JetBlue Announces Agreement to Buy Spirit Airlines Rent may increase
NEW YORK (CNN Business) JetBlue Airways announced Thursday that it will buy Spirit Airlines, a combination that would make it America’s fifth-largest airline.
The announcement comes a day after Spirit pulled the plug on a deal to merge with Frontier.
JetBlue was pursuing a hostile bid for Spirit even as Spirit sought shareholder approval for a low-cost deal with Frontier. Spirit had expressed ongoing concerns about whether regulators would approve the deal with JetBlue. But with JetBlue’s all-cash offer on the table, shareholders were reluctant to accept Frontier’s undervalued cash-and-stock offer.
JetBlue CEO Robin Hayes said the deal would be beneficial for investors and passengers.
“We look forward to delivering this exciting combination that turbocharges our strategic growth, enabling JetBlue to bring our unique blend of low fares and exceptional service to more customers, on more routes,” he said in a statement.
But industry experts say the deal could raise rents across the industry. The Frontier-Spirit deal, by contrast, would have brought together two airlines with much lower base fares. Airlines do not have first class or business class seats.
The presence of Spirit or Frontier on a route typically forces major airlines like American ( AAL ), United ( UAL ) and Delta ( DAL ) to offer more space in their similar bare-bones basic economy fares. JetBlue may argue that it charges less than larger network carriers, but its airfares are higher than Spirit and Frontiers. And JetBlue plans to reconfigure Spirit planes if it takes over the airline to add first-class seats.
“Spirit and Frontier play a big role in the fare you pay, even if you’ve never flown,” said Scott Keyes, founder of Scott’s Cheap Flights, a website that helps travelers find cheap fares. “When Delta announced basic economy fares in 2012, they described it to investors as ‘spirit-matching fares,’ because the world’s budget carriers were eating their lunch. I’m not a fan of either merger, but I like the JetBlue option even less.”
For that reason, it’s possible that the JetBlue deal for Spirit will face strong antitrust scrutiny from the US Department of Justice, especially if the Justice Department views the acquisition as harmful to consumers.
The proposed JetBlue Spirit deal is smaller than many airline mergers in recent decades, which turned the 10 largest US airlines into four mega-carriers that control 80% of US air traffic. But the Biden administration has taken a more aggressive stance on antitrust law issues and pledged to encourage greater competition in the airline industry.
Biden’s Justice Department filed a lawsuit to block an alliance between American and JetBlue that allows each airline to book passengers on the other’s flights. Spirit pointed to that legal action, arguing that the JetBlue deal would not receive the necessary approvals.
But those doubts about the deal with JetBlue were nowhere to be found in Spirit’s comments Thursday.
“We are thrilled to join forces with JetBlue through our revised agreement to create the most attractive national low-fare challenger to the dominant US carrier,” said CEO Ted Christie.
In an interview on CNBC on Thursday, Christie was pressed about past criticism of JetBlue’s offer and doubts about regulators approving the deal.
“We’ve learned a lot in the past few months,” he said. “They have an aggressive strategy to get this deal done. We’re behind them making sure it happens, because it’s good for our group. It’s going to create a big national competitor. To the Big Four.”
JetBlue’s Hayes said the best argument for regulators is that the deal will provide another major national carrier and create more competition, not less.
“We’re focused on getting this deal done,” he said on CNBC. “We are focused on bringing more aircraft to customers in more geographies than JetBlue or Spirit could do alone, offering lower fares and better products.”
Passengers may like the low fares offered on Spirit and Frontier, but they generally dislike the service. Spirit had the most passenger complaints in 2021, with 11.45 complaints per 100,000 passengers, according to the US Department of Transportation. JetBlue had the second most complaints with 6.38, while Frontier was third with 5.78. Frontier had the worst complaint rate in 2020, when it recorded 49.31 complaints per 100,000 customers.
The deal announced Thursday will pay Spirit shareholders $33.50 per share in cash, including a prepayment of $2.50 per share in cash payable upon approval of the transaction by Spirit stockholders – before the deal closes.