(Bloomberg) — JetBlue Airways Corp. offered to buy budget carrier Spirit Airlines Inc. for $3.6 billion, potentially spoiling a competing bid by rival Frontier Group Holdings Inc. and reshaping the landscape for ultra-low-cost air travel.
Spirit said Tuesday it received an unsolicited proposal from JetBlue to buy outstanding shares for $33 apiece in cash. Spirit will work with financial and legal advisers to evaluate the offer, according to a statement.
The surprise development comes about two months after Frontier reached an agreement to buy Spirit for $2.9 billion. Frontier criticized the competing offer, saying such a combination would raise fares and reduce flight options. It also questioned JetBlue’s effort in light of an unrelated federal lawsuit to block an alliance with American Airlines Group Inc.
“An acquisition of Spirit by JetBlue, a high-fare carrier, would lead to more expensive travel for consumers,” Frontier said in an email, without specifying whether the company planned to increase its bid.
Spirit’s allure stems in part from an industry-wide turn toward domestic markets and leisure travelers — the bread-and-butter of ultra-low-cost airlines — to recover from a pandemic slump. Bigger carriers are moving more heavily onto that turf as business and overseas travel demand remains tepid.
A Spirit acquisition would give JetBlue the growth that it’s long sought, moving it closer to competing with larger carriers and assuring its spot as the fifth-largest airline in the U.S.
“Once you’ve created megacarriers with over 1,000 planes, then it’s fair game for the No. 5 to beef up,” said Samuel Engel, senior vice president of the aviation group at consultant ICF. “You look around and say, ‘If the next round of consolidation is now, I want to be in on it.’”
$700 Million Synergies
JetBlue said in a statement its offer isn’t subject to approval by its shareholders or to a financing contingency. The proposed deal would generate as much as $700 million in annual synergies, the carrier said.
Spirit shares jumped 22% in New York after the New York Times first reported on the proposal and were little changed in aftermarket trading. JetBlue fell 1.4% in the postmarket as of 6:34 p.m. in New York after a 7.1% drop at the close. Frontier was almost unchanged in the aftermarket after closing up 3.9%.
A Spirit deal would give JetBlue, hounded by Wall Street analysts for much of its 23-year history over cost creep, access to an organization and management team highly focused on keeping operating expenses in check. JetBlue lost out in its only other takeover attempt when it was outbid by Alaska Air Group Inc. for Virgin America in 2016.
JetBlue said its offer is superior to Frontier’s bid and “represents the most attractive opportunity for Spirit’s shareholders.” The combination of JetBlue and Spirit would position the buyer “as the most compelling national low-fare challenger to the four large dominant U.S. carriers,” it said.
It would also help JetBlue — with much of its capacity in New York and Boston — grow in markets where it has little or no presence. At the same time, the combined JetBlue and Spirit would have a larger presence in popular leisure markets in Florida and the Caribbean where both already operate. That overlap of networks could make a JetBlue-Spirit combination more compelling because it creates greater opportunity to rationalize operations and increase efficiency, said Engel, the ICF consultant.
Blunting Frontier’s Ambitions
Disrupting Frontier’s bid, meanwhile, could blunt the growth ambitions of the Denver-based airline, which has expanded nationally in recent years.
“It certainly muddies the waters,” consultant Robert Mann of R.W. Mann & Co., said of JetBlue’s offer. “I don’t know if it’s designed to be disruptive, or if they’re targeting what seems to be money left on the table by Frontier.”
The proposed deal would combine two large operators of Airbus SE A320neo-family jets, allowing JetBlue to rapidly grow its fleet at a time when the hot-selling aircraft is sold out through mid-decade. Spirit agreed to purchase 100 Airbus A320neo jets, with options for 50 more, in October 2019 and expects deliveries through 2027.
What Bloomberg Intelligence Says:
“A bigger airline could improve costs, which becomes critical as soaring fuel prices push fares higher and stress consumers’ budgets. Merging very different cultures — Spirit the scrappy upstart vs. genteel JetBlue — would be a challenge.”
— George Ferguson, BI senior aerospace industry analyst
Click here to read the research.
But the two airlines otherwise have little in common, whether it’s business models, computer systems or customers. While JetBlue has cultivated a business clientele with its roomier seating, Spirit appeals to budget-minded leisure travelers with its bare-bones service. Keeping expenses low post-merger would be a challenge should JetBlue prevail, Mann said, with past mergers showing that “costs rise to the level of the higher-cost carrier.”
A JetBlue victory in the takeover battle would bring new attention to the carrier from federal antitrust enforcers who have already weighed in against a pending alliance with American Airlines focused on their operations in the northeastern U.S. The U.S. Justice Department and a group of state attorneys general say the partnership is a de-facto merger, a claim the airlines plan to fight in court.
(Updates with consultant comments from 14th paragraph)
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