UAL - JetBlue And Spirit Merger Has A Chance

2023-04-07 22:20:32 ET

Summary

• JetBlue and Spirit merger will likely go through.
• The Department of Justice's legal footing, Section 7 of the Clayton Act, may be fairly weak.
• Judge William, assigned to the case, likely has a favorable view towards corporate mergers.

Introduction

In 2022, JetBlue ( JBLU ) and Spirit Airlines ( SAVE ) announced a merger. However, in March of 2023, the United States Department of Justice sued in an attempt to block the merger, which caused some concerns and uncertainties regarding the acquisition. Some investors have pointed out the newly found risk as a result of the DOJ's, Department of Justice, action; however, I view the matter differently. I believe that it is more likely for the deal to go through than to be blocked by DOJ for a few reasons. First, DOJ suggests two major reasons why two firms should not merge, but I believe the legal standing on the matter is fairly weak. Further, the judge assigned to the case is likely to have different views than DOJ. Therefore, I believe that JetBlue and Spirit Airlines have a chance at winning the case against DOJ, which makes Spirit Airlines a buy and JetBlue Airlines a hold.

Department of Justice's Argument

In suing the merger, the DOJ has two major points. First, the DOJ says that the "acquisition [will] allow JetBlue to elimate its largest ultra-low-cost rival," which has brought "lower fares and more options" for "particularly price sensitive consumers." Also, the DOJ says that the merger will "eliminate half of the ultra-low-cost capacity in the United States," which will "result in higher fares and fewer choices for tens of millions of travelers." Further, the DOJ points out that "prices would increase on routes where the two airlines currently compete," which, for "over 40 routes," will make the "combined market share" so high that "the deal is presumptively anticompetitive." All these arguments by the DOJ have a legal footing under Section 7 of the Clayton Act.

Flaw

I believe the legal footing for the DOJ's argument is rather weak. According to the Federal Trade Commission's guide to antitrust laws , "Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect may be substantially to lessen competition or to tend to create a monopoly."

First, addressing the part where it says "tend to create a monopoly." I believe this to be completely false in the case of JetBlue and Spirit's merger. According to the United States Bureau of Transportation Statistics , in 2022, JetBlue had about 5.5% market share while Spirit had about 4.9% market share. Thus, the combined market share of these two companies is nowhere near a monopoly as it will stand at about 10.4%, which is significantly lower than American's ( AAL ) 17.6%, Delta's 17.2% ( DAL ), Southwest's 16.9% ( LUV ), and United's ( UAL ) 15.5%.

Also, the DOJ mentions that over 40 routes will become a monopoly if JetBlue and Spirit merge. But, regarding this matter, JetBlue already said that the company has committed to "divest[ing] all of Spirit's holdings in Boston and New York as well as five gates and related assets at Fort Lauderdale to allow for the allocation of other ultra-low-cost carriers."

As such, because the merger will not create a monopoly in the airline industry in any way, I believe it will be extremely hard for the DOJ, under Section 7 of the Clayton Act, to argue that the merger creates a monopoly.

Further, Section 7 of the Clayton Act also says that it prohibits mergers that might substantially lessen competition in the market. Again, I believe it is reasonable to argue against the DOJ's claims regarding this matter. Going back to the statics by the Bureau of Transportation Statistics, ultra-low-cost carriers' market share only accounts for a combined total of about 8.2% while the three biggest legacy carriers have a market share of about 51.7%. If including Southwest, the four biggest players have a market share of about 67.2%. Thus, I believe JetBlue's argument of the merger potentially having a positive effect on the market to be more reasonable. The merger may hurt the ultra-low-cost consumers, but they only account for less than 10% of the market. Thus, if JetBlue and Spirit's merger allows them to better compete against the four biggest carriers, over half of the travelers may benefit from the merger. According to JetBlue, the company's "unique combination of low fares and great service is a competitive force that keeps the legacy carriers on their toes." Therefore, like the arguments regarding monopoly, I believe the DOJ's argument to be weak leaving a potential for the merger to go through.

Court

Judge William Young will be hearing the case on October 16th, 2023. Judge William was appointed by former President Ronald Raegan, whose administration was strongly in favor of mergers. The judicial branch is an actor that is independent of the political aspects of the executive and legislative branches; however, judges appointed by the president will often have similar ideologies to the president who appointed them.

President Raegan was arguably for corporate mergers. As Washington Post's 1988 article puts it, "the Raegan years have witnessed one of the greatest waves of mergers, takeovers and corporate restructuring in history." The deals, during the Raegan era, were worth $2 trillion and the "door to corporate mergers has never been open wider than during the Raegan presidency." Therefore, I believe it is reasonable to argue that Judge William Young may be more lenient in antitrust policies.

Spirit and JetBlue

I will not go into the details of the merger as it has already been covered extensively in the Seeking Alpha community, but Spirit Airlines will be the biggest beneficiary if the deal goes through. JetBlue is expected to buy Spirit Airlines for $3.8 billion . Considering that Spirit Airlines has a market capitalization of about $1.9 billion , the potential from the merger is at about 100% upside. In the case of JetBlue Airlines, the company may benefit from the merger years into the future, but in the near term, the risks out shadow the benefits. The company's market capitalization is about $2.26 billion , far smaller than the price it is paying for Spirit Airlines, and the company's cash stands at about $1 billion. As such, there will be a massive dilution.

Summary

Risk exists. The outcome of the case can be speculated, but nothing is certain. As such, the unpredictable and speculative outcome holds a significant risk to my bullish thesis. However, I remain bullish on Spirit Airlines as I strongly believe that the chances of a merger approval are extremely high. Not only is the DOJ's argument fairly weak, but the judge assigned to the current case may also have a favorable view of the mergers. Therefore, I believe Spirit Airlines is a buy while JetBlue is a hold due to the high acquisition fee.

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