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JetBlue Airways at a crossroads after Spirit rejects its takeover offer

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A JetBlue airliner lands past a Spirit Airlines jet on taxi way at Fort Lauderdale Hollywood International Airport on Monday, April 25, 2022. (Joe Cavaretta/Sun Sentinel/Tribune News Service via Getty Images)

Joe Cavaretta | Sun Sentinel | Getty Images

JetBlue Airways is at a virtually quarter-century crossroads.

The airline’s first flight took off from Latest York City for Fort Lauderdale in February 2000. Twenty-two years later, JetBlue executives again set their sights on South Florida with a surprise bid for Spirit Airlines. That first flight was successful, the bid was not.

Spirit on Monday rejected JetBlue’s $3.6 billion all-cash offer and said it was sticking with a deal to merge with fellow ultra-low-cost carrier Frontier Airlines, an agreement struck in February valued at $2.9 billion. Spirit’s stock fell greater than 9% on Monday after it announced it was turning down the JetBlue offer in favor of the Frontier deal, while JetBlue’s rose greater than 2%.

Miramar, Florida-based Spirit cited regulatory concerns in turning down the offer, saying it doubted a JetBlue acquisition would get approved, partly due to JetBlue’s Northeast partnership with American Airlines, which the Justice Department sued to dam last yr. The DOJ argued in its suit that it might drive up fares and hurt competition, specifically mentioning the importance of smaller carriers like JetBlue.

JetBlue said it might divest Spirit assets in Latest York, Boston and a few in Florida under a revised offer. The discount carrier still said no. Spirit CEO Ted Christie said throughout the airline’s first-quarter call Thursday that he has “wondered whether blocking our cope with Frontier is, the truth is, their goal.”

Spirit’s rejection leaves JetBlue Airways at a turning point. Nearly 24 years after it was incorporated, JetBlue has grown from a unusual leisure airline based in Latest York City with one class of service into the sixth-largest airline within the U.S. with greater than 100 destinations from Los Angeles to Lima, Peru.

Throughout its greater than 20 years of service, JetBlue stood out amongst its peers, promoting low fares and passenger amenities like seatback screens, satellite television and later, free Wi-Fi. It even has more legroom than competitors. Its latest enterprise – service to London – goals to capture rivals’ high-paying passengers with its Mint business-class suites.

JetBlue shares are down greater than 43% during the last 12 months, as of Thursday’s close, underperforming a 29% drop within the NYSE Arca Airline Index, which tracks 18 mostly U.S.-based carriers. Over the identical period, the S&P 500 is off 1.3%.

That, combined with the rejection from Spirit’s board, is adding pressure on Robin Hayes, JetBlue’s third-ever CEO, and his management team to concurrently grow the airline and ensure reliability in the method.

JetBlue in February ranked last amongst U.S. carriers for punctuality, with a virtually 62% on-time arrivals rate compared with a 17-airline average of virtually 77%, in accordance with the Department of Transportation.

In April, it faced a number of other operational trouble as thunderstorms swept through Florida, impacting operations of Spirit, Southwest Airlines, American Airlines and others.

“I believe they’ll fix themselves. They need leadership who is absolutely in a position to manage a much greater and far more complex airline,” said Mark Ahasic, an aviation consultant who worked at JetBlue from 2000 to 2006, including as director of operational planning and manager of corporate planning. “It isn’t the entrepreneurial start-up JetBlue anymore. It’s an evolved carrier.”

JetBlue executives argued the Spirit acquisition would have helped speed up its growth, giving it access to Spirit’s fleet of greater than 170 Airbus planes in addition to greater than 2,000 pilots at a time when pilot shortages and attrition are hindering expansion.

JetBlue has a number of internal issues to resolve, reminiscent of improving reliability and its relationship with crews, who’ve complained about grueling schedules coming out of the Covid pandemic, something staff at other carriers like Southwest and American have also reported. JetBlue has already taken steps to scale back its schedule by about 10% this summer so it has more wiggle room for disruptions.

Wiggle room it hasn’t all the time offered its top boss.

A meltdown in February 2007 stranded hundreds of consumers and value JetBlue’s founder David Neeleman his position as CEO then. (Neeleman now runs upstart carrier Breeze Airways.) JPMorgan airline analyst Jamie Baker noted the precedent in light of JetBlue’s operational problems during an April 26 earnings call, the week before Spirit rejected JetBlue’s offer.

“The structure of JetBlue’s Board is different today, nevertheless it’s price noting there’s precedent for senior leaders being let go when operations have suffered,” Baker said.

JetBlue and other airlines have needed to navigate bad weather in travel hotspot Florida. The Federal Aviation Administration said Wednesday it is going to “immediately” add staff to a fundamental air traffic control center for the state after a gathering with airlines, during which carriers said they’d proceed to fly service to Florida above 2019 levels.

“We won’t control the weather, but we will try to control the whole lot enough, and that is what we’re laying out to do,” Hayes said on the April earnings call. “However the No. 1 priority from that for me, for the leadership team, for the board straight away is restoring our operational performance because that’s the path to margin recovery.”

JetBlue says it is going to proceed to work on its operation and toward regaining profitability. For now, it says it still wants to amass Spirit.

“While we’d unquestionably prefer to barter a transaction with you, if you happen to proceed to refuse to constructively engage with us in order that we will deliver this value to your stockholders, we’re actively considering all other options available to us,” Hayes wrote to Spirit Chairman H. McIntyre Gardner and CEO Christie in an April 29 letter.

A JetBlue spokesman declined to elaborate, but a tussle for Spirit Airlines through a proxy battle or tender offer might be costly.

JetBlue’s bid for Spirit is not its first attempt at an acquisition. It lost out to Alaska Airlines in 2016 when that airline, one other midsize carrier like JetBlue, acquired Virgin America.

JetBlue hasn’t indicated that it’s open to acquiring or combining with a special carrier than Spirit. Alaska’s CEO, Ben Minicucci, told CNBC in March that he wants his airline to grow organically and that a mix is not on the table currently. An Alaska spokeswoman told CNBC on Tuesday that Minicucci’s strategy stands.

“A number of times firms will do acquisitions to avoid having to repair their very own house,” said Emilie Feldman, a management professor on the University of Pennsylvania’s Wharton School. “Sometimes it’s higher to let the acquisition go and fix your personal business.

Ahasic added JetBlue has “more fundamental fish to fry.”

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