What is the rationale behind JetBlue’s unsolicited offer for Spirit Airlines and trying to outmaneuver Frontier Airlines? JetBlue’s webcast on April 6 provided some clarity and perspective that went further than just the public relation-speak like making JetBlue and Spirit the “most compelling national low-fare challenger” to the Big Four. The real reason is that JetBlue seems afraid to be restricted to ‘organic growth’ in the coming years and wants to ‘turbocharge’ growth, as was mentioned numerous times in the presentation. Why Spirit is so attractive to JetBlue? JetBlue CEO Robin Hayes said that his airline decided it had to act with an offer for Spirit after Frontier Airlines made its bid on February 7. But behind “the concept of turning JetBlue into a more national brand is something that we have been thinking about for years.” Actually, it goes back to 2016, when JetBlue missed the opportunity to acquire Virgin America and with it a West coast network and accelerate growth but was outbid by Alaska Airlines with a higher offer. At the time, JetBlue was down and out, but Hayes confirmed today that the logic behind the failed Virgin opportunity is still valid six years later. The airline is currently ranking in sixth place behind American, Delta, United, Southwest, and Alaska but ahead of Spirit, Frontier, and Allegiant. The Frontier-Spirit combination would make it the number five airline in the US, with JetBlue demoted to seventh between Alaska and Allegiant. That would leave it in an unlikely position to find a suitable partner for accelerated growth, nor Alaska and Allegiant seem obvious partners. JetBlue would need to continue its tried and tested strategy of organic growth, benefitting from its partnership with American in the Northeast but competing with them elsewhere. Becoming a truly national challenger Acquiring Spirit will be “speeding up of what would have taken us years to do. It is giving us a more instant benefit. We are not changing strategy with this, we are just accelerating our strategy to be more relevant in markets where we are competing with legacy airlines with more flights and better schedules. (…) When I think about access to customers, access to gates and more airports and legacy hubs, all sets us up for more long-term success to become a truly national challenger outside of the Big Four.” If JetBlue would be forced to stick to the organic growth scenario for much longer, it runs into a few obstacles in the current post-Covid market: a shortage of aircraft, a shortage of staff, and few options for airport slots. The airline has a fleet of 282 aircraft, including 214 Airbus A320ceo/A320neo-family, eight A220-300s, and sixty Embraer E190s. It still has 92 A220s and 64 A321neo’s, -LRs, and -XLRs on direct order until 2027, when the fleet will consist of 246 A320neo-family and 100 A220s. Slide of JetBlue's presentation, showing its projected development of the combined fleet. (JetBlue) That’s where the acquisition of Spirit comes in to ‘turbocharge’ JetBlue’s growth, as Chief Financial Officer Ursula Hurley explains: “We do have a meaningful order book over the next few years, but not beyond 2025 when we are moving to a period when we start retiring airplanes. Obviously, a combination with Spirit would fill the longer-term order book. The current standalone order book supports mid to high, single-digit revenue growth. Combined with Spirit, this would move to low to mid-double-digit rates.” In other words: with Airbus sold out on the A3220neo family until 2027, the only way for JetBlue to accelerate growth and grow its fleet size is by acquiring another airline, in this case, Spirit. It has still 61 A320neo’s and 26 A321neo’s on direct order, plus dozens more on lease. The combined fleet of JetBlue/Spirit would grow from 455 now to 675 aircraft in 2027. Both airlines together have 312 aircraft on order. The challenge of the organic strategy “The challenge of the organic strategy is the constraints on our airplanes, a tight labor supply market, particularly pilots for the next two to three years. The risk is that (without the acquisition) you have to slow your organic plan. We certainly don’t believe that is in our best interest. This is the sort of thing that allows us to sort of turbocharging, get over that speed bump and create a fundamentally based leisure airline that can offer more breath and products and more choices to customers. (…) We made similar arguments when we tried to acquire Virgin America, but this is a much more substantive transaction”, added Robin Hayes. If JetBlue acquires Spirit, it will reconfigure the Spirit Airbus fleet and make it identical to its own aircraft. This means it will reduce the number of seats by some ten percent. (Spirit Airlines) A single-type fleet will bring synergies and other benefits, but integrating the Spirit A320s and A321s into JetBlue’s will take some time and effort. And adaptation. Hurley and Hayes said that many Spirits aircraft will be reconfigured to JetBlue’s standards, meaning that an A321neo will go down from 214 to 200 seats. “This is going to be a multi-year Capex investment. We just completed our A320 cabin restyle program, so we know how to do it. As we work through due diligence, we will work towards the number of aircraft, what time frame, and the level of investment that this would take”, said Hurley. While fewer seats would mean higher costs per available seat miles (CASM), Hurley explained that unit costs of the converted Spirit aircraft will not be different from those of today. “The dis-synergy is in the puts and takes of density. We remain committed to maintaining a unit cost-benefit compared to the legacy carriers, which is what JetBlue’s business model is. And when we combine with Spirit, that would be even more important to effectively grow profitably for the long term.” In all, JetBlue expects $600-700 million in annual synergy benefits from an increased network relevance, optimized schedule, economies of scale, and more customers of its travel and loyalty programs. About one-third of these would come already in the first year. High-fare airline? A few (including Frontier…) see JetBlue as a high-fare airline that makes a bad fit with ultra-low-cost Spirit. Hayes doesn’t agree: “We both fly leisure customers and we believe we can expand the product offering we have today, whether it is the Blue Basic fare for more price-conscious customers or our Blue Fares. You can start to expect a much broader offering to leisure customers. The ability to scale that and bring that to a lot more markets is core to our ability to grow.” This JetBlue slide shows how its own network would integrate with that of Spirit Airlines. (JetBlue) And then, there is what Hayes calls the 'JetBlue effect': "When JetBlue flies into a legacy market, we are not ignored. We bring prices down across the board, which we have seen recently when we entered into London. ULCCs are often ignored by legacy airlines, they don't respond to their pricing. We are convinced, based on our analyses and our data, that average fares will come down more when JetBlue flies than when an ultra-low-cost carrier does." Regulatory approval could be a lengthy one JetBlue has discussed its proposed acquisition of Spirit with the Department of Justice to see if there are any juridical obstacles or conditions. The regulatory process could be a lengthy one, but Hayes is ruling out that the carrier would have to sacrifice its Northeastern alliance with American: “No, we see this as complementary to the NEA, which is focused on airports in the New York area and Boston and which has created an unprecedented opportunity for JetBlue to grow. The DoJ was concerned about how much of our network was concentrated in the NEA market. We always said that outside the NEA market we fiercely compete with American. This proposal actually brings us much network strength outside the northeast.” There is no specific deadline for when Spirit Airlines will have to respond to the offer. As reported, the Spirit Board will carefully study the offer and see if it makes any sense to them compared to that of Frontier. If a definitive agreement runs into antitrust objections, it will include a reversible break-up fee that JetBlue will have to pay to Spirit. As Robin Hayes says: "Of all the opportunities, this is the one that makes the most sense in terms of aligning with our ability to create this low-fare, national challenger and also as far as the network is concerned."
