Why JetBlue is willing to spend $ 3.6 billion on discount airline spirits

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

Pablo Manslev | Getty Images

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

The bid, which Spirit called “unsolicited”, cast doubt on the latter’s planned tie-up with Frontier Airlines. Spirit shares rose more than 22% on Tuesday after news of the offer broke, but fell 3% in premarket trading on Wednesday. JetBlue was down 4% while Frontier was down 3%.

Frontier and Spirit have similar business models: low fares, onboard services and fees for everything from hand luggage to seat selection.

JetBlue, on the other hand, has spent years developing its Mint Business Class service, which includes lie-flat beds and full meals. On the same day it announced its surprise bid for Spirit, JetBlue also announced the start date of its first flight from Boston to London.

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

This will allow JetBlue to rapidly increase its fleet thanks to a large Airbus orderbook that has increased its major numbers in both carriers as well, especially pilots. JetBlu CEO Robin Hayes said in a call with analysts on Wednesday morning that he expects the pilot shortage in the United States to continue for several years.

JetBlue did not disclose how much it would cost to reconfigure Spirit’s Airbus planes to match the JetBlue interiors, which have inflight entertainment like a seatback screen low seat, but the carrier said it would be a “multi-year” capital expense.

The airline’s bid for Spirit has confused some analysts.

UBS called it a “headscratcher”.

“What are you waiting for?” Ask MKM partners.

Bank of America says both JetBlue and Spirit have Airbus planes “We strive to find additional benefits for JBLU.”

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

Raymond James Savanthi Seth writes, “The process could scatter or possibly confuse current initiatives, especially the Northeast alliance with the United States.” Also, the prospect of higher debt, even if managed, could affect investor sentiment.

The Biden administration is investigating the merger and other alliances.

The Biden administration sued last year to block JetBlue’s partnership with American Airlines, which allows airlines to adjust routes to the New York City area and Boston airports.

Asked if JetBlue would leave the alliance to get a deal with Spirit through regulators, JetBlu CEO Hayes said in an analyst call that the deal was “complementary” to his partnership with American Airlines.

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