JetBlue’s warning to Spirit Airlines suggests a deal unraveling

JetBlue Airways Corp.’s dogged pursuit of Spirit Airlines Inc. has withstood pushback from US regulators, a court-ordered rebuff and market declines that have upended the economics of the deal.

But it’s now eyeing the emergency exits.

JetBlue on Friday warned the agreement could be terminated as soon as Jan. 28 because certain conditions may not be satisfied by dates specified in the fine print.

The brief regulatory filing, coming a week after the carriers said they would appeal a federal judge’s ruling blocking the deal, sent Spirit’s shares tumbling as it renewed questions over how the beleaguered low-cost carrier could survive without JetBlue as its savior. Spirit quickly countered with a filing of its own, saying the terms of the merger agreement remain in effect and there’s no basis for JetBlue to walk away.

“This smells like an effort to abandon the deal and avoid having to overpay,” said Bill Baer, former head of the US Justice Department antitrust division. “JetBlue filed the obligatory notice of appeal, but at the same time is looking for a back-door escape hatch.”

JetBlue declined to comment. Spirit did not immediately respond to a request for comment.

It wasn’t immediately clear whether or when JetBlue might take action — the company said it’s evaluating options — but the filing hints that the agreement may be reaching an end point. The carrier has stood by the $3.8 billion deal since it was struck in 2022, even as Spirit has contended with a range of problems that have dragged its market value under $700 million.

The news Friday boosted JetBlue shares by 3.6%. Spirit’s stock dropped 13%. Its shares had already lost more than half their value since the judge’s ruling Jan. 16. 

Spirit has contended with delayed aircraft deliveries, planes grounded by engine issues and lagging domestic fares. Wall Street analysts have speculated that the airline could be forced into Chapter 11 bankruptcy or liquidation, though Spirit said earlier this month that it had no such plans. 

Under the agreement, JetBlue is required to pay Spirit $70 million if the deal is blocked for antitrust reasons, and $400 million to Spirit shareholders. Much of the shareholder payments have already been accounted for through periodic payouts and a special dividend.

Either side can seek to terminate the deal on or after Jan. 28 if there has been a court order enjoining the merger, though they have to take “reasonable best efforts to resist” as in an appeal. Spirit may try to argue that JetBlue can’t terminate on Jan. 28 because there’s supposed to be a six month extension to July 28 in the case of an adverse antitrust ruling. 

“This is clearly JetBlue triggering its first available date on which it can walk away if all conditions aren’t met,” said Jennifer Rie, a Bloomberg Intelligence litigation analyst. 

It’s hard to contest well-written merger agreements. (Remember Elon Musk versus Twitter?) The last big case involving an antitrust block was Anthem Inc.’s attempt to acquire Cigna Corp. A court blocked the deal, followed by more than four years of litigation over whose fault it was. The battle ended in a draw in 2020.

In the odd ways these agreements work, Spirit could even wind up owing JetBlue money. Termination under certain circumstances could require the carrier to pay JetBlue a $94.2 million breakup fee, according to the agreement. On top of that breakup fee, if the deal is ended because of a “material” breach of the agreement by Spirit, it would have to pay JetBlue back the amount already sent to Spirit stockholders under “ticking fees” and a special dividend.

JetBlue executives began their pursuit of Spirit because they believe becoming bigger is the only way the company can influence pricing among the four largest US carriers. JetBlue needed Spirit’s 200 aircraft and roughly 3,000 pilots at a time when both are in short supply across the industry. 

The federal court ruling against the JetBlue-Spirit combination isn’t the first strike JetBlue has suffered under the Biden Administration’s aggressive stance on consolidation. A federal judge last year killed JetBlue’s route-sharing partnership with American Airlines Group Inc. in the Boston and New York areas. That judge similarly found that the alliance stymied competition, limiting choices for consumers and raising fares. American is appealing the ruling.