JetBlue or Frontier? Which partner will Broward County’s Spirit Airlines choose?
The bidding war for Spirit Airlines that has rocked the airline industry is set to come to an end this week, when the South Florida airline’s shareholders vote Thursday on whether to go forward with a planned company merger with Frontier Airlines.
Spirit also has a more lucrative, unsolicited offer on the table to be acquired by JetBlue Airways. Spirit’s board and CEO have repeatedly said they favor the Frontier deal and have strong doubts regulators would approve a sale to JetBlue.
Spirit, which is based in Miramar and employs 3,400 people in South Florida, is caught between competing bids from rivals in a tussle that’s dragged on for months. Spirit and Frontier officials said in February they would merge in a $2.9 billion deal, under an agreement whereby Denver-based Frontier would become the majority shareholder. Then New York-based JetBlue landed with an unsolicited higher cash bid to buy Spirit and has continued to up the ante.
After Spirit’s board of directors said it would stick with Frontier, JetBlue launched a hostile takeover in May, urging Spirit shareholders to vote against the planned merger with Frontier. JetBlue sweetened its offer on June 20, raising its cash offer to $33.50 a share, or $3.64 billion, a big premium over Frontier’s cash-and-stock bid, which has lost some value due to fluctuating stock prices.
On Friday, Frontier sweetened its offer as the deal jockeying continues down to the wire. Frontier boosted the cash portion of its offer by $2 to $4.13 per share of Spirit stock. In addition to the cash bump, the share consideration portion remains that Spirit shareholders would receive 1.9126 of Frontier shares for each of their Spirit shares. And Frontier increased the amount it would pay Spirit in a deal breakup fee to $350 million, up from $250 million, if federal regulators eventually won’t approve a Spirit-Frontier merger.
Spirit said in a statement on Friday that its board continues to unanimously recommend that shareholders vote to go through with the merger.
The stakes are high for all three airlines. Absorbing Spirit will create the country’s fifth-largest airline for either Frontier or JetBlue, enabling that airline to compete with the big four legacy airlines: American, Delta, Southwest and United.
“I suspect that the JetBlue offer is superior given where the stocks are trading,” said Helane Becker, a senior research analyst who covers the aviation industry for Cowen, an investment bank.
Spirit shareholders were supposed to vote June 10 on which deal they preferred, but the airline’s board pushed it back until the end of June to take more time considering the competing bids.
“We think a major reason that the vote was postponed is because they didn’t have the votes to approve the Frontier deal,” Becker said of Spirit’s board. “By postponing for three weeks, it gives them opportunities to meet with shareholders and explain why their transaction (Spirit-Frontier) makes more sense.”
But she says there’s one big caveat: Either deal needs to be approved by federal regulators, and President Joe Biden’s Department of Justice has not been friendly to airline market consolidation.
“The Spirit team is evaluating based on which offer has greater likelihood of getting done. And I think both transactions will be hard to get approved in this administration,” Becker said.
Realizing that, JetBlue and Frontier each has offered a $350 million breakup fee to Spirit, in case the respective offers can’t secure federal regulatory approval.
If approved, either combination would alter the U.S. airline industry. Spirit and Frontier have a similar discount business model, which many experts think makes them a better fit. Although both airlines offer cheap, bare-bones airfares that set the pricing floor for the industry, there’s not much overlap in flight routes. Frontier focuses on the Midwest and West Coast, while Spirit mainly flies on the East Coast and in the Caribbean.
The two airlines make a significant portion of their profits from passenger fees for things like putting carry-on luggage in overhead bins and even for drinking water on flights. The two also share a poor track record for consumer complaints regarding on-time performance and flight cancellations. In March, for example, Colorado’s attorney general asked the Department of Transportation to investigate Frontier over persistent customer complaints.
JetBlue competes with Spirit and Frontier, but its fares are usually more expensive. The airline also charges for overheard bin space, but its jets have more legroom and amenities like free snacks, drinks and Wi-Fi.
Many industry experts, and Spirit’s board, think Spirit merging with Frontier would more likely eventually clear antitrust review and gain federal regulatory approval. A combined Spirit and Frontier would create a coast-to-coast ultra discount carrier, which would push prices down across the airline industry. For that reason, regulators would probably view that combination beneficial to consumers.
What’s more, the Justice Department already has brought an antitrust lawsuit against JetBlue and American Airlines for creating the Northeastern Alliance — a partnership between the two airlines that allows the carriers to sell each other’s flights at certain Northeast airports and link their frequent flier programs. The lawsuit asked a federal judge to stop the deal because it would create higher airfares for consumers. A judge ruled early this month the case can proceed to trial.
JetBlue executives have said they would divest assets in an attempt to appease regulators, but have stopped short of letting go of the alliance with American.
Airline deals are among the trickiest, lengthiest merger-and-acquisition transactions. In addition to merging the fleets and passenger booking and other technologies, they have to merge their workforces. Pilots’ and flight attendants’ unions obviously play key roles; the pilots and flight attendants work off seniority lists that can be messy to integrate in a merger.
The Association of Flight Attendants-CWA, a union that represents Frontier and Spirit flight attendants, came out in support of the Frontier merger in May, saying that it reached an agreement with Frontier Holdings for flight attendants from both airlines that addressed seniority and job protections.
“No matter what the (Spirit) shareholders decide, it doesn’t change our position,” and Sara Nelson, president of the flight attendants’ union. “We affirmed job security, seniority protections, and the means to achieve contract improvements under a Frontier/Spirit merger. We would demand the same of any merger, if it’s going to have our support.”
Institutional Shareholder Services, a proxy firm that advises on shareholder votes, recommended in late May that Spirit’s shareholders vote against the Frontier merger. But Glass Lewis, another prominent proxy advisory firm, in early June urged shareholders to accept the Frontier merger.
Along with other members of the board, Spirit’s CEO Ted Christie has made his position clear and not wavered. Since the original deal with Frontier was announced four months ago, he’s been rallying shareholders to vote to approve it.
“What is JetBlue’s motivation in all this?” Christie asked in a call with industry analysts in late May. “I believe it is a cynical attempt to disrupt our merger with Frontier, because a Spirit-Frontier combination poses a competitive threat. ... My message to Spirit stockholders is, don’t be distracted by JetBlue’s tender offer.”
Clarification: Although Spirit Airlines has competing bids from Frontier Airlines and JetBlue Airways, Spirit’s shareholders will vote Thursday only on whether to accept Frontier’s merger offer.
This story was originally published June 26, 2022 at 6:30 AM with the headline "JetBlue or Frontier? Which partner will Broward County’s Spirit Airlines choose?."
