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JetBlue is willing to spend $3.6 billion on Spirit to compete against giant airlines

JetBlue Airways executives on Wednesday said acquiring Spirit Airlines is the airline’s ticket to growth and a shot at better competing against larger rivals.

The $3.6 billion all-cash bid, which Spirit called “unsolicited,” casts doubt on the latter’s planned tie-up with Frontier Airlines, which the carriers announced in February. Spirit shares surged more than 22% on Tuesday after news of JetBlue’s offer broke, but fell more than 2% Wednesday, while JetBlue dropped nearly 9% and Frontier shed 11%.

The triangle between the carriers shows appetite for consolidation of midsize carriers, particularly those that compete for price-conscious leisure travelers. That segment of the market has become even more important in the Covid pandemic, which devastated international and corporate travel.

JetBlue intends to scrap Spirit’s brand from its bright-yellow planes to bare-bones service that has provided comedians with fodder for years. And yet Spirit has worked to improve customer service and reliability and even ranked 6th in U.S. on-time arrivals last year, while JetBlue came in 9th.

Paying for growth

JetBlue’s CEO Robin Hayes told analysts on a call Wednesday that executives there had been thinking about how to grow and compete against bigger airlines for years. But said once the Spirit-Frontier deal was announced “it created a window of opportunity that if you don’t act in it, it’s gone.”

The deal would have $700 million in annual synergies, JetBlue said.

Spirit and JetBlue overlap on 11% of their routes, according to aviation data firm Cirium. “This looks like an airline that’s just run out of ideas on growth,” Brett Snyder, a founder of the Cranky Flier travel website, said about JetBlue.

The executives said the deal would help them grow at airports where large airlines dominate like Dallas/Fort Worth International Airport, Chicago’s O’Hare International Airport and Hartsfield-Jackson Atlanta International Airport. It would also speed up growth in airports in Florida, where Spirit is based and JetBlue runs a large operation, as well as in other cities like Las Vegas.

Fort Lauderdale is a key airport for both carriers and the bid could be somewhat defensive.

“The very last thing JetBlue needs is for Spirit to get stronger in Fort Lauderdale,” said Craig Jenks, president of Airline/Aircraft Projects, an aviation consulting firm. “This is a battleground specifically in the lower-cost sector.”

JetBlue made a failed bid for Virgin America, which ended up combining with Alaska Airlines, its only other attempt at an acquisition in its more than 22 years of flying.

A deal with Spirit would allow JetBlue to quickly grow its fleet thanks to a large Airbus orderbook both carriers have. A combined JetBlue and Spirit would have a total fleet of 675 planes in 2027, compared with 346 planes in that year without it.

JetBlue would also increase its head count, particularly pilots, to 32,000. Hayes said he expects the pilot shortage, which is already hampering growth, in the U.S. to persist for several years.

Different business model

Frontier and Spirit have very similar business models: low fares, sparse onboard service and fees for everything from hand baggage to seat selection.

JetBlue, on the other hand, has spent years building up its Mint business class service that includes lie-flat beds and full meals. The same day it announced its surprise bid for Spirit, JetBlue also disclosed start dates for its first flights from Boston to London. But JetBlue is mostly concentrated in domestic travel. The Spirit deal, if approved by antitrust officials at the Justice Department, would give JetBlue more breadth and ability to compete with larger carriers, executives said.

JetBlue didn’t disclose how much it would cost to reconfigure Spirit’s Airbus planes to match JetBlue interiors, which have inflight entertainment like seatback screens and fewer seats, but the carrier said it would be “a multi-year” capital expenditure.

Wrapping Spirit into JetBlue could help Frontier, especially in Florida, since Spirit would no longer be following such a similar model, said Snyder.

“Blue skies in Florida for Frontier,” he said. “They don’t have a serious competitor anymore.”

Confounded analysts

The airline’s bid for Spirit confounded some analysts. UBS called it a “headscratcher.”

“Wait, What?” asked MKM Partners.

Bank of America said while both JetBlue and Spirit have Airbus planes “we struggle to find additional benefits for JBLU.”

Raymond James downgraded JetBlue to market perform after the announcement and said product and labor would be tough to combine.

That issue with American

“The process is also likely to distract or possibly unwind current initiatives, most notably the Northeast alliance with American,” Raymond James airline analyst Savanthi Syth wrote. “Moreover, the prospect of elevated debt, even if manageable, is likely to be an overhang on investor sentiment.”

The Biden administration has been scrutinizing mergers and other alliances. The Justice Department sued last year to block JetBlue’s partnership with American Airlines, which allows the airlines to coordinate routes in airports in the New York City area and Boston.

The DOJ didn’t comment on JetBlue’s bid for Spirit.

Asked whether JetBlue would give up that alliance to get a deal with Spirit through regulators, JetBlue CEO Hayes said on the analyst call that the deal is “complementary” to its American Airlines’ partnership and said he was optimistic that both would pass muster.

American declined to comment, but JetBlue executives said they discussed their plan with counterparts at American, after they disclosed the bid.

If approved, the deal could put more pressure on other airlines to merge but it isn’t clear whether that will happen, especially since the Biden administration has promised to scrutinize such deals.

Acquisition vs organic growth

Alaska Airlines, for example, whose merger with Virgin America closed in late 2016, is aiming for growth on its own. That will be fueled by its recently upsized order for Boeing 737 Max aircraft.

“My preference is always organic growth over acquisition. You’re controlling so many elements of the growth,” Alaska Airlines CEO Ben Minicucci said in an interview on the Seattle-based airline’s investor day last month.

He pointed to challenges like merging IT systems and company culture. Minicucci added, “I never rule anything out.”

This article originally appeared on CNBC

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