News of the Stock Exchange and Economy of July 28, 2022

JetBlue Airways on Thursday reached a deal to buy Spirit Airlines, a merger that could reshape the airline industry by putting pressure on the nation’s four dominant airlines.

The deal, which values ​​Spirit at $3.8 billion, would create the nation’s fifth-largest airline, with more than 10 percent market share, behind United Airlines, which has a nearly 14 percent share . Delta Air Lines and Southwest Airlines each control more than 17%, while American Airlines owns more than 18%.

The merger is likely to face a thorough investigation by the Biden administration’s antitrust regulators, who have taken an aggressive stance against corporate consolidation, especially in industries already dominated by a few companies. Given that reality, JetBlue’s top executive tried to pitch the Spirit deal as a way to make his industry more competitive, rather than less.

“Our argument is clear: The best thing we can do in the US to create a more competitive industry is to allow JetBlue to grow,” Robin Hayes, the company’s chief executive, said in an interview.

The deal is a victory for JetBlue, which spoiled a rival bid: Frontier Airlines and Spirit called off a merger deal Wednesday after Spirit had trouble persuading its shareholders to back the bid, which was below that of JetBlue by about $1 billion.

JetBlue and Spirit said they expected to seek approval for the deal from Spirit shareholders this fall and from regulators in early 2024. The airlines plan to close the transaction no later than the first half of 2024 and begin operations as a sole carrier during the first semester. of 2025.

But the merger could be difficult to complete. Regulators have already sued JetBlue and American over a partnership at Boston and New York airports. And on Wednesday, the Federal Trade Commission filed a lawsuit to block social media giant Meta’s acquisition of a small virtual reality company, Within.

To address regulatory scrutiny, JetBlue has said it will preemptively divest from certain airports where it and Spirit together have a large presence. One of the main concerns about airline mergers is that they can make one company dominant at certain airports or on certain routes, allowing it to suppress competition and raise fares for some travelers. If regulators block the takeover, JetBlue will pay Spirit $70 million and Spirit shareholders $400 million.

“The airline industry is ridiculously concentrated and has legitimately been and continues to be an area of ​​focus for the Justice Department,” said Bill Baer, ​​a visiting fellow at the Brookings Institution who led the department’s antitrust division at the Department of Justice. Obama administration.

While companies involved in mergers with direct competitors generally argue that the combinations will increase competition and benefit consumers, Mr. Baer, ​​they don’t usually work that way. The terms of the JetBlue-Spirit deal suggest the airlines are preparing for an uphill battle, he said.

According to the agreement, JetBlue would acquire Spirit for at least $33.50 per share in cash, much more than Spirit’s current price. Spirit shares ended Thursday down less than 6 percent at $25.66 a share, reflecting skepticism about the deal. Frontier shares, meanwhile, rose more than 20 percent on Thursday.

JetBlue said it would pay Spirit shareholders $2.50 per share up front on its approval of the deal and the equivalent of 10 cents per share per month over the next year, an incentive to keep them on board during what could be a lengthy process. If the deal isn’t completed in 2024, its value could rise to $34.15 per share.

The combined airline would be headquartered in New York and led by Mr. Hayes. It would have 458 planes, 34,000 employees and an estimated 77 million customers, according to the airlines.

JetBlue said it expected annual savings of $600 million to $700 million by spreading fixed costs across a larger business. Based on 2019 figures, the combined airline’s annual revenue is expected to be around $11.9 billion.

After years of bankruptcy and consolidation, the airline industry had largely stabilized by the early 2010s, with the big four airlines controlling most of the market. In 2016, JetBlue lost a bidding war for Virgin America to Alaska Airlines.

Acquiring Spirit would help JetBlue expand its presence in cities such as Fort Lauderdale and Orlando in Florida, San Juan in Puerto Rico and Los Angeles. The airline also said it hoped to grow at the hub airports of larger airlines, including Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami, a strategy designed in part to win over eager antitrust regulators to see more competition at airports where one or two airlines control most gates and flights.

But even if the deal is successfully closed, airline mergers are notoriously difficult, requiring merging unions, sometimes antiquated and incompatible IT systems, mismatched aircraft fleets and disparate company cultures.

“The merger will be a case study of the winner’s curse,” said Erik Gordon, a business professor at the University of Michigan. “JetBlue will face years of nightmares trying to integrate planes, systems and cultures that are from different planets.”

When American and US Airways merged about a decade ago, it took four and a half years to negotiate a single contract for mechanics, ramp workers and other employees represented by the Transport Workers Union of America, said Gary Peterson, union air director. division

“Combining task forces is like combining the Mets and the Yankees into one organization,” he said.

Mr. Peterson said passengers and workers were generally losers in such combinations, but the union would fight to protect workers as the merger moved forward.

Sara Nelson, president of the Association of Flight Attendants-CWA, which represents flight attendants at 19 airlines, including Spirit, said her union would support the deal only if flight attendants shared the your benefits

“Our job is to improve conditions for workers and to be strategic about how we do it,” he said in a statement.

The JetBlue-Spirit deal comes amid widespread dissatisfaction with the airline industry, which has struggled to keep up with a recovery in travel demand over the past year.

The Department for Transport recently said it had received more than twice as many complaints about refunds, delays, cancellations and other airline problems in May as in the same month in 2019, even though fewer people were traveling. In April, the department received more than three times as many complaints as before the pandemic.

While JetBlue ranks high in customer satisfaction, Spirit has fewer followers. And both airlines have struggled to operate smoothly during the recent recovery. About 68 percent of Spirit’s flights and slightly more than 62 percent of JetBlue’s were on time this year through May, according to the Transportation Department. Spirit ranked seventh and JetBlue ranked 10th among US carriers in on-time performance during that period. Spirit has improved significantly in this regard in recent months, but JetBlue only slightly, according to FlightAware, an aviation data provider.

Some experts have questioned the airlines’ claim that the deal would benefit consumers, arguing that JetBlue would not be able to keep costs as low as Spirit, known in the industry as a low-cost carrier.

“In the last 30 years, we have yet to see an airline merger in the United States that has been good for consumers, good for the workforce and even good for the cities and regions in which they operate,” said William J. McGee, a senior. aviation and travel fellow at the American Economic Liberties Project, which pushes for stronger antitrust and enforcement policies.

The Spirit-JetBlue deal could inspire other airlines to merge to stay competitive, said Helane Becker, managing director and senior analyst at Cowen, an investment bank. “If this transaction were to go through, it could encourage smaller airlines, particularly regional airlines, to consider merging,” he said.

JetBlue and Spirit said they will continue to operate independently, with no changes to loyalty programs and customer accounts, until the merger is completed.



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!