JetBlue agrees to buy Spirit for $7.6bn

US low-cost carrier JetBlue Airlines emerged victorious in the fight to acquire Spirit Airlines as the companies’ boards announced a definitive merger agreement that would make their combined networks the fifth-largest airline in the US.

New York-based JetBlue will buy Florida-based Spirit for $3.8bn, or $33.50 a share, after Spirit’s deal with preferred merger partner Frontier Airlines, a fellow ultra low-cost carrier, fell apart on Wednesday. The adjusted enterprise value for Spirit was $7.6bn.

The deal included a prepayment of $2.50 a share, payable in cash to Spirit shareholders upon their approval of the merger. Depending on the timing, the total paid per share could go up to $34.15.

With its acquisition, JetBlue aims to take on the US airline industry’s so-called Big Four: American, United, Delta and Southwest. The transaction, however, is expected to face antitrust scrutiny as US competition watchdogs have been critical of airlines’ abuse of market dominance.

JetBlue chief executive Robin Hayes said the merged airline could be a solution to the lack of competition in the US airline industry and the dominance of the Big Four. “By enabling JetBlue to grow faster, we can go head-to-head with the legacies in more places to lower fares and improve service for everyone,” he claimed.

As part of the agreement, JetBlue has agreed, from January, to start paying Spirit shareholders an extra 10 cents a share fee every month. This “ticking fee” was added to mitigate the risk that the deal will be held up by regulators over antitrust concerns.

Lina Khan, chair of the Federal Trade Commission, wrote in 2015 that consolidation in the airline industry negatively affected the quality of services and, because of too much dealmaking in the sector, “the situation . . . bears classic signs of oligopoly.”

JetBlue said its combination with Spirit would only give the combined company control of about 9 per cent of the market. The Big Four account for about 80 per cent of the market. The company said its combination would create a realistic challenger to the more established airlines creating the “best opportunity to disrupt legacy carrier pricing”.

One of the hurdles to the deal’s approval is JetBlue’s existing partnership with American Airlines, known as the Northeast Alliance. JetBlue is already in the crosshairs of the US Department of Justice, which filed an antitrust suit last year against it and American Airlines, the US’s largest carrier, over the alliance. The NEA is a code sharing partnership in New York and Boston that provides reciprocal frequent flyer benefits.

Regulatory approval in such a consolidated industry could hinge on dismantling the NEA, though Hayes said he stressed to American JetBlue’s commitment to the alliance. The DoJ has already expressed concern to JetBlue over how much of its network is concentrated in the NEA markets.

JetBlue made a failed bid for Virgin America, which was ultimately bought by Alaska Airlines for $4bn in 2016, in the most recent airline merger greenlit by the DoJ.

The acquisition would allow JetBlue to expand more easily out of the north-east, its primary operational region, by increasing its relevance in “certain key focus cities” of Fort Lauderdale, Orlando, San Juan and Los Angeles, and encroach on Big Four hubs such as Chicago, Dallas, Atlanta, and Miami.

JetBlue projected that the combined carrier would bring in around $11.9bn in revenues, based on 2019 levels. It said the completed merger would add $600mn to $700mn in “net annual synergies” based on expanded customer offerings provided by the larger network. The airlines have a combined customer base of 77mn, JetBlue said.

Frontier moved to buy Spirit in February for $2.9bn, but JetBlue swept in with a better offer in April, at a roughly 40 per cent premium. A bidding war ensued for months. Spirit fended off JetBlue multiple times, even as its would-be partner sweetened its offer, as it was “still lovestruck over Frontier,” Raymond James analysts quipped.

While analysts considered the JetBlue-Spirit merger as more beneficial to the industry, the Frontier-Spirit deal was thought as having an easier path to regulatory approval.

But following a shareholder meeting on Wednesday, the Spirit-Frontier agreement was terminated, which left Spirit “disappointed,” said Spirit chief executive Ted Christie.