The final call is on the regulators, but the fight for Spirit Airlines seems over. After Frontier Airlines’ decision on Wednesday to terminate the merger agreement with Spirit, the ultra-low-cost airline announced on Thursday that the boards of directors of Spirit and JetBlue have approved a definitive merger agreement. Spirit prefers JetBlue over Frontier.
JetBlue will acquire Spirit for an aggregate fully diluted value of $3.8 billion/adjusted enterprise value of $7.6 billion or $33.50 per share, including a prepayment of $2.50 per share in cash once Spirit’s stockholders have approved the agreement. This is identical to the offer JetBlue made on June 20.
Within days, Frontier Airlines and its parent Indigo Partners came up with an amended offer “that is well in excess of JetBlue’s illusory proposal.” In May, Spirit had raised many red flags against JetBlue. But the pro-Frontier mood that had persisted week after week since the first announcement in February started to shift when JetBlue made an unsolicited offer and continuously amended it. Spirit’s stockholder’s meeting, originally scheduled for June 10, had already been adjourned a number of times until a final date on July 27. Their support for the Frontier-Spirit agreement had waned and stockholders were ready to vote against the offer, which was the “last, best, and final” one, as Frontier said on July 10. Before they could, Frontier withdrew its offer. “Rather than overpay for Spirit, the Board had prioritized shareholders, employees, and customers”, Frontier’s Barry Biffle said in an earnings call.
“While we are disappointed that we had to terminate our proposed merger with Frontier, we are proud of the dedicated work of our Team Members on the transaction over the past many months,” said Spirit CEO Ted Christie said on Wednesday in a media statement. “Moving forward, the Spirit Board of Directors will continue our ongoing discussions with JetBlue as we pursue the best path forward for Spirit and our stockholders.”
Fruitful discussions
These discussions have been fruitful, as Spirit and JetBlue announced their agreement on Thursday morning. The acquisition gives JetBlue what it wanted for months: the assets, network, and order book of Spirit to “turbocharge” its growth instead of natural growth at a much slower rate. The Frontier-Spirit merger would have left JetBlue behind as the number six airline in the US, whereas it aspired to become a national low-cost alternative to the Big Three (American, Delta, United) and Southwest. It consistently stressed the ‘JetBlue effect’, in which fares go lower wherever JetBlue enters the market, something as consistently denied by the Spirit board in the past hectic months.
With an agreement now reached, JetBlue CEO Robin Hayes says in a media statement: “We are excited to deliver this compelling 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. We look forward to welcoming Spirit’s outstanding Team Members to JetBlue and together creating a customer-centric, fifth-largest carrier in the United States. Spirit and JetBlue will continue to advance our shared goal of disrupting the industry to bring down fares from the Big Four airlines. This combination is an exciting opportunity to diversify and expand our network, add jobs and new possibilities for crewmembers, and expand our platform for profitable growth.”
Having fought so hard to fight off JetBlue, Ted Christie no changed his tone: “We are thrilled to unite with JetBlue through our improved agreement to create the most compelling national low-fare challenger to the dominant U.S. carriers, and we look forward to working with JetBlue to complete the transaction. Bringing our two airlines together will be a game changer, and we are confident that JetBlue will deliver opportunities for our Guests and Team Members with JetBlue’s unique blend of low fares and award-winning service. We especially appreciate the commitment of our Spirit Family throughout this process. Today’s exciting announcement reflects JetBlue’s admiration for Spirit and a shared belief in what the combined airline can bring for our Guests.”
Fleet of 458 aircraft
Once finalized, the Spirit brand and its striking yellow aircraft will disappear from the US skies as the JetBlue brand takes over. The combined airline will have a fleet of 458 aircraft plus over 300 Airbus A220 and A320neo family on order, the neo slots being a major reason for JetBlue to buy Spirit. Together, Spirit and JetBlue fly around 77 million passengers a year on over 1.700 daily flights to over 125 destinations in thirty countries, the December 2022 schedule shows. The combined workforce will be around 34.000 and the two airlines should generate between $600 and $700 million in annual synergies.
Northeast-based JetBlue will get access to new markets that have been Spirit’s for so long, including Florida (Fort Lauderdale, Orlando), San Juan, and Los Angeles, plus to hubs where the ‘Big Four’ have a strong presence like Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta, and Miami. Spirit’s current support center in Fort Lauderdale will be retained.
Approval not expected until mid-2024
Getting regulatory approval is expected to take up to two years but no later than the first half of 2024, the two airlines say. That’s why the agreement includes a transaction price of $33.50 per share if the deal is concluded before December 2023 and a $34.50 per share price in the event approval takes longer than July 2024.
The focus of attention from the Department of Justice will be on how the acquisition will affect competition, notably in the Northeast around New York and Boston where JetBlue has its home base. And where it tries to get approval from the DoJ for the Northeast Alliance with American Airlines. During the relentless battle for Spirit, the yellow airline and Frontier stressed on multiple occasions that a Spirit-JetBlue combination would never get regulatory approval, especially with so many doubts and uncertainties surrounding the approval of the NEA.
The media statement says: “In connection with the agreement, JetBlue has made the upfront commitment to divest Spirit’s holdings at the NEA airports to allow for allocation to other ultra-low-cost carriers. (…) JetBlue has committed to divesting Spirit assets up to a material adverse effect on the combined JetBlue-Spirit, with a limited carve-out to this divestiture obligation for actions that would be reasonably likely to materially and adversely affect the anticipated benefits under JetBlue’s NEA.” The Spirit-JetBlue combination will have a nine percent market share in the Northeast.
It continues: “In the unlikely event the proposed agreement is not consummated for antitrust reasons, JetBlue will pay Spirit a reverse break-up fee of $70 million and stockholders of Spirit a reverse break-up fee of $400 million less any amounts paid to stockholders of Spirit prior to termination.”
Robin Hayes adds: “We believe we can uniquely be a solution to the lack of competition in the U.S. airline industry and the continued dominance of the Big Four. By enabling JetBlue to grow faster, we can go head-to-head with the legacies in more places to lower fares and improve service for everyone. Even combined with Spirit, JetBlue will still be significantly smaller than the Big Four, but we’ll be much better positioned to bring the proven JetBlue Effect to many more routes and locations.”
Spirit has to pay Frontier
While Spirit and Frontier have parted ways, the end of the proposed agreement isn’t over yet. In its 10-Q filing, Frontier says that it “expects to record in the third quarter of 2022 approximately $9 million of employee retention costs. (…) Further, Spirit is obligated to reimburse $25 million of the Company’s incurred Merger-related expenses.” Another $69 million has to be paid within twelve months if Spirit concludes an acquisition proposal with “another acquirer or enters into a definitive written agreement.”
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.
Can you make the case that Spirit isn’t better off without Jetblue (or previously Frontier). Throughout the drama, few people have questioned the wisdom of why Spirit needs to merge at all.
This is a fair question. As the industry matures it constantly seeks better economies of scale. That is what drives every merger.