What if JetBlue doesn’t get Spirit?

JetBlue seems determined to get its deal done to acquire Spirit. A previous attempt to acquire Virgin American floundered as Alaska Airlines outbid it. More recently, JetBlue’s deal with American had to be abandoned. These experiences seem to reinforce JetBlue’s determination not to lose Spirit. This determination looks like running into a wall erected by the US Department of Justice (DOJ). JetBlue has taken several steps to win over the decision-making power. It has agreed to sell Boston and Newark slots Spirit owns to Allegiant. JetBlue has also given its flight attendants a pay bump to win them over. The forces arrayed in this deal are stacking up against JetBlue. The moves to sell slots and offer pay raises are not strong hand plays. The odds are not just 50:50 anymore. What else does JetBlue have to sweeten this deal and take it over the government hurdle? That is unclear at this point. So, let’s look at what happens if the deal is denied. What might happen? The image below is Spirit’s route map. It is helpful to keep this in mind as we explore possible suitors. Spirit is Florida-heavy and based in Miramar, Florida (Near to FLL). The network is less potent as one goes west. Its Caribbean and Latin America service is attractive because it is large and well-developed. [caption id="attachment_77902" align="aligncenter" width="477"] Source: Spirit Airlines[/caption] JetBlue – airlines achieve economies of scale as they grow. This is what JetBlue wants. Spirit fits well because it has the same fleet types (and engines) as JetBlue. This means no pilot training. It means standard MRO requirements. These two are big issues. But a merger also means JetBlue can use the Spirit network as a feeder for its growing North Atlantic operations. Without this deal, JetBlue’s growth plans suffer from a lack of potential acceleration. A failed JetBlue/Spirit deal leaves JetBlue vulnerable as a target. Spirit – Can Spirit survive on its own? Probably, yes. It will continue to operate as it has so far. That is competing with Frontier and Allegiant. However, Avelo and Breeze are poking holes in the market, looking for niche advantages. Spirit has acquired a poor reputation for service and is the regular butt of jokes on late-night TV shows. Its brand is, shall we say, bruised. Frontier – This aggressive operator is part of the airline combined owned by Indigo Partners. So, it is well run with serious financial support. But its CEO, Barry Biffle, has annoyed a lot of employees. We hear several senior managers have now left or are planning to leave. Frontier was competing with JetBlue to get Spirit. Frontier wouldn’t match JetBlue’s bid. As a minority shareholder, Frontier wins anyway if the JetBlue deal goes through. Frontier might return and try to get Spirit if the JetBlue deal falls through. Outside players – other players could step in if the JetBlue deal falls through. Allegiant – Here, we have another ULCC with growth plans. Currently, an Airbus operator which provides synergies with Spirit. Moreover, acquiring Spirit will boost Allegiant's critical mass and economies of scale. Allegiant has a wrinkle with its MAX order, but that is some way off and probably could be managed. A deal with Spirit will likely bring significant changes to Allegiant’s business. Could the deal be brought in via a holding company? That way, both brands co-exist and cooperate. Alaska – This airline retired its last Airbus A321 NEO recently. A deal with Spirit would bring back another ~186 non-Boeing aircraft. Besides the fleet and crew complications. A deal nearly doubles Alaska’s fleet to just under 500 aircraft. This would catapult Alaska into the Big Boy League – the Big Four would become the Big Five. Is the economy of scale attraction worth it for Alaska? Culturally, Spirit and Alaska are very different, which is a complication. Such a deal brings significant indigestion, making Alaska less of a target. Similar objections to low-cost market removal would likely be a barrier with the DoJ. Sun Country – Could Spirit and Sun Country find a mutually workable outcome? Significant fleet differences are a hurdle. But like with Allegiant, they could operate as separate brands under a holding company. The attraction of economies of scale should not be dismissed out of hand. Remember, too, that Sun Country has deep pockets behind it in the form of Apollo Funds. Others – there could be other airlines that could enter the market to acquire Spirit. But there aren’t many to choose from. For example, we don’t see any of the big four looking at this. But an outlier like SkyWest might because its focus on regional flying is seeing a dimmer future. But its management is superb and likely could fold in Spirit. Such a deal would make SkyWest a big airline with over 600 aircraft. A challenge for any suitor stepping forward to acquire Spirit must be able to finance the deal. As traffic declines and the first fare wars start, these are uncertain times for airlines. Banks have low-risk tolerance, and the era of cheap money is over. This alone thins out potential suitors. This is going to be interesting to watch as it plays out.

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