JetBlue and Spirit Investors React Differently to Merger Denial

On Tuesday, a U.S. District Court judge in Massachusetts thwarted a $3.8 billion bid by JetBlue Airways (NASDAQ:JBLU) to acquire its rival, Spirit Airlines (NYSE:SAVE). In fact, investors in these two airlines had very different reactions to the news.

The court deemed JetBlue’s proposed takeover unlawful under the Clayton Act, stating that it violated antitrust laws. Judge William Young wrote that while the merger of JetBlue and Spirit would likely put stronger competitive pressure on the larger airlines, consumers that depend on Spirit’s low-price model would likely be harmed.

“Summing it up, if JetBlue were permitted to gobble up Spirit — at least as proposed — it would eliminate one of the airline industry’s few primary competitors that provides unique innovation and price discipline,” the judge’s order stated. “It would further consolidate an oligopoly by immediately doubling JetBlue’s stakeholder size in the industry. Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier. While it is understandable that JetBlue seeks inorganic growth through acquisition of aircraft that would eliminate one of its primary competitors, the proposed acquisition, in this Court’s attempt to predict the future in murky times, does violence to the core principle of antitrust law: to protect the United States’ markets — and its market participants — from anticompetitive harm.”

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United States v. JetBlue Airways Corporation (2024)

After the decision, Spirit’s stock price tanked, dropping a massive 47% on the day from about $15 per share to $7.92 in early-morning trading on Wednesday.

However, JetBlue investors were pleased with the decision, sending the airline’s stock price up nearly 5% to $5.12 per share.

Losing Spirit

JetBlue is the sixth-largest airline in the U.S., while Spirit is the seventh-largest. A merger between the two low-cost carriers would have created the fifth-largest airline with about a 10% market share. JetBlue had argued that it would put more competitive pressure on the big four U.S. airlines.

Among other things, the benefit of the merger for JetBlue was to accelerate its growth by acquiring Spirit’s fleet at a time when more planes are needed to meet demand. The benefit for Spirit was financial, as the company has been unprofitable since the pandemic and has had to scale back on routes. In the third quarter, it recorded a net loss of $158 million and elected not to even have an earnings call.

Thus, Spirit investors clearly saw the merger as a financial lifeline for the company, but now that it has been cut, the outlook for the company is murky at best. The companies said in a joint statement that they would review the decision and decide next steps. An appeal is possible, but some analysts believe it is not likely as it would take time and probably not result in a win.

The more likely scenario for Spirit would be to find another merger partner. Spirit had been in talks with Frontier (NASDAQ:ULCC) before JetBlue stepped in, so it is possible they could restart talks. Incidentally as part of the negotiations with Spirit, JetBlue had offered to pay Spirit $400 million if the deal didn’t go through, so it should get something out of it.

However, failing that, the outlook for Spirit is not great. It is dealing with an increase in competition for leisure travelers, rising costs and the need for more planes to handle the growing leisure demand, as it was hit the hardest by the recall of the faulty Pratt & Whitney engines over the summer.

In a research note reviewed by Flight Global, TD Cowen analyst Helene Becker said a potential scenario for Spirit is Chapter 11 bankruptcy. The company is due to release its fourth-quarter earnings on Feb. 6, so stay tuned for that release for more visibility. However, this is a stock to avoid, at least for now.

What’s next for JetBlue?

JetBlue investors were happy with the judge’s decision, although the reasons are not entirely apparent. However, one reason may be that Spirit wasn’t going to solve its problems. Instead, it could be creating more problems, as JetBlue was seen by many investors as overpaying for a struggling airline that had been losing money for years.

The idea was to accelerate its growth in a market where that is hard to do, but in the end, the judge’s decision could be a blessing in disguise for JetBlue.

The airline is slated to report its Q4 earnings on Jan. 25. Interested investors should watch closely for what JetBlue will do next, particularly since the company has a new CEO, Joanna Geraghty, starting on Feb. 12. Geraghty, the current president and chief operating officer, replaces Robin Hayes.

Like Spirit, this is not a stock to pursue right now, but maybe the earnings call will shed some more light one way or the other.