Spirit Airlines vs. Jetblue Stock: It has never been easy to run a profitable airline. The costs associated with operating the business are constantly on the rise, but the amount consumers are willing to pay for air travel is dropping.
Years of price-based competition within the airline industry have trained leisure travelers to insist on deep discounts. Meanwhile, many businesses are reducing or eliminating travel budgets in favor of digital conferencing alternatives.
The past two years have been particularly challenging for air carriers. The pandemic decimated travel demand, leaving airlines unable to pay their staff. Furloughs and layoffs were the only solutions, which created another set of problems.
Eventually, demand for air travel began to recover, but former employees weren’t interested in returning to the companies that laid them off.
As airlines attempted to get staffing sorted out, flight delays, cancellations, and lost luggage became the norm. Those issues had not yet been resolved when the invasion of Ukraine caused fuel prices to skyrocket.
The combination of staffing woes, customer complaints, and record-breaking fuel costs created a state of turmoil industry-wide. One possible solution? Join forces and consolidate resources.
Who Is Trying To Buy Spirit Airlines?
In 2019, investors were optimistic about Spirit Airlines (NYSE:SAVE). The company was finding success with a new pricing strategy – ultra-low fares and a la carte fees for everything from baggage to beverages.
Consumers embraced the concept of paying almost nothing for their ticket in exchange for doing without complimentary snacks and other luxuries. While several other airlines also focus on low fares, including Southwest and JetBlue, Frontier is Spirit’s primary competition in the ultra-low fare space.
After the 2020 market crash and the pandemic-related disruption to the travel industry that followed, all of the airlines struggled – Frontier and Spirit most of all.
On Valentine’s Day 2020, Spirit Airlines stock was above $40 per share. When the market crashed, it plunged below $10 per share. Spirit stock perked up a little when vaccines became widely available in the first quarter of 2021, but it never fully recovered.
Frontier held its IPO on April 1, 2021, and it is down more than 40 percent since it started public trading. On February 7, 2022, Frontier and Spirit announced a merger that would make the combined airline the fifth-largest carrier in the United States. The new company would control 8.2 percent of the US market, with American Airlines, Southwest, Delta, and United still in the top four positions.
Frontier and Spirit were poised to move forward with the merger when something unexpected happened. On April 5, 2022, JetBlue made an unsolicited offer to buy Spirit for considerably more than Frontier’s proposal.
That set off a chaotic chain of events that is still unresolved. While Spirit’s leadership is fully committed to the Frontier deal, shareholders aren’t convinced. The shareholder vote has been delayed several times already, and tensions are high.
Every new development in the unfolding drama sends all three stocks into a frenzy. For the moment, the only winners are Spirit’s shareholders. If either of the deals is completed, Spirit stock will be more valuable.
Frontier’s best and final offer is a combination of cash and stock totaling around $2.4 billion, while JetBlue’s offer is all cash and totals approximately $3.6 billion.
Frontier vs JetBlue: Which Offer Is Best For Spirit?
The battle between Frontier and JetBlue (NASDAQ:JBLU) to acquire Spirit Airlines has investors, analysts, and industry experts on the edge of their seats. In a world where mergers and acquisitions are generally tedious and dull, this deal has all the drama of a Hollywood production.
Frontier and Spirit are the two biggest players in the ultra-low fare niche. They control 3.3 percent and 4.9 percent of the domestic air travel market, respectively, compared to JetBlue’s 5.3 percent.
Frontier and Spirit are direct competitors, but they have close personal ties. Frontier’s current CEO, Barry Biffle, was Spirit’s Chief Marketing Officer from 2005 to 2013, and the Chairman of Frontier’s Board, William Franke, was Chairman of Spirit’s Board from 2006 to 2013. Both joined Frontier very shortly after leaving their positions with Spirit.
JetBlue insisted that Spirit’s refusal to entertain JetBlue’s offer reflects the close ties between the companies and not the best interests of Spirit’s shareholders. After all, JetBlue’s proposal is $1 billion higher than Frontier’s, and it is all cash, which most shareholders consider an advantage.
Furthermore, JetBlue added a clause that rewards Spirit shareholders with a $400 million “breakup fee” if regulators stop the merger. Frontier’s offer has a similar clause, but it totals just $350 million in shareholder compensation.
Spirit’s leadership stated that a merger with JetBlue is out of the question because regulators will not permit a deal between the two due to antitrust concerns. JetBlue said a merger between Spirit and Frontier would bring just as many regulatory challenges.
Antitrust expert Hayley Berg agreed that either merger would catch the attention of regulators. Berg suggested that the combination of Spirit and Frontier could be more problematic than a Spirit/JetBlue merger.
Berg noted that only 16 percent of current JetBlue and Spirit routes overlap, so there would be no loss of competition in the remaining 84 percent. Berg pointed out that in a merger between Frontier and Spirit:
Sixty-five percent of the added network capacity would be incremental to Frontier’s current domestic service. With about one-third of Frontier and Spirit’s networks overlapping, there is some risk that these duplicative routes would suffer from reduced competition in the event of a merger.
Politicians have expressed concerns about both options, and either deal would likely be a tough sell on the regulatory front.
Spirit has delayed the shareholder vote on the Frontier plan four times because it appears that shareholders do not support the move. They prefer the more lucrative offer from JetBlue. Spirit leadership said the company would remain a standalone business if the Frontier deal doesn’t go through. However, it’s possible that JetBlue could still be successful with a hostile takeover.
Spirit Airlines vs. JetBlue Stock: Which Is Best?
There are too many variables to determine which airline stock will be the long-term winner when it comes to JetBlue vs. Spirit stock. At the moment, Spirit stock doesn’t reflect the full value of the Frontier proposal or the JetBlue proposal because it is unclear whether Spirit’s board and its shareholders will accept either transaction.
If an agreement is finalized, regulatory agencies will take a hard look at the impact of the combined company to determine whether there are violations of antitrust laws. Ultimately, the deal could be scrapped by the Federal Trade Commission (FTC), even if both companies are ready to move forward.
As the process plays out, Frontier stock, Spirit stock, and JetBlue stock will likely see ups and downs along the way. A successful merger will create substantial returns for Spirit shareholders, but if the deal fails, Spirit stock will drop.
Investors who prefer stability should stay away from all three of these airline stocks for the foreseeable future. Those who are comfortable with the uncertainty that is certain to be a constant theme in the coming months can accept the risk and gamble on Spirit stock. In either case, JetBlue stock is unlikely to see strong returns. Frontier stock, Southwest stock, and Delta stock are all better options for those that want to add airlines to their portfolios.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.