Stock market updates and economy news for July 27, 2022

A months-long effort by Frontier Airlines to acquire Spirit Airlines ended abruptly Wednesday when the companies scrapped their proposal, breathing new life into a rival bid for Spirit by JetBlue Airways.

The announcement came shortly before Spirit announced the results of a shareholder vote on Frontier’s takeover bid. Spirit had repeatedly delayed the vote as it sought to persuade shareholders to support the deal and ignore the appeal of JetBlue’s more valuable offer.

The airline industry consolidated greatly in recent decades, creating four dominant airlines. For Frontier and JetBlue, buying Spirit has represented an opportunity to expand quickly and gain traction to attract business outside of American Airlines, Delta Air Lines, Southwest Airlines and United Airlines.

But any merger will face legal challenges from the Biden administration’s antitrust regulators, who have vowed to be tougher than their predecessors on mergers that can reduce competition.

“While we are disappointed to have to end our proposed merger with Frontier, we are proud of the dedicated work of our team members on the transaction over the past several months,” said Spirit Chief Executive Officer Ted Christie. in a statement. “Going forward, Spirit’s board of directors will continue our ongoing discussions with JetBlue as we pursue the best path forward for Spirit and our shareholders.”

The cash and stock deal valued Frontier at about $2.8 billion, based on the stock’s closing price on Wednesday. JetBlue’s cash offer is worth $3.6 billion.

Frontier said it was disappointed that Spirit shareholders had not rallied behind the deal. The airline, which has expanded aggressively since going public last year, said it was poised for growth, however.

JetBlue said in a statement that it would continue negotiations with Spirit and remain “fully committed to completing this transaction so that we can create a compelling domestic challenger to the dominant airlines.”

Spirit and Frontier jointly announced their merger plan in February, arguing that a combination would create a domestic budget carrier. The two airlines complement each other, sharing a low-cost business model with different geographic strengths.

Weeks later, JetBlue made an unsolicited offer for Spirit. But Spirit executives questioned JetBlue’s intentions, suggesting the bid may have been intended only to spoil the combination with Frontier. Spirit also said antitrust regulators would likely block a JetBlue merger, although experts said either deal would be subject to intense federal scrutiny.

Wednesday’s news doesn’t mean JetBlue’s offer will be accepted, but it could bode well for Spirit in its negotiations.

“Today’s completion simplifies the path to a possible JetBlue-Spirit merger, although it does not guarantee that outcome,” JP Morgan airline analysts Jamie Baker and James Kirby said in a research note. “That said, we’re of the ‘no news is good news’ opinion, as it suggests that Spirit is continuing to hone its negotiation efforts rather than simply throwing in the towel and accepting JetBlue’s latest public offering” .

It’s unclear whether a majority of Spirit shareholders would support a JetBlue takeover. And even if they did, regulators could derail the combination or demand stiff concessions from the companies, such as requiring them to give up flights or airport gates in places where they have significant overlap.

The Justice Department is already suing JetBlue and American Airlines to prevent a partnership between those airlines at Boston and New York airports, with a trial scheduled for early this fall.

The acquisition of Spirit would accelerate JetBlue’s expansion plans and create the nation’s fifth-largest airline. Together, the airlines would control about 10.2 percent of the market, still behind the country’s four dominant carriers. United, the fourth-largest airline, has a 13.9 percent market share.

Frontier reported quarterly financial results at the same time as its Spirit deal was canceled. The airline reported a profit of $13 million on revenue of $909 million in the three months ending in June. This was a 65% improvement in revenue and a 32% drop in profits compared to the previous year. The airline, which has room for growth, invested heavily in service expansion throughout the quarter.

JetBlue, which is much larger than Frontier, has struggled to grow as fast as expected since losing a similar bidding war to Virgin America in 2016. Alaska Airlines won and completed the acquisition in 2018.

Buying Spirit could change that for JetBlue, but airline mergers are notoriously difficult, requiring the integration of unions, sometimes antiquated and incompatible computer systems, mismatched aircraft fleets and disparate company cultures.

The Transportation Workers Union, which represents flight attendants, reservation agents and other JetBlue workers, said it opposed the Spirit acquisition.

“We believe airline workers and passengers should be concerned,” union president John Samuelsen said in a statement. “If a JetBlue-Spirit deal happens, we expect regulators to step in and recognize that combining these airlines could result in job cuts and reduced choices for consumers.”

Spirit, a budget carrier with an average reputation for service, keeps costs and fares low by charging more for everything from seat selection to carry-on bags. JetBlue ranks highly in customer satisfaction and offers more premium options and free perks like branded snacks and wireless Internet access.

JetBlue has said the acquisition will offer lower fares with a better customer experience, pointing to its track record of cutting costs for travelers as it enters new markets. The Justice Department cited that reputation in its lawsuit to block the company’s association with American, saying that JetBlue’s presence in Boston created “substantial savings for consumers” and that the airline had a similar effect in New York.

But some aviation experts have questioned how JetBlue could maintain fares at Spirit’s already low prices. If anything, these people argued, some of JetBlue’s plans, such as removing some seats from Spirit planes to increase legroom and selling larger premium seats, would almost certainly increase costs.

On a call with analysts and reporters Wednesday, Frontier Chief Executive Barry Biffle said his airline would benefit if JetBlue bought Spirit.

“If they merge, you take an airline that is probably one of the most similar to us, you get 40 percent more costs and that creates a lot of runway ahead of us,” he said.

Peter Eavis contributed to the report.

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About the Author: Chaz Cutler

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