A Jan. 16 federal court ruling blocking Spirit Airlines' merger with JetBlue could have dire consequences for Spirit and leave JetBlue with an uncertain future.
Spirit has been unable to return to profitability post-pandemic and expects losses of more than $460 million for 2023.
Spirit and JetBlue have the option to appeal the court's decision, which was issued by U.S. District Judge William Young. But unless the appeal is successful, Spirit will likely look for another buyer at a price well below the $3.8 billion JetBlue agreed to pay, analysts say.
One potential buyer is Spirit's biggest low-cost carrier (ULCC) competitor, Frontier, which entered into a purchase agreement for Spirit in early 2022 before it was overtaken by JetBlue.
“I think Frontier will still be interested at the right price,” said Brad Beckley, CEO of consulting firm Hospitalio.
Size matters in the aviation industry, and the acquisition of Spirit will help Frontier right-size its capacity in the ULCC sector, Beckley said.
However, Helen Becker, an investment analyst at Cowen, wrote that in 2022 Frontier intended to use its shares to pay for the acquisition. Since then, Frontier's stock prices have fallen by 60%.
The most likely scenario is for Spirit to file for Chapter 11 bankruptcy, followed by liquidation, Baker said.
“We realize this sounds alarming and harsh, but the reality is that we believe there are limited scenarios that enable Spirit to restructure,” she wrote, adding that Spirit has limited free cash flow.
The main problem for Spirit is that there is too much capacity among domestic discount airlines, analysts say.
Meanwhile, the ability of the giant airlines to separate themselves from larger airlines on the basis of cost has declined because labor scarcity has driven up wages, Beckley said.
Analysts say the outlook for JetBlue, if Young remains in office, is better. Under the terms of their agreement, JetBlue will have to pay Spirit a $70 million separation fee if the merger fails. But a failed merger would also prevent JetBlue from taking on nearly $3.5 billion in debt.
In the immediate aftermath of Young's decision, Spirit's stock fell more than 40%, but JetBlue's stock rose nearly 5%.
“We believe the relief rally in JetBlue shares reflects the view that JetBlue is no longer on the hook for an expensive deal,” wrote Michael Linenberg, investment analyst at Deutsche Bank.
Second setback for JetBlue
However, a failure to acquire Spirit would be the second major shock for JetBlue since May, when a court ordered it to break up its alliance with American Airlines in the New York and Boston areas.
Brett Snyder, an airline industry analyst who writes the Cranky Flier blog, wrote that JetBlue may now want to consider joining American in its appeal of that court decision. He said JetBlue should also focus on improving its lagging operating performance in the industry, focus more on Boston where it is the leading airline, and look for new opportunities in the United States when it acquires new planes.
JetBlue, which will have a new CEO next month when Chairman Joanna Geraghty replaces outgoing CEO Robin Hayes, will have to develop a new strategy to avoid marginalization, Beckley said. The airline's product, which boasts the most economy legroom among major U.S. airlines, places it at the premium end of the leisure market. But with its smaller loyalty program and limited network size, JetBlue can't take the fare premiums of Delta, United and American.
Beckley added that the real winners of Young's decision are the big three airlines, which will not have to face stiffer competition from the larger and stronger JetBlue, if Young's decision stands.
