JetBlue Airways reached a deal to purchase Spirit Airlines on Thursday, a merger that might reshape the airline industry by putting pressure on the nation’s 4 dominant carriers.
The deal, which values Spirit at $3.8 billion, would create the nation’s fifth-largest airline, with a share of greater than 10 percent of the market, behind United Airlines, which has an almost 14 percent share. Delta Air Lines and Southwest Airlines control greater than 17 percent each, while American Airlines has greater than 18 percent.
The merger is more likely to face an intensive investigation from the Biden administration’s antitrust regulators, who’ve taken an aggressive stand against corporate consolidation, especially in industries already dominated by just a few businesses. Provided that reality, JetBlue’s top executive sought to solid the Spirit deal as a solution to make his industry more competitive, somewhat than less.
“Our argument is obvious: One of the best thing we are able to do within the U.S. to create a more competitive industry is to permit JetBlue to grow,” Robin Hayes, the corporate’s chief executive, said in an interview.
The agreement is a victory for JetBlue, which spoiled a rival offer: Frontier Airlines and Spirit called off a merger deal on Wednesday after Spirit struggled to steer its shareholders to back the offer, which fell in need of JetBlue’s by about $1 billion.
JetBlue and Spirit said they expected to hunt approval for the deal from Spirit’s shareholders this fall and from regulators by early 2024. The airlines plan to shut the transaction no later than the primary half of 2024 and start operating as a single carrier by the primary half of 2025.
However the merger might be hard to finish. Regulators have already sued JetBlue and American over a partnership at airports in Boston and Latest York. And on Wednesday, the Federal Trade Commission filed a lawsuit to dam the social media giant Meta’s acquisition of a small virtual reality company, Inside.
To handle regulatory scrutiny, JetBlue has said it can pre-emptively divest from certain airports where it and Spirit together have a giant presence. A serious concern in airline mergers is that they will make one company dominant at certain airports or on particular routes, enabling it to squelch competition and lift fares for some travelers. If regulators prevent the acquisition, JetBlue pays Spirit $70 million and Spirit’s shareholders $400 million.
“The airline industry is ridiculously concentrated, and has been and legitimately continues to be an area of focus for the Justice Department,” said Bill Baer, a visiting fellow on the Brookings Institution who led the department’s antitrust division within the Obama administration.
While corporations involved in mergers with direct competitors generally argue that the mixtures will increase competition and profit consumers, Mr. Baer said, they don’t typically work out that way. The terms of the JetBlue-Spirit deal suggest that the airlines are preparing for an uphill battle, he said.
Under the agreement, JetBlue would acquire Spirit for at the very least $33.50 per share in money, significantly greater than Spirit’s current price. Spirit’s stock ended Thursday up lower than 6 percent, at $25.66 per share, reflecting skepticism concerning the deal. Frontier’s stock, meanwhile, shot up greater than 20 percent on Thursday.
JetBlue said it will pay Spirit shareholders $2.50 per share upfront on their approval of the deal and the equivalent of 10 cents per share per 30 days next yr — an incentive to maintain them on board during what might be a protracted process. If the deal shouldn’t be accomplished by 2024, its value could rise to as much as $34.15 a share.
The combined airline can be based in Latest York and led by Mr. Hayes. It could have 458 aircraft, 34,000 employees and an estimated 77 million customers, the airlines said.
JetBlue said it expected $600 million to $700 million in annual savings from spreading fixed costs over a bigger business. Based on 2019 figures, the annual revenue of the combined airline is projected to be about $11.9 billion.
After years of bankruptcies and consolidation, the airline industry had mostly stabilized by the early 2010s, with the 4 large carriers controlling many of the market. In 2016, JetBlue lost a bidding war for Virgin America to Alaska Airlines.
The Spirit acquisition would help JetBlue to expand its presence in cities like Fort Lauderdale and Orlando in Florida, San Juan in Puerto Rico, and Los Angeles. The airline also said it expected to grow on the hub airports of the larger carriers, resembling Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami — a technique devised partly to win over antitrust regulators who’re wanting to see more competition at airports where one or two airlines control most gates and flights.
But even when the deal closes successfully, airline mergers are notoriously difficult, requiring the melding of unions, sometimes antiquated and incompatible computer systems, mismatched fleets of aircraft and disparate company cultures.
“The merger will likely be a case study of the winner’s curse,” Erik Gordon, a business professor on the University of Michigan, said. “JetBlue will face years of nightmares attempting to integrate aircraft, systems and cultures which might be from different planets.”
When American and US Airways merged a couple of decade ago, it took 4 and a half years to barter a single contract for mechanics, ramp staff and other employees represented by the Transport Staff Union of America, said Gary Peterson, the director of the union’s air division.
“Combining work groups is like combining the Mets and the Yankees into a company,” he said.
Mr. Peterson said that passengers and staff were generally losers in such mixtures but that the union would fight to guard staff because the merger proceeded.
Sara Nelson, the president of the Association of Flight Attendants-C.W.A., which represents flight attendants at 19 airlines, including Spirit, said her union would support the deal provided that flight attendants shared in its advantages.
“Our job is to enhance conditions for staff and to be strategic about how we try this,” she said in an announcement.
The JetBlue-Spirit deal arrives amid widespread dissatisfaction with the airline industry, which has struggled to maintain up with recovering travel demand over the past yr.
The Transportation Department said recently that it had received greater than twice as many complaints about airline refunds, delays, cancellations and other problems in May than it did in the identical month in 2019, although fewer people were traveling. In April, the department received greater than thrice as many complaints because it did before the pandemic.
While JetBlue ranks high in customer satisfaction, Spirit has fewer fans. And each airlines have struggled to run easily in the course of the recent recovery. About 68 percent of Spirit’s flights and just over 62 percent of JetBlue’s arrived on time this yr through May, in keeping with the Transportation Department. Spirit ranked seventh and JetBlue tenth amongst U.S. carriers in on-time performance over that period. Spirit has improved significantly in that regard in recent months but JetBlue only barely, in keeping with FlightAware, an aviation data provider.
Some experts have questioned the assertion by the airlines that the deal would profit consumers, arguing that JetBlue can be unable to maintain costs as little as Spirit, which is thought within the industry as an ultra-low-cost carrier.
“We’ve yet to see an airline merger in the US within the last 30 years that has been good for consumers, good for labor and good even for the cities and regions during which they operate,” said William J. McGee, a senior fellow for aviation and travel on the American Economic Liberties Project, which pushes for stronger antitrust policies and enforcement.
Spirit and JetBlue’s deal could encourage other airlines to merge to remain competitive, said Helane Becker, a managing director and senior analyst at Cowen, an investment bank. “If this transaction were to get done, it might encourage smaller airlines, especially regional airlines, to think about merging,” she said.
JetBlue and Spirit said they’d proceed to operate independently, with loyalty programs and customer accounts unchanged, until the merger was complete.