greater influence under a combined JetBlue-Spirit entity to coerce American into accepting concessions across the whole NAV partnership.
According to former DOT official Philip Musser, the collapsed deal "likely will lead to Justice seeking to modify or eliminate the NEA.” Without Spirit to enhance JetBlue's Northeast presence, regulators could determine the anti-competitive impacts of the NAV now outweigh the claimed consumer benefits.
Unwinding the complex NAV agreement would be a major setback for JetBlue. The alliance helped drive a revenue rebound and improved profit margins as demand recovered from pandemic lows. JetBlue CEO Robin Hayes called the NAV "a huge advantage competitively for us.” The airline estimated it generated $100 million in annual consumer savings through expanded routes and reduced fares.
But some consumer advocates argued those benefits were overstated. A 2022 study by the Institute for Policy Integrity claimed the NAV resulted in 3-7% higher fares on routes covered by the partnership. It recommended blocking the Spirit merger and potentially forcing modifications to the NAV itself.

American Airlines now finds itself caught in the crossfire between regulators and partner JetBlue. It may need to make a choice between defending the NAV or maintaining growth opportunities in the Northeast if DOJ pushes for concessions. Makeup of the alliance and interdependence between JetBlue and American could be at stake.
Unwinding the NAV would also impact airport slot allocations and flight schedules painstakingly aligned between the two carriers. And it could leave American weaker in competing for premium corporate contracts against a Delta-Virgin Atlantic joint venture also operating out of the Northeast.

Wing Clipped: How the JetBlue-Spirit Merger Met Its Turbulent End - Consumers Lose Out on Low Fares

The collapse of the proposed JetBlue-Spirit merger deals a blow to budget-conscious travelers hoping for continued low fares. While the deal faced long regulatory odds, it had promised to expand ultra-low cost options if the Spirit brand was maintained. Instead, consumers are left with two weakened low-fare airlines, each facing their own challenges competing effectively.
JetBlue touted nearly $1 billion in consumer savings from the merger, arguing the deal would allow Spirit to accelerate growth and aircraft purchases. But regulators disagreed, believing removing Spirit as a competitor would reduce pressure on JetBlue to keep fares affordable. History shows when low-cost carriers merge, initial promises of continued discounts frequently give way to higher prices once the competitive incentives disappear.

Spirit passengers had been relishing the prospect of gaining access to JetBlue's wider network under a merged entity. JetBlue flyers welcomed the ability to buy no-frills Spirit fares for leisure trips where amenities don't matter as much. But with Spirit remaining independent, the ability to mix and match low-cost options on a single itinerary is gone.

Consumers generally benefit when airlines expand route networks and schedules. JetBlue claimed Spirit would serve new markets using JetBlue's stronger brand name to attract passengers hesitant to fly America's most unloved airline. Instead, Spirit lacks the resources to keep expanding and winning new converts beyond its niche of ultra price-sensitive flyers.
Leisure passengers stand to lose out most if an emboldened Spirit and JetBlue end up retreating from competitive fare wars. Spirit may have to initiate even more ancillary fees to prop up margins, on top of charges for carry-on bags and seat assignments. Yet its product is already so bare-bones that customers are frustrated with being nickeled and dimed.

JetBlue lacks Spirit's cost structure to get fares as low, but has faced Wall Street pressure to boost revenues. One way is harvesting more ancillary fees besides just extra legroom and baggage. But JetBlue risks undermining its value proposition if it alienates loyal customers with excessive fees.