The tug-of-war over Spirit Airlines could end in victory for Frontier Airlines on June 10 if shareholders vote to accept its $2.9 billion buyout offer, effectively rejecting a higher bid from JetBlue Airways.
The two low-cost carriers have been locked in turbulent competition for Spirit Airlines since February, when Frontier and Spirit announced a proposed merger. JetBlue subsequently launched a hostile all-cash bid for $3.6 billion, an offer that Spirit rejected twice over concerns that antitrust regulators would not approve the deal because of JetBlue’s Northeast Alliance with American Airlines. On Monday, JetBlue tried to overcome those concerns by increasing the fee it would pay Spirit if the deal is blocked to $350 million, up from its previous offer of $200 million.
Both Frontier and JetBlue have argued that a merger with Spirit will help them compete against the four legacy carriers that control 80% of the passenger market — Delta, American, United, and Southwest.
“To use a metaphor that is probably apt for the airline industry, it’s really a perfect storm of factors that are creating a complicated situation,” Wharton management professor Emilie Feldman said on Wharton Business Daily on SiriusXM. “There has been a wave of consolidation over the past years. If we look at the large legacy carriers, we’re down to three in terms of the mergers that have happened: Delta and Northwest, United and Continental, and American and US Airways. Now, the next frontier is the low-cost carriers, and I think that’s why this battle has become so pitched.”
Last week, proxy advisory firm International Shareholder Services recommended that Spirit Airlines shareholders vote against the Frontier bid in favor of JetBlue’s offer, which they said would make more money for investors. However, Spirit CEO Ted Christie said the board “continues to unanimously recommend” the merger with Frontier.
“To use a metaphor that is probably apt for the airline industry, it’s really a perfect storm of factors that are creating a complicated situation.” — Emilie Feldman
Feldman thinks the Frontier merger is more likely to go through because of the antitrust issues with JetBlue. The U.S. Department of Justice and several states have filed an antitrust lawsuit to block the 2020 Northeast Alliance partnership, claiming it reduces competition. JetBlue has said it would eliminate Spirit as a brand if it acquires the airline, while Frontier would not.
“JetBlue has started to make moves that don’t put it exactly in the same class as legacy carriers, but nonetheless can create some issues,” Feldman said. “So, competition is a big deal, antitrust is a big deal, and the overall consolidation of the industry is a big deal here as we look at this unfolding.”
Open Questions
Even if a merger with Frontier happens, she said, it doesn’t resolve lingering questions about competitiveness and what that deal means for passengers.
“There are no more dance partners [for JetBlue] in terms of potential merger opportunities,” Feldman said. “It’s tricky from either perspective, whether it goes forward, whether it doesn’t go forward.”
Each competitor is making the case for why its offer is better, including touting their routes, fleets, and ability to offer customers more choices at better prices. But Feldman noted that JetBlue would gain a clear market advantage from the acquisition. Its participation in the Northeast Alliance has opened up transatlantic access, and absorbing Spirit Airlines would push the company into the ultra-low-cost carrier realm.
“Competition is a big deal, antitrust is a big deal, and the overall consolidation of the industry is a big deal here as we look at this unfolding.” — Emilie Feldman
Feldman wondered whether JetBlue would consider a third option: Abandoning the bid for Spirit and focusing instead on fixing its operational problems. But she said that’s unlikely because of “action bias,” which she identified as a seize-the-moment inclination toward mergers and acquisitions because the opportunity may not arise again.
“It’s almost a pathology,” she said of action bias. “The trade-off is quite sharp. We tend to see companies in these kinds of competitive situations gravitate toward action as opposed to the internal piece.”
Feldman said she’s not surprised at the fight for dominance in the budget airline industry. In many ways, it was predictable.
“The low-cost carriers have really developed over the past years as the alternative to the legacy carriers, so it was bound to happen,” she said. “I don’t know that the intensity of competition and the back-and-forth that we’re looking at with Frontier and JetBlue for this one asset, Spirit, was as predictable. But this idea that there would be consolidation in this low-cost segment certainly was.”
