JetBlue and Spirit Airlines announce merger plan

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On Thursday, JetBlue Airways reached an agreement to buy Spirit Airlines, a merger that could reshape the airline industry by putting pressure on the country’s four major carriers.

The deal, which values ​​Spirit at $3.8 billion, would create the country’s fifth-largest airline, with more than 10% market share, behind United Airlines, which has a nearly 14% share. Delta Air Lines and Southwest Airlines each control more than 17%, while American Airlines owns more than 18%.

The merger is expected to be thoroughly investigated by antitrust regulators in the Biden administration, which have taken an aggressive stance against corporate consolidation, especially in sectors already dominated by a few companies. Given this reality, JetBlue’s top executive sought to frame the Spirit deal as a way to make its industry more competitive, rather than less.

“Our argument is clear: the best thing we can do in the United States to create a more competitive industry is to allow JetBlue to grow,” Robin Hayes, the company’s chief executive, said in an interview.

The deal is a win for JetBlue, which spoiled a competing bid: Frontier Airlines and Spirit called off a merger deal on Wednesday after Spirit struggled to persuade its shareholders to back the bid, which was lower than that of JetBlue about $1 billion.

JetBlue and Spirit said they expect to obtain approval for the deal from Spirit shareholders this fall and from regulators by early 2024. The airlines expect to close the transaction no later than the first semester of 2024 and to start operating as a single carrier by the first semester. of 2025.

But the merger could be difficult to achieve. Regulators have already sued JetBlue and American over a partnership at Boston and New York airports. And on Wednesday, the Federal Trade Commission filed a lawsuit to block social media giant Meta’s acquisition of a small virtual reality company, Within.

To face regulatory scrutiny, JetBlue said it will preemptively divest itself of certain airports where it and Spirit have a large presence. A major concern in airline mergers is that they can make one airline dominant at certain airports or on particular routes, allowing it to stifle competition and raise fares for some travellers. If regulators block the acquisition, JetBlue will pay Spirit $70 million and Spirit shareholders $400 million.

“The airline industry is ridiculously concentrated, and has been and legitimately continues to be an area of ​​interest for the Department of Justice,” said Bill Baer, ​​visiting fellow at the Brookings Institution who led the division. antitrust department in the Obama administration.

While firms involved in mergers with direct competitors generally argue that the combinations will increase competition and benefit consumers, Baer said, they generally don’t work that way. The terms of the JetBlue-Spirit deal suggest the airlines are preparing for an uphill battle, he said.

According to the contract, JetBlue would acquire Spirit for at least $33.50 per share in cash, significantly more than the current price of Spirit. Shares of Spirit ended Thursday up less than 6% at $25.66 per share, reflecting skepticism over the deal. Shares of Frontier, meanwhile, jumped more than 20% on Thursday.

JetBlue said it will pay Spirit shareholders $2.50 per share upon approval of the deal and the equivalent of 10 cents per share per month next year – an incentive to keep them on board during what could be a long process. If the deal is not completed by 2024, its value could reach $34.15 per share.

The combined airline would be based in New York and run by Mr. Hayes. It would have 458 planes, 34,000 employees and about 77 million customers, the airlines said.

JetBlue said it expects annual savings of $600 million to $700 million from spreading fixed costs over a larger company. Based on 2019 figures, the combined airline’s annual revenue is expected to be around $11.9 billion.

After years of bankruptcies and consolidation, the airline industry had essentially stabilized by the early 2010s, with the Big Four carriers controlling most of the market. In 2016, JetBlue lost a bidding war for Virgin America to Alaska Airlines.

The acquisition of Spirit would help JetBlue 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 expects to expand into the hub airports of larger carriers, such as Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami – a strategy designed in part to convince regulators antitrust who are eager to see more. competition at airports where one or two airlines control most gates and flights.

But even if the deal goes through successfully, airline mergers are notoriously difficult, requiring the merging of unions, sometimes antiquated and incompatible IT systems, mismatched aircraft fleets and disparate corporate cultures.

“The merger will be a case study of the winner’s curse,” said Erik Gordon, a business professor at the University of Michigan. “JetBlue will face years of nightmares trying to integrate aircraft, systems and cultures from different planets.”

When American and US Airways merged a decade ago, it took four and a half years to negotiate a single contract for mechanics, crawlers and other employees represented by the Transport Workers Union of America, Gary said. Peterson, air director of the union division.

“Combining labor groups is like combining the Mets and Yankees in one organization,” he said.

Mr Peterson said passengers and workers usually lose out in such combinations, but the union will fight to protect workers as the merger goes forward.

Sara Nelson, president of the Association of Flight Attendants-CWA, which represents flight attendants at 19 airlines including Spirit, said her union would only support the deal if flight attendants shared in its benefits.

“Our job is to improve conditions for workers and to be strategic about how we do that,” she said in a statement.

The JetBlue-Spirit deal comes amid widespread dissatisfaction with the airline industry, which has struggled to keep up with the recovery in travel demand over the past year.

The Department for Transport recently said it received more than twice as many complaints about refunds, delays, cancellations and other airline issues in May as in the same month in 2019, even though fewer people were traveling. In April, the ministry received more than three times as many complaints as before the pandemic.

As JetBlue ranks high level of customer satisfaction, Spirit has fewer fans. And both airlines have struggled to operate smoothly during the recent recovery. About 68% of Spirit’s flights and just over 62% of JetBlue’s arrived on time this year through May, according to the Department of Transportation. Spirit ranked seventh and JetBlue 10th among US carriers in on-time performance during this period. Spirit has improved considerably in this regard in recent months, but JetBlue has made only slight progress, according to FlightAware, an aeronautical data provider.

Some experts questioned the airlines’ claim that the deal would benefit consumers, arguing that JetBlue would be unable to keep costs as low as Spirit, which is known in the industry as an ultra-low-cost carrier.

“We have yet to see an airline merger in the United States in the past 30 years that has been good for consumers, good for the workforce, and good even for the cities and regions in which they operate,” said William J. McGee, a senior. Aviation and Travel Fellow at the American Economic Liberties Project, which lobbies for tougher antitrust policies and enforcement.

The deal between Spirit and JetBlue could inspire other airlines to merge to stay competitive, said Helane Becker, managing director and principal analyst at Cowen, an investment bank. “If this transaction were to go ahead, it could encourage smaller airlines, especially regional airlines, to consider merging,” she said.

JetBlue and Spirit said they would continue to operate independently, with loyalty programs and customer accounts unchanged, until the merger is complete.

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