SAVE - JetBlue And Spirit Merger Potential Gets Stronger

2023-07-07 06:35:32 ET

Summary

• The U.S. Department of Justice's lawsuit against the JetBlue and Spirit Airlines merger may be weakened due to the Northeast Alliance ban and JetBlue's divestiture of assets to Frontier Airlines.
• JetBlue's willingness to give up slots shows the company's intent to divest all assets that could cause a monopoly, nullifying one of DOJ's key arguments.
• With merger potential increasing, Spirit Airlines is a buy as JetBlue will acquire Spirit for $33.50 per share upon approval.

Introduction

JetBlue ( JBLU ) and Spirit ( SAVE ) airlines' merger has a major roadblock. The United States Department of Justice sued to block the merger citing anticompetitive reasons. However, as I have said in my previous article , I believe there is a chance that the deal would go through for multiple reasons. The size of the combined JetBlue and Spirit would still be smaller than the legacy US carriers commanding a fraction of the US market likely creating more competition for the legacy carriers. JetBlue is willing to give up slots that would be predominantly controlled by the combined companies. And the judge assigned to the case was appointed by former President Ronald Reagan; a president who viewed corporate mergers favorably.

I believe the case for my bullish thesis on Spirit Airlines due to the merger in recent weeks became stronger. On top of all the relevant reasoning from my previous thesis, Northeast Alliance with JetBlue and American Airlines ( AAL ) got banned, likely strengthening the chance of approval. Further, JetBlue announced a major divestiture of assets to Frontier Airlines ( ULCC ), another low-cost carrier to comply with the DOJ. Therefore, a major roadblock is removed allowing the upside potential from the merger for Spirit Airlines to strengthen, making Spirit Airlines a buy.

DOJ's Argument

Department of Justice cited anti-competitive reasons for suing to block JetBlue and Spirit Airlines merger, and the organization's main argument was as follows:

• Prices would increase on routes where the combined airline dominates a market share.
• A smaller number of airlines in the market will make it easier for market participants to collude and charge consumers higher prices, which is the case for JetBlue and American Airlines through the Northeast Alliance.
• The elimination of a low-cost carrier, Spirit Airlines, will leave cost-conscious travelers with fewer choices as the price of flying will likely increase.

Citing these reasons, DOJ sued to block JetBlue and Spirit Airlines' proposed merger.

Divestiture Decision

To address DOJ's first main argument against the merger regarding the potential price increases and monopoly on some routes after the merger, JetBlue has initially said that the company will divest assets to address the issue. In March, the company said , "JetBlue has already made unprecedented upfront commitments to divest all of Spirit's holdings in Boston and New York, as well as five gates and related assets at Fort Lauderdale, to allow for allocation to other ultra-low-cost carriers (ULCCs)." Then, in early June, the company gave a clearer picture of the divestiture. Frontier Airlines will take all of Spirit Airlines' assets in Laguardia International Airport. As the merger creates additional competition for the major legacy airlines through a more competitive JetBlue, the divestiture will likely allow another ULCC, Frontier Airlines, to take the spot of Spirit Airlines to continue low-cost flights for more budget-conscious travelers, creating a win-win situation for budget conscious and legacy airline customers.

Due to JetBlue's intent to divest assets to address DOJ's concerns, I believe this argument will not pose a significant threat to the merger as airline mergers are almost always followed with divestiture before being approved. For example, Asiana and Korean Airlines, are attempting to merge. Initially, the British government objected due to the merger creating a route where the combined companies will gain a monopoly. To address the issue, Korean Airlines has agreed to divest a slot at London Heathrow to Virgin Atlantic , which was enough to gain regulatory approval. As such, the merger is often followed by monopoly concerns, which can be addressed by divestiture.

Therefore, I believe JetBlue's decision to divest assets to Frontier Airlines shows JetBlue's intention to divest any assets that will bar the company from merging with Spirit Airlines. This likely nullifies one of the DOJ's main arguments.

Northeast Alliance

DOJ's second main argument raises concerns regarding the elimination of a key competitor in the market, resulting in a potential for a price increase from market participants colluding. The DOJ gave Northeast Alliance between JetBlue and American Airlines ( AAL ) as an example. However, in late May, Northeast Alliance was blocked . Then, on July 5th, JetBlue said that the company "initiated the termination of the NEA, beginning a wind-down process that will take place over the coming months" to "turn even more focus to our proposed combination with Spirit."

In the same July 5th statement, JetBlue said, "terminating the NEA renders the U.S. Department of Justice's (DOJ) concerns about our partnership with a legacy carrier entirely moot."

I concur with JetBlue's statement as also believe that the ending of Northeast Alliance and JetBlue's decision to not appeal the court's decision creates an increased chance of the merger approval. The court has left a precedent. Cooperation to the level of Northeast Alliance is anti-competitive. As such, the DOJ's argument regarding a smaller number of airlines exposed to an easier colluding environment is likely no longer relative as these levels of cooperation will not be able to form.

Overall, I believe JetBlue's case against the DOJ became stronger. Not only was the Northeast Alliance broken, but JetBlue has also decided not to appeal the decision, weakening one of the DOJ's main arguments.

Summary

JetBlue and Spirit Airlines merger, in my opinion, is becoming more realistic. JetBlue's divestiture decision shows the company's intent to continue doing so to nullify one of the DOJ's main arguments against the case. Further, the ending of Northeast Alliance significantly weakens the DOJ's argument regarding a potential colluding environment generation through a smaller number of airlines. Finally, DOJ's third and final main argument regarding cost-conscious travelers facing steeper prices after the merger is not strong as well. As mentioned in my previous article and earlier in the article, more travelers benefit from JetBlue becoming more competitive while most Spirit Airlines routes will be divested to another ULCC to minimize the impact on these travelers. Therefore, with a growing potential for the JetBlue and Spirit Airlines merger, I believe Spirit Airlines is a buy. JetBlue, if allowed, will acquire Spirit for $33.50 a share , or about 90% above the current levels as announced in 2022.

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