Podcast: The JetBlue-Spirit Merger

What will these two U.S. airlines look like as a single operation; and how hard will it be to get it through regulatory approval?

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Rush Transcript

Karen Walker:

Hello everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World, and Group Air Transport editor-in-chief. Karen Walker. Welcome on board.

Karen Walker:

This week I'm joined by my colleagues, David Casey, editor-in-chief at Routes magazine, Ben Goldstein, North American Air Transport editor at Aviation Week, and Lori Ranson, senior analyst Americas at CAPA. So it's great to be with everyone. And thank you so much for joining Window Seat this week. We're going to be discussing the proposed merger between JetBlue Airways and Spirit Airlines. This has been a story that has pretty much run throughout the year starting when Denver-based ultra low cost carrier Frontier announced it intended to acquire Fort Lauderdale based ultra LCC Spirit. And that all seemed to be moving along with both sides amicable.

Karen Walker:

But then New York based JetBlue put in a competing bid. And for months, Frontier and JetBlue jockeyed to up their bids and secure the deal, with Spirit's management making clear its preference for a Frontier merger. And then on July 28, a day after Frontier ended its bid, JetBlue and Spirit announced a deal in which JetBlue will acquire Spirit for $3.8 billion. The resulting airline would be the fifth largest in the US with a total of 458 aircraft, and orders for more than 300 Airbus narrow bodies.

Karen Walker:

JetBlue CEO Robin Hayes said it would turbocharge JetBlue's strategic growth, while Spirit CEO, Ted Christie said he was thrilled at the prospect, and that the resulting airline will be a game changer. But there's a long way to go yet with some significant steps to address.

Karen Walker:

First, there's ensuring the approval of Spirit shareholders, and then more challenging, gaining government approval. And we're going to hear a bit more about that in the discussion. And other airlines of course, are bound to challenge this deal. Nevertheless, Robin Hayes expects to see the transaction completed by the first half of 2024.

Karen Walker:

So what would a JetBlue Spirit combo look like, and what are the challenges and the opportunities? David, I'm going to start with you in terms of a little bit of an overarching thing. What would that airline look like, that new combined airline in terms of its network maps and key airports?

David Casey:

Yeah. Thanks Karen. If we look at it purely from a network perspective, I wouldn't describe the JetBlue Spirit deal as a match made in heaven, certainly less though than a combined Frontier Spirit network, which was far more complimentary. However, I'd say the combination of JetBlue and Spirit, as things stand, would give JetBlue increased scale in some key markets. It would create an airline with about 12,000 flights a week across almost 500 routes. And of those routes, they currently compete on about 10% of them.

David Casey:

Obviously, as you said, there's a lot of regulatory hurdles that need to be overcome. But one of the key points to the deal for JetBlue is that the acquisition will significantly increase its market share in what it refers to as its focus cities. So namely, Fort Lauderdale, Orlando, Los Angeles, and San Juan in Puerto Rico. And it'll also increase its presence in some big four hubs like Dallas, Houston, Chicago, Miami, as well as Las Vegas in Western US where it lacks a large footprint.

David Casey:

I think Florida in particular is going to be critical. And it's critical to both JetBlue and Spirit's networks. And the combination would actually see the carrier, the combined carrier become the second largest in the state behind American. This is obviously massively important due to the huge demand that we've seen for leisure travel to Florida since the pandemic. And if we look at Fort Lauderdale in particular, Spirit is currently number one in its hometown, JetBlue is number two, and combined, the new carrier could have a share of about 55% based on current schedules.

David Casey:

So I think what we'd actually see is Fort Lauderdale, as I said, would become JetBlue's busiest airport, overtaking New York, JFK. Orlando will become its third busiest, and Boston would drop to fourth. So as well as growing in Florida, and the addition of Spirit would see JetBlue become the largest US carrier in the Caribbean and the upper Latin American region.

David Casey:

Again, many of the routes here are important leisure markets, and they attract some strong VFR traffic, visiting friends and relatives, which is another segment that's performed really well since the pandemic. And as I touched on earlier, the acquisition would give JetBlue a bigger presence in the west of the US. It'd become the second largest carrier in Las Vegas and about the fifth largest in Los Angeles.

David Casey:

Obviously the big caveat to all that is the antitrust review, and it could lead to significant changes. I mean, JetBlue has already acknowledged it would have to divest some Spirit holdings. So that's gates at Newark, LaGuardia, Boston, for example. And I imagine there'll have to be some concessions in Florida as well.

David Casey:

So I think overall it's going to expand JetBlue's network in key markets like Florida. It'll provide a more meaningful option for customers in places outside of the Eastern seaboard. But the final makeup of that combined airline's network probably might not be able for some time.

Karen Walker:

So yeah, significant opportunities there, obviously. And as you say, particularly in the leisure markets, particularly in where they could end up market-wise in the Caribbean, but also, big hurdle here is getting through the regulatory process. Most people were saying that the Frontier Spirit merger would've had an easier time on this.

Karen Walker:

Lori, can you just spell out please, what is the regulatory process that they will have to go through? And I'm also interested in if you could give a little background context on the so-called Northeast Alliance issue, can you talk through that as well?

Lori Ranson:

So this is a unique situation in which an airline is attempting to acquire and merge with another airline while it's being sued by the Department of Justice. So the Department of Justice is suing American and JetBlue, claiming that their Northeast Alliance is a defacto merger. That trial is set for September. And I think most people believe there will not be a settlement, that those parties will go to trial.

Lori Ranson:

At the same time, JetBlue is gathering its information to make the case, to gain approval for the merger with Spirit. And as you said, Karen, they expect that to happen during the first half of 2024. So the outcome of the trial is anyone's guess. And we can talk more about if we think the merger is going to get approved. That's the timeline. And I think I would just point out that President Biden's antitrust chief, which is Jonathan Cantor, is not a big fan of mergers. So that's the context that we have going forward.

Karen Walker:

Yeah, that's an interesting point there, that of course, some of this is about timing and which administration is in and where their points are.

Karen Walker:

Ben, I know you've been following all of this very closely from the beginning. Where do you see the key sticking points here in terms of the regulatory approval? And maybe bring in on the one hand, on the operational side JetBlue and Spirit look pretty good because they've both got new Airbus aircraft, so that's good, common fleet. But if you look inside those aircraft, the way those airlines operate them inside are very, very different. So does that feed into the regulatory process, do you think?

Ben Goldstein:

Hi Karen. Yeah, absolutely. And I think that's really the crux of the issue here, is Spirit operates these very dense Airbus A320 family cabins, and JetBlue operates more roomy, premium spacious interiors. And JetBlue's stated plan is to "de-densify" Spirit's airplanes. So they want to remove seats from the cabin. And this is going to inevitably lead to higher fares.

Ben Goldstein:

Some numbers really quick. Spirit has 182 seats on each of its A320s, and JetBlue has 157. Spirit also has 228 seats on each A321, and JetBlue has 178. So there's a difference of 25 seats on each 320, and 50 on each 321. From a regulatory standpoint, I think that is going to be an issue and it's going to invite some scrutiny from the Department of Justice.

Karen Walker:

Thanks Ben. So just picking up on that because it's not just a regulatory issue, that's also a cost issue. And all the airlines are seeing rising costs, labor in particular, and also fuel costs of course. But JetBlue has just recently posted its second quarter earnings. I think it was around $150 million loss, net loss, and that was worse than expected. And that was based about on cost. Spirit posted a much smaller loss. Ironically Frontier posted a small profit for the same quarter.

Karen Walker:

But especially for Spirit, costs are everything. Ben, how much of a concern is that for the combined airline when it's going to be expensive to conduct this merger anyway?

Ben Goldstein:

Well, the costs are going to come up. The plan is for JetBlue to turn Spirit into JetBlue. So like I said, JetBlue is going to be removing seats, they're going to be adding their lie flat, mid cabins into these airplanes, and they're going to be making Spirit into a more premium airline. So they're going to also have to pay their workers more, and their whole core cost structure will rise. I think that is probably the biggest regulatory risk because that'll obviously lead to higher fares. And this is also the main argument that Frontier and Spirit had been making all along, which is that the DOJ has said they don't want us to essentially remove ULCC capacity from the market. And in effect, that is what is going to happen.

Karen Walker:

Lori, going back to the regulatory thing, as I said earlier, we can expect, and you also said that can expect the other airlines, US airlines to protests. Where's the biggest pushback going to come from, and what are the other US airlines going to seek? Where would they see the opportunities for instance, of getting slot? Where's going to be the focus on that.

Lori Ranson:

Yeah, I think to David's point there probably have to give some slots up in the New York market, simply because in every merger you have to give up slots in the New York market, whether it makes sense or not. And I do think that airlines serving Florida may obviously push for concessions in that regard. So you think about Southwest, Southwest has a huge presence in Florida. And all the major airlines have built up their presence in Florida as well. So I expect that they'll have some commentary about what needs to be done, if it goes through to ensure that competition remains robust.

Lori Ranson:

I think it's going to be a longer process than perhaps JetBlue may be banking on simply because there's going to be a lot of back and forth as is the case with these mergers. And this is a significant merger, the most significant since Alaska and Virgin America. And this is going to be a bigger carrier. So there's going to be some pushback. I would expect Southwest to offer pushback. Frontier, they could take the arguments that they made and why it was better for them to merger Spirit and simply take those to DOJ as well.

Lori Ranson:

I think there's going to be a lot of discussion around this. And I think just one point to make, so if JetBlue loses its Northeast Alliance lawsuit, and this merger is not approved, where does that leave JetBlue? I think that's an interesting question that no one can answer at this point.

Karen Walker:

And that is a really interesting point because the other thing that's going on with JetBlue right now and has been for a couple of years, but they've launched into the transatlantic market, and that's a big focus and that's obviously a growth strategy, but there's also cost to building that up.

Karen Walker:

David, welcome your perspective on JetBlue managing both the buildup of that transatlantic market, where are they now, and what's the game plan? For which they've course also got the four, the majors, not just the US majors, but the big majors and the Europe on the tails for that one. So the combination of dealing with both of these, how feasible is that?

David Casey:

Well, I think the integration of Spirit is just going to be immensely challenging regardless of the transatlantic entry. As Ben said earlier, JetBlue plans to convert Spirit's narrow bodies, and that's going to be a pricey and a lengthy proposition. As well, you've got the substantially high labor rate. So there's that distraction as well.

David Casey:

Can it continue growing in the transatlantic market? I think it can. It's present so far. It's pretty small. There's two routes from New York to London Heathrow and Gatwick. There was a Boston Gatwick route which launched just last week. Boston Heathrow is going to follow next month. And then in '23, JetBlue CEO Robin Hayes has said that Paris is going to be the next location.

David Casey:

So I think at the minute it's a relatively small part of its network. And I think that expansion will remain gradual and therefore probably manageable. But I think the overall integration is going to be incredibly challenging and a big distraction for all its operations.

Karen Walker:

Let's just look at Frontier a little bit more closely in all of this. Frontier was the one who started all of this. Everybody thought that was the one that would go through. Ben, where do you think this leaves Frontier? What are the opportunities now for that carrier in these change circumstances?

Ben Goldstein:

It's kind of ironic Karen, because in a sense, Frontier lost the bidding war obviously, for Spirit, but they sort of come out on top in all this in a sense that they will be by far the largest ULCC left in North America. That leaves them with a lot of growth opportunity. Maybe they could backfill some of the missing ULC capacity that leaves the market when Spirit joins JetBlue, but they're going to have a real runway for growth and a real claim, I think, to be a truly national ULCC.

Ben Goldstein:

So I think the future is bright for Frontier. And I think that might be part of the reason why maybe they didn't try so aggressively to match JetBlue. There might have been some recognition here that from a strategic standpoint, having their largest rival, Spirit Airlines, exit the picture, isn't the worst thing that could happen to Frontier. And really they might make out okay from this.

Karen Walker:

That's a really good point. And as you said, they can continue to claim that they are the true ultra low-cost carrier. And they can probably have a big competitive edge by keeping those unit costs down, while in a more manageable proposition to keep those unit costs down.

Karen Walker:

One thing that fascinates me is that look at a Frontier and where they are now. There's airlines on both sides of the border, north and south, that are very much more closely aligned in model types to Frontier, they're ultra low cost carriers, particularly in Mexico and then across in Canada. And in another world, if it wasn't for US foreign airline ownership rules, those would probably be natural deals to start talking about.

Karen Walker:

Lori, do you think, does that illustrate just how, I don't know how you want to put it, protectionist or restricted the US domestic market is in terms of who can merge with who?

Lori Ranson:

Yeah, I think it does because if you drip out sort of what some people think are outdated ownership laws, you look at Volaris and Frontier, and they're both, Indigo's the majority shareholder in both carriers. It would make sense for them to merge because they have the same fleet, they have the same cost structure. I mean, they already have a code share that is not active at the moment because of Mexico's safety rating. But that would be sort of a win-win for everyone. And you have Allegiant and Viva Aerobus that are trying to do that through their proposed joint venture.

Lori Ranson:

So yes, I do think there could be opportunities for ultra low cost carriers to merge in the transporter market if ownership rules were different. But I think the reality is ownership rules are not going to change anytime soon because there's so much union backlash regarding that. So yes, ideally that would be a wonderful tie up. But at this point in time, something like that is not going to happen.

Karen Walker:

Yeah. As you say, that's really a very strong union position here in the US. I'd just like to go around each of you in turn, please, if I can, and just for you to each give your opinion about how likely this merger is to happen, how it will be able to come through the things ahead. David, would you like to kick off?

David Casey:

Yeah, sure. Thanks Karen. I know JetBlue and Spirit think the deal will get done in early 2024, but I'm a little more skeptical of that. I think JetBlue will argue that the merger is going to increase competition with the big four, provide a lower cost alternative. But I think regulators are likely to view it as the loss of a ULC competitor that's going to lead consolidation in the market for the most price-conscious consumers. The plan to increase Spirit's cost and therefore fares is likely to be viewed as anti-competitive. So I think a JetBlue Spirit merger is going to be a much tougher pill for regulators to swallow than a Frontier Spirit one.

David Casey:

If it does get through the regulatory process, then I think JetBlue, as we've said, is going to have to make a number of concessions. And I think it's just going to take much longer to approve than the airline currently hopes.

Karen Walker:

Ben, your thoughts?

Ben Goldstein:

Yeah. It's tough to say, Karen. I agree with what David said. I will say though that the people, the analysts that I follow, a lot of people have warmed up to this idea in the past weeks and months as JetBlue kept making its pitch. And I personally now think it's more likely to get approved than I did originally when I first heard about this. Because truthfully there is competition, especially in the ULCC space. There are new entrants. We have Avelo, we have Breeze. And right now we're in a time of big industry-wide supply constraints affecting the entire global economy. So I think the benefits of consolidation at a time like this could make a lot of sense. And I think that there are people in the government who are going to be listening very carefully to what JetBlue and Spirit have to say.

Karen Walker:

Good points. Lori, your thoughts.

Lori Ranson:

Yeah. I think I give it a 50/50 chance, simply because I can see some benefits of the tie-up, but it's just so hard to predict how the regulators are going to view this. And what concessions are going to be made? Will JetBlue be happy with those concessions or will it be too much? So I wouldn't see JetBlue walking away, but I do think there's a lot of uncertainty in getting approval. Not to say it won't happen, but the odds are tough to predict in terms. And as you said earlier, it could depend on if there's a change in administration as well. So that's a big factor to think about. And maybe that could be in their favor, and as David said, if the process of just getting approval is pushed out, that could be a benefit to them. So, yeah, 50/50.

Karen Walker:

Interesting. I'll just chime in also. I agree with you, Lori. I think there's going to be a lot of twists and turns still with this story. But what I will just say is that both JetBlue and Spirit are run by very, very competent management teams who are also very innovative management teams as well. So I wouldn't underestimate them at all. I did actually have a brief chat with Robin Hayes at the IATA AGM in Doha, in June. And he sounded very confident at that point. And that was before, that was while they were still dueling it out with Frontier. But he seemed very confident that they were going to get the bid and that they would be going forward. So there'll be no lack of effort and determination to make this happen.

Karen Walker:

David, Ben and Lori, thank you so much for your insights, and thank you also to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. And if you do listen on Apple Podcasts, please remember you can also rate us and provide feedback, and that will help us select the topics that you most want to hear about. So until next week, this is Karen Walker, disembarking from Window Seat.