JBLU - Last Update Before Merger: Spirit Airlines Is A Buy

2023-10-13 05:31:39 ET

Summary

• JetBlue's argument for acquiring Spirit Airlines is compelling and creates a potentially favorable situation for Spirit Airlines.
• I believe DOJ's argument has discrepancies and is inconsistent, which strengthens JetBlue and Spirit Airlines' merger case.
• JetBlue continues to divest assets of a combined airline to uphold competition and further strengthen their case.

Introduction

In my past two articles , I have been bullish on Spirit Airlines (SAVE) as JetBlue (JBLU) attempts to acquire Spirit Airlines at about $3.8 billion, about twice the current valuation of the company. For numerous reasons, I believe JetBlue's argument to be compelling in comparison to the Department of Justice's argument, which still stands today. Now, as the court hearing date is expected to occur in about two weeks, I continue to believe JetBlue continues to have a compelling case creating a potentially favorable situation for Spirit Airlines. The reasons are as follows:

1. DOJ's argument of the "JetBlue Effect" creates a discrepancy

2. JetBlue continues to divest assets of a combined airline to continue to uphold competition

Continuously Compelling Argument

The Department of Justice seems to be dedicated to blocking the merger from happening. However, I continue to believe JetBlue and Spirit Airlines' case, upon a closer look at the arguments presented by JetBlue and the government agencies, reveals a compelling case for the merger contrary to the DOJ's claims as the merger will continue to uphold the free functioning of markets.

First, in my opinion, DOJ's argument has discrepancies. In my previous article, I mentioned that the JetBlue and Spirit Airline's merger chances improved due to the failure of the Northeast Alliance, NEA, which was an alliance between JetBlue and American Airlines (AAL). At the time, my argument was that the DOJ's claim of a smaller number of remaining airlines leading to a conspiracy in the market was rendered ineffective due to the court's precedent benefiting JetBlue. Then, weeks leading up to the court hearing date, JetBlue has claimed that DOJ is having an inconsistent position. The company's argument made in September , which is compelling in my opinion, is as follows:

This motion arises from the startling switch in positions by the Department of Justice ("DOJ") with respect to the competitive role that JetBlue plays in the airline marketplace. Just last year, DOJ touted JetBlue as the antidote to the dominance of the legacy airlines (American, Delta, and United) and persuaded another court in this District that JetBlue is a "maverick" airline that makes it less likely for airlines to coordinate. United States v. Am. Airlines Grp. Inc., No. 1:21-cv-11558-LTS (D. Mass.) (the "NEA Case"). In this case, in an effort to stop the JetBlue/Spirit merger, DOJ is saying the opposite: the transaction should not be allowed to proceed because it will facilitate collusion between JetBlue and its airline rivals post-merger.

Simply, JetBlue is saying that the DOJ argued to the court during the NEA case that JetBlue and American Airlines should not collaborate as JetBlue is a unique player in the industry that pressures the legacy airlines. Then, in the JetBlue and Spirit Airlines' case, the company claims that the DOJ argues that JetBlue will collude with its bigger rivals despite that JetBlue, in the eye of the DOJ, was a "maverick" airline and collusion such as NEA has been blocked by the court already creating inconsistency in the DOJ's argument.

The following are the DOJ's arguments in the NEA trial:

JetBlue differentiated itself from other low-cost airlines by offering not only low fares, but also high-quality service.

JetBlue's high quality of service allowed it to compete effectively against the legacy airlines in ways other LCCs and ULCCs could not.

JetBlue is a close competitor to legacy airlines and is able to constrain their pricing.

Travelers benefited from the JetBlue Effect whether or not they flew on JetBlue

I believe this to solidify JetBlue and Spirit Airlines' merger case. One, as mentioned, collusion between JetBlue and a legacy carrier has already been blocked by the court leaving a precedence. Two, as JetBlue says, "litigants, including DOJ, are not permitted to successfully advance an argument in one case and make the opposite one in a second proceeding." DOJ has stated that JetBlue can constrain legacy airlines' pricing, which benefits the overwhelming majority of the flying public. Thus, to say that this is not the case because JetBlue is merging with Spirit, in my opinion, is inconsistent. If anything, by JetBlue becoming bigger through the merger, the company will be able to better compete with the legacy players as it is just a prediction with no merit to say that a bigger JetBlue will act like a legacy airline instead of competing with them.

Further, JetBlue is continuing to announce asset divestiture of a combined Spirit and JetBlue Airlines. As I have said in my previous article, JetBlue has announced numerous asset divestitures including airport slots to avoid a situation where the combined Spirit and JetBlue do not have a majority market share in any route or an airport. This effort has continued to take hold leading up to the trial date. For example, on September 11th, JetBlue announced a divestiture in Boston Logan, Newark, and Fort Lauderdale to Allegiant Airlines (ALGT). As such, given the company's intent to divest all assets that the DOJ or the court could acknowledge as anti-competitive, I do not see market share becoming a problem in the trial.

Therefore, I continue to believe that JetBlue's merger with Spirit Airlines is compelling as the merger could provide Spirit Airline's investors with a favorable upside potential.

Risks

Potential investment in Spirit Airlines in anticipation of the merger could be risky. My bullish thesis is reliant on the merger being approved in the court. As such, if DOJ wins the case against JetBlue and Spirit Airlines barring the merger from happening, my bullish thesis would be irrelevant, and as my buy rating for Spirit Airlines mostly comes as a result of the potential merger, the risk for investors could be significant.

However, the market is currently pricing Spirit Airlines at about half of the potential merger value. As such, given that I believe JetBlue's argument to be reasonable, risk-to-reward potential could be viable to some investors.

Overall, in the case that the merger is not approved, there could be significant downside risks to the investors.

Final Takeaway

Over the course of about six months, I have been bullish on Spirit Airlines. JetBlue has agreed to purchase Spirit Airlines for $3.8 billion, which is about twice the current valuation of Spirit Airlines. Although the deal is being challenged by DOJ, I believe the merger case to be compelling. Not only is the DOJ's argument inconsistent, but JetBlue has continued to intend to divest all assets that could cause the combined entities to have an unfair advantage. Therefore, ahead of the court hearing date, I continue to believe Spirit Airlines is a buy.

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