JBLU - Spirit Airlines: Waiting On JetBlue Money

Summary

• Spirit Airlines expects to hear from the DOJ in the next month on whether the government organization will file to block the merger.
• JetBlue Airways Corporation has started paying Spirit shareholders $0.10 a month to wait on the deal close.
• Spirit Airlines stock is cheap based on closing the merger for $31 in cash or as a standalone airline with substantial EPS upside.

As the airline industry hits a boom phase, Spirit Airlines, Inc. ( SAVE ) shareholders have to decide on whether to wait around for the JetBlue Airways Corporation ( JBLU ) merger cash. The biggest question remains whether the Department of Justice will file a lawsuit to block the deal. My investment thesis remains Bullish on the airline stock, as SAVE investors now collect $0.10 a month to wait on the deal close.

Deal Close

Back in July, Spirit Airlines agreed to a merger deal with JetBlue at a price of $33.50 per share in cash. The $3.8 billion deal price included a $2.50 cash prepayment paid by JetBlue on the merger approval by Spirit shareholders back on October 18.

The deal also offers an additional prepayment fee of $0.10 per month starting in January 2023 through closing. JetBlue paid this first fee to Spirit Airlines holders on January 31.

The stock currently trades below $19.50 and the deal price still offers shareholders a cash payment of $31.00 plus the $0.10 monthly payment to wait for the deal closing. Shareholders will see a nearly 60% upside with no pricing risk due to the cash offer.

The biggest question remains whether the DOJ will block the merger. The airline business is booming with high airfares, so one has to question whether the government will be too excited to eliminate an ultra-low-cost-carrier from the market.

The combined companies don't compare anywhere close to the legacy airlines, but the DOJ will likely focus on the competitive landscape for airfares outside of the Big 4. Right now, JetBlue and Spirit compete with Alaska Air Group ( ALK ) and Frontier Group ( ULCC ) for the low-cost passenger, and this combination limits some of this competition.

The biggest concern is the consumer harm of moving to the higher-costing JetBlue brand. Consumers could be forced to pay higher fares, but at the same time, ULCCs like Frontier will likely step up and replace any disappearance of low fares from the Spirit Airlines brand.

The Biden DOJ has failed miserably in blocking deals on an antitrust basis. The courts have blocked all but one case brought by the DOJ in the last year. Regardless, media outlets are reporting an expectation for the DOJ to file a lawsuit to block the deal.

On the recent Q4'22 earnings call , CEO Ted Christie expects the DOJ to provide an update in the next month:

We announced in December 2022 that Spirit and JetBlue had certified substantial compliance with the DOJ's second request and are now waiting to see whether the DOJ filed suit to block the deal or allows us to proceed. We anticipate hearing from the DOJ in the next 30 days or so and that's really all we have to say on that topic for now.

SAVE Standalone Upside

The best part of any deal risk is that Spirit Airlines is likely worth just as much as a standalone airline. For Q4'22, the airline reported an EPS of $0.12 , and the airline is expected to generate far more profits in the years ahead with multiple catalysts on lowering costs after a big revenue gain.

As with other airlines, Spirit Airlines started 2022 losing money and now the company is on the path to strong profits. The airline is forecast to produce a $0.61 profit this year before a surge to an EPS of $1.79 in 2024.

Spirit Airlines has jumped in with aggressive capacity growth to take advantage of domestic travel demand and legacy airlines' slow return to 2019 capacity levels. The airline forecasts growing ASMs by over 20% in 2023 with only a 13% boost starting in Q1.

The company has already grown revenues by 44% above Q4'19 levels in the last quarter, to $1.4 billion. As in the past, Spirit Airlines sacrifices profits with these aggressive capacity additions in what partially leads to the big EPS boost in 2024.

As with the other airlines taking on covid debt, Spirit Airlines obtains a big EPS boost as positive cash flow generation leads to interest expense reductions via debt repayment. The airline spent $37 million on interest expenses in Q4'22 compared to the $21 million back in Q4'19. Over the course of a year, the company could boost EPS by $0.50 alone via reducing net interest expenses from elevated levels.

In addition, fuel costs hit Spirit Airlines and other ULCCs higher than legacy airlines, considering the airline only generates a meager $64 in ticket revenue per segment. The company spent nearly double on fuel costs in 2023 as compared to 2019 at nearly $2 billion with only a 20% volume increase.

Spirit can easily boost annual EPS by $1 to $2 via fuel expenses dipping from $100 to $200 million annually in a more normalized market. After all, RASM was up 17% versus 2019 while adjusted CASM ex-fuel was up just 14% compared to Q4'19. The airline did a great job of boosting revenues along with costs outside of fuel, while the legacy airlines have more ability to hike fares to cover additional fuel expenses.

Despite the growth, Spirit Airlines is still underutilizing the fleet by an approximate 10%. The airline continues to face Neo engine performance issues, staffing constraints in the Florida market, and Airbus ( EADSF ) delivery delays.

If anything, the analyst EPS estimates appear far too low, with lower fuel costs and interest expenses contributing to considerable profit expansion when combined with revenue growth. At $19.50, Spirit Airlines doesn't trade consistent with travel stocks looking to recapture prior EPS levels despite higher debt levels and outstanding share counts. The airline produced a $5+ EPS back in 2019.

Takeaway

The key investor takeaway is that the DOJ is likely to file to block the Spirit Airlines, Inc. merger with JetBlue Airways Corporation. The department has a horrible record of winning such lawsuits, setting up an eventual deal close based on merger remedies. Regardless, though, the booming air travel demand sets up Spirit Airways to rally as an independent airline returning to prior strong EPS targets with a better expense structure.

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