JetBlue Airways on Thursday reached an agreement to buy Spirit Airlines, a merger that could transform the airline industry by putting pressure on the country’s four dominant carriers.
The deal, which values Spirit at $3.8 billion, would create the country’s fifth-largest airline with a more than 10 percent market share behind United Airlines, which has a nearly 14 percent share. Delta Air Lines and Southwest Airlines each control more than 17 percent, while American Airlines owns more than 18 percent.
The merger is likely to face a thorough scrutiny by the Biden administration’s antitrust authorities, which have been aggressively opposed to corporate consolidation, particularly in industries already dominated by a few companies. Faced with this reality, JetBlue’s top executive tried to view the Spirit deal as a way to make its industry more competitive, not less.
“Our argument is clear: The best thing we can do in the US to create a more competitive industry is to let JetBlue grow,” Robin Hayes, the company’s chief executive officer, said in an interview.
The agreement is a victory for JetBlue, which has blighted a competing bid: Frontier Airlines and Spirit canceled a merger deal on Wednesday after Spirit struggled to persuade its shareholders to back the bid, which cost about $1 billion dollars fell short of JetBlue’s offer.
JetBlue and Spirit said they expect to receive Spirit shareholder approval this fall and regulatory approvals by early 2024. The airlines plan to complete the transaction no later than the first half of 2024 and to operate as a single airline until the first half of 2025.
But the merger could be difficult to complete. Regulators have already sued JetBlue and American over a partnership at airports in Boston and New York. And on Wednesday, the Federal Trade Commission filed a lawsuit to block social media giant Meta’s acquisition of a small virtual reality company, Within.
To address regulatory scrutiny, JetBlue has announced it will preemptively divest certain airports where it and Spirit together have a large presence. A key concern with airline mergers is that they can make one company dominant at certain airports or on certain routes, allowing it to suppress competition and raise fares for some travelers. If regulators block the acquisition, JetBlue will pay $70 million to Spirit and $400 million to Spirit shareholders.
“The airline industry is ridiculously concentrated and has been and justifiably continues to be a focus area for the Justice Department,” said Bill Baer, a visiting scholar at the Brookings Institution who headed the department’s antitrust division in the Obama administration.
While companies involved in mergers with direct competitors generally argue that the mergers increase competition and benefit consumers, Mr. Baer said they don’t typically work that way. The terms of the JetBlue Spirit deal suggest airlines are preparing for an uphill battle, he said.
Under the terms of the agreement, JetBlue would acquire Spirit for a minimum of $33.50 per share in cash, significantly more than Spirit’s current price. Spirit shares rose less than 6 percent on Thursday to $25.66 per share, reflecting skepticism about the deal. Frontier shares, meanwhile, shot up more than 20 percent on Thursday.
JetBlue said it would pay Spirit shareholders $2.50 a share upfront if they approve the deal and the equivalent of 10 cents a share per month over the next year — an incentive to keep them on board during a potentially lengthy process to keep. If the deal doesn’t close by 2024, its value could go as high as $34.15 per share.
The combined airline would be based in New York and run by Mr. Hayes. It would have 458 planes, 34,000 employees and an estimated 77 million customers, the airlines said.
JetBlue said it expects annual savings of $600 million to $700 million by spreading fixed costs across a larger company. Based on 2019 figures, the combined airline’s annual revenue is estimated at approximately $11.9 billion.
After years of bankruptcies and consolidation, the airline industry had largely stabilized by the early 2010s, with the Big Four airlines controlling most of the market. In 2016, JetBlue lost a bid war for Virgin America against Alaska Airlines.
The acquisition of Spirit would help JetBlue expand its presence in cities like Fort Lauderdale and Orlando in Florida, San Juan in Puerto Rico and Los Angeles. The airline also said it expects to grow at the hub airports of the larger carriers, such as Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami — a strategy designed in part to convince antitrust authorities who are eager to do so to see more Competition at airports where one or two airlines control most gates and flights.
But even if the deal succeeds, airline mergers are notoriously difficult, requiring union mergers, sometimes outdated and incompatible computer systems, mismatched aircraft fleets, and different corporate cultures.
“The merger will be a case study in the winner’s curse,” said Erik Gordon, an economics professor at the University of Michigan. “JetBlue will endure years of nightmares trying to integrate aircraft, systems and cultures that come from different planets.”
When American and US Airways merged about 10 years ago, it took four and a half years to negotiate a single contract for mechanics, dock workers and other employees represented by the Transport Workers Union of America, said Gary Peterson, director of the union’s airline division.
“Merging work groups is like bringing the Mets and the Yankees together as one organization,” he said.
Mr Peterson said that passengers and workers in such combinations are generally the losers but that the union will fight to protect workers as the merger goes ahead.
Sara Nelson, president of the Association of Flight Attendants-CWA, which represents flight attendants from 19 airlines including Spirit, said her union would only support the deal if flight attendants shared its benefits.
“Our job is to improve conditions for workers while being strategic about it,” she said in a statement.
The JetBlue Spirit deal comes amid widespread dissatisfaction with the airline industry, which has struggled to keep up with the recovery in travel demand over the past year.
The Transport Ministry recently said it received more than double the number of complaints about refunds, delays, cancellations and other issues from airlines in May compared to the same month in 2019, despite fewer people on the road. In April, the department received more than three times the number of complaints it had received before the pandemic.
While JetBlue ranks highly when it comes to customer satisfaction, Spirit has fewer fans. And both airlines have struggled to run smoothly during the recent recovery. About 68 percent of Spirit flights and just over 62 percent of JetBlue flights arrived on time through May this year, according to the Department of Transportation. Spirit ranked seventh and JetBlue 10th among US airlines for on-time performance during that period. Spirit has improved significantly in this regard in recent months, but JetBlue has only slightly improved, according to FlightAware, an aeronautical data provider.
Some pundits have questioned the airlines’ claim that the deal would benefit consumers, arguing that JetBlue would not be able to keep costs as low as Spirit, which is branded in the industry as ultra-low-cost. airline is known.
“We haven’t seen an airline merger in the United States in the last 30 years that’s been good for consumers, good for the workforce, and even good for the cities and regions in which they operate,” William said J. McGee, a senior fellow in aviation and travel at the American Economic Liberties Project, which advocates for stronger antitrust policies and enforcement.
Spirit and JetBlue’s deal could inspire other airlines to join forces to stay competitive, said Helane Becker, a managing director and senior analyst at Cowen, an investment bank. “If this transaction goes through, it could encourage smaller airlines, particularly regional airlines, to consider a merger,” she said.
JetBlue and Spirit said they would continue to operate independently until the merger is complete, with loyalty programs and customer accounts unchanged.