When the pandemic hit in early 2020, airlines cut staff, current pilots retired, and fewer new pilots started training. These shortages have now forced carriers to keep up with booming travel demand and pushed smaller airlines to merge or buy competitors to make the most of a reduced staff and a burgeoning customer base. . Both JetBlue (JBLU -1.60%) and Border (ULCC -4.64%) bid high for Spirit Airlines (TO REGISTER -3.29%) in this frantic race for consolidation. This mid-carrier battle should make either bidder stronger and more secure going forward – but now may be the time to grab shares of Spirit before a winner emerges. emerges.
Intense competition for acquisition
Midsize carriers lack the rising market capitalizations and cash reserves of their larger airline brethren, but the belt-tightening of recent years has left them running leaner operations with an eye on expanding at the horizon. Consolidation means a more diverse and larger fleet, access to additional airports and reduced overall competition in markets where both carriers currently exist.
Spirit agreed to merge with Frontier on February 5, subject to an upcoming shareholder vote on June 10. The deal exchanges each Spirit share for 1.9126 shares of the combined company, plus $2.13 in cash. In response, Spirit shares fell from $21.73 to $27.53 over the next few days, closing in on the roughly $29.40 value of Frontier’s offer on the day news of the deal broke. agreement broke. Frontier’s flight attendants union has already approved the move, but regulators and shareholders have yet to follow suit to seal the deal.
In response to the potentially tougher competition, JetBlue CEO Robin Hayes said on April 6 that the Spirit-Frontier deal “has created a window of opportunity which, if you don’t act on it, it’s left”. In early April, JetBlue made its own hostile bid to buy Spirit, leaving airline equity investors unsure of the eventual winner and reluctant to jump on the Spirit bandwagon.
After their initial bid hike for Frontier, Spirit shares settled lower on uncertainty, and Frontier shares fell from $14.26 to around $10. JetBlue initially offered $30 per share for Spirit, but sweetened that offer to $33 as the shareholder vote neared — more than $10 per share ahead of Frontier, which is $21.60 at current market prices. the latter company.
How regulators could derail a done deal
However, there is more on the table than the buyout price when it comes to evaluating a JetBlue offer. Because a combination of JetBlue and Spirit would have a direct impact on the markets where JetBlue’s partner American airlines (AAL -7.36%) operates, any agreement between JetBlue and Spirit may lead New York antitrust regulators to intervene. The move would reduce the number of competing carriers in shared markets, creating concern for regulators seeking to prevent monopolies in regional airspace. The Justice Department has already filed a lawsuit against the JetBlue-American partnership agreement, in which JetBlue would serve many American flights, sharing terminal space and simplifying transfers with the larger carrier.
JetBlue has yet to finalize a merger attempt, losing its bid for Virgin Airlines in 2016 to Alaska Air. JBLU’s stock price fell 40% during competition for Virgin, delivering the stock its biggest recent drop outside of the pandemic shutdown. That could leave investors wary that JetBlue has once again expanded trying to woo existing Spirit shareholders, only to lose a foothold in key markets if Frontier’s bid wins.
Meanwhile, Frontier only debuted during the pandemic, making it a relatively new player on the public scene. Its inexperience could prove costly if it fails to secure the merger and the courts with American and JetBlue in competitive markets.
Blue sky on the horizon
A hypercompetitive discount carrier market means that if either of these two consolidations ends, the emerging carrier likely gains an advantage over other airlines in the same regions. The JetBlue takeover could either result in a quick win for investors or stretch over time amid protracted legal issues. Likewise, those betting on Frontier’s offer could see it rejected outright next month if JetBlue wins with a direct appeal to shareholders. Frontier appears to be closer to a successful takeover ahead of the June 10 vote, while JetBlue likely faces a much longer and unlikely road to a successful takeover.
Still, there are signs pointing to an eventual winner of the contest being announced, rather than the three carriers remaining separate entities. Although betting on the success of Frontier or JetBlue seems risky, investors entering Spirit now could be well positioned to reinvest JetBlue buyout funds into a stronger combination carrier, or profit from immediate action by a Frontier. strengthened if and when consolidation is complete. Regardless of the eventual winner, jumping into Spirit now could offer investors an option to get into the ground floor of a newly combined carrier before it starts to beef up in years to come.