JetBlue’s $3.8 billion Spirit deal turns into a nightmare

It was supposed to be the merger from heaven — or at least, from 30,000 feet.

But now, the collapse of the $3.8 billion deal between JetBlue Airways Corp. and Spirit Airlines Inc. over antitrust concerns leaves the two carriers adrift, upending the low-cost travel sector and tarnishing the legacy of JetBlue’s swashbuckling CEO as he heads for the exits.

A federal judge’s decision to scuttle the buyout means JetBlue will continue to be relegated to second-tier status behind the industry’s big four carriers — United Airlines Holdings Inc., American Airlines Group Inc., Delta Air Lines Inc. and Southwest Airlines Co. — which wield unmatched pricing power and command vastly bigger fleets. It also leaves incoming JetBlue Chief Executive Officer Joanna Geraghty, who takes over next month, to pick up the pieces.

“It leaves JetBlue in a very challenging position,” said Samuel Engel, a senior vice president at ICF and former head of the consultant’s aviation group. “They don’t have an easy path to grow. They will continue to be, at scale, disadvantaged compared to the largest airlines. They no longer have an obvious way to rectify that disadvantage.”

The collapse of the deal may not be such bad news for JetBlue’s investors. The company won’t have to shell out billions of dollars and won’t be saddled with a discount carrier as demand wanes at the lower end of the travel market. JetBlue’s stock rose almost 5% after the news.

“The company was acquiring Spirit at a time when US domestic fares are falling, a likely indicator of too much capacity,” said George Ferguson, a Bloomberg Intelligence analyst. “The time and monetary costs of modifying Spirit’s fleet were likely going to be high and the merging of cultures would be challenging.”

For Spirit, the consequences appear dire. Its shares were cut in half Tuesday in their worst loss ever, and they were down another 18% in premarket trading Wednesday. A buyout had represented a lifeline for the beleaguered carrier, which analysts from Melius Research and TD Cowen said may now face the prospect of a bankruptcy filing.

“The path forward for Spirit turns to survivability,” Conor Cunningham, a Melius Research analyst, said in a note. “Spirit’s financial results have been outright bad and are not expected to materially improve in the near term.”

Spirit didn’t offer immediate comment on its post-deal plans.

‘Slow and Challenging’

Acquisitions are seen as the best way to grow in a market with considerable barriers to expansion. Airplane manufacturers Boeing Co. and Airbus SE have order backlogs stretching years into the future, giving carriers limited options to obtain new planes in the near term. Smaller airlines have also struggled to hire pilots.

Spirit had just over 200 planes as of late last year and about 3,000 pilots, a fleet that would have added considerably to JetBlue’s.

“Organic growth is slow and challenging,” Engel said. The collapse of the Spirit deal shows that mergers for the sake of quick growth aren’t an option right now, he added. “This is a no-win for the smaller airlines and ultimately for the US consumer.”

The modern US airline industry was built largely through consolidation, including Delta and Northwest Airlines, United and Continental, and American and US Airways. That has come to a halt in recent years, as the Justice Department under the Biden administration has taken an aggressive stance against deals that could harm consumers by raising prices and reducing competition.

The Spirit ruling comes less than a year after JetBlue’s other major industry partnership — the route-sharing Northeast Alliance with American — was dismantled when a federal judge agreed with antitrust regulators that it should be dissolved. American is appealing the ruling.

“The DOJ is now batting 1.000” in challenges to airline combinations, said Jonathan Root, senior vice president at Moody’s Investors Service. “Anyone looking to combine under this administration is going to have a challenge.”

Next up could be JetBlue rival Alaska Air Group Inc., which announced plans last month to buy Hawaiian Holdings Inc. for $1.9 billion. If that deal goes through, it would rub more salt in the wound for JetBlue, which lost a bidding war in 2016 with Alaska to buy Virgin America.

Failed Deals

The failed Virgin and Spirit pursuits roughly bookend the CEO tenure of Robin Hayes, who took the top post in 2015 with a mandate to grow the brand. The brash London native was a disrupter in the industry, pushing in-flight perks like seat-back televisions and free snacks before they were common.

Yet JetBlue’s stock has declined by 70% since Hayes took over, and his legacy will be marked as much by failed deals as anything else he did. He abruptly announced plans last week to step down for health reasons.

The airline didn’t make Hayes or Geraghty available for comment on Tuesday. JetBlue and Spirit said in a statement they disagreed with the ruling and are weighing next steps.

That leaves the incoming CEO, a nearly 20-year company veteran, to decide where JetBlue goes from here.

“She’s been intimately involved in the whole merger, the planning for the merger, execution of the merger,” said Jerry Glass, a former airline executive and current president of FH Solutions Group, a labor relations consulting firm. “Like any good company, you have contingency plans.”