Why JetBlue is willing to shell out $3.6 billion for discount airline Spirit

View of JetBlue aircraft at Terminal 5 at John F. Kennedy International Airport on May 12, 2020 in New York, NY.

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JetBlue said Wednesday its $3.6 billion cash offer for ultra-low-cost carrier Spirit Airlines would help it expand across the country and better compete with major airlines.

The offer, which Spirit called “unsolicited,” casts doubt on the latter’s proposed tie-up with Frontier Airlines. Shares of Spirit jumped more than 22% on Tuesday after the bid was announced, but were down 3% in premarket trading on Wednesday. JetBlue was down 4% while Frontier was down 3%.

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

JetBlue, on the other hand, has spent years developing its business class Mint service which includes extended beds and full meals. On the same day it announced its surprise offer for Spirit, JetBlue also announced the start dates for its first flights from Boston to London.

But JetBlue is mostly focused on domestic travel. The Spirit deal, if approved by Justice Department antitrust officials, would give JetBlue more breadth and ability to compete with larger carriers, executives said Wednesday.

It would also allow JetBlue to rapidly grow its fleet thanks to a large Airbus order book from both carriers as well as increase its workforce, particularly pilots. JetBlue CEO Robin Hayes said in a call with analysts Wednesday morning that he expects the U.S. pilot shortage to persist for several years.

JetBlue didn’t reveal how much it would cost to reconfigure Spirit’s Airbus planes to match JetBlue interiors, which have in-flight entertainment like seatback screens fewer seats, but the carrier said it will. would act as a “multi-year” capital expenditure.

The airline’s offer for Spirit has puzzled some analysts.

UBS called it a “headache”.

“Wait what?” asked MKM Partners.

Bank of America said that although JetBlue and Spirit have Airbus planes, “we are struggling to find additional benefits for JBLU.”

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

“The process is also likely to distract from or possibly unravel current initiatives, including the Northeast’s alliance with the Americans,” wrote Raymond James Savanthi Syth. “Furthermore, the prospect of high debt, even if manageable, is likely to be an overhang on investor sentiment.”

The Biden administration has looked at mergers and other alliances.

The Biden administration filed a lawsuit last year to block JetBlue’s partnership with American Airlines, which allows airlines to coordinate routes through New York and Boston area airports.

When asked if JetBlue would walk away from that alliance to secure a deal with Spirit through regulators, JetBlue CEO Hayes said on the analyst call that the deal was “complementary” to the partnership with American Airlines.

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