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After a federal judge blocked JetBlue’s $3.8 billion merger with Spirit Airlines over competition concerns, could Spirit be toast as a result?
Spirit Airlines faces a tough financial road now that the company’s $3.8 billion merger with JetBlue has been scrapped, according to a Northeastern airlines expert.
The airlines announced on Monday that they were calling it quits on the deal. The news comes a little over a month after a federal judge sided with the U.S. Department of Justice and blocked the $3.8 billion merger over competition concerns.
JetBlue and Spirit said there were too many regulatory and legal challenges to close the acquisition, but asserted the merger would have challenged the dominance of the four major airlines in the U.S. — American, Delta, United, and Southwest.
JetBlue will pay Spirit a $69 million termination fee, but the low-cost airline company still faces financial difficulty and could go bankrupt, explains Ravi Sarathy, a Northeastern professor of international business and strategy.
That could mean less options for travelers looking to save on airplane tickets.
“If Spirit goes bankrupt, that option is reduced,” he says. “You’ll only have Frontier Airlines, and some of the big airlines and their back-of-the-aircraft seats, which may not be as cheap as what Spirit was offering. So, that’s the really big thing.”
JetBlue announced it was going to buy Spirit Airlines in July 2022 for $3.8 billion in an attempt to become the fifth-largest airline in the United States. The Department of Justice officially filed an antitrust lawsuit to block the acquisition in March 2023.
“We believed this merger was worth pursuing because it would have unleashed a national low-fare, high-value competitor to the Big Four airlines,” Joanna Geraghty, JetBlue’s chief executive officer, said in a statement. “We are proud of the work we did with Spirit to lay out a vision to challenge the status quo, but given the hurdles to closing that remain, we decided together that both airlines’ interests are better served by moving forward independently. We wish the very best going forward to the entire Spirit team.”
Northeastern Global News caught up with Sarathy to get his thoughts on the news. This interview has been edited for clarity.
Number one, clearly the Big Four benefit, because JetBlue is weak compared to the Big Four. If JetBlue and Spirit had been allowed to merge, they’d have become number five. And they’d have become a reasonable-sized airline, almost 8 to 9% of the total capacity of the industry. Right now, JetBlue is only about 4 to 5%. So, for the Big Four, not allowing this merger means they don’t have to worry about a competitor getting stronger.
Second, if you’ve flown on a plane recently, all the big guys, they all have different classes of seats. They got first class. They got business class, some kind of economy plus. And then they have lots of seats in the back that are relatively low cost, and those are the ones that are very much like a Spirit or low-cost airline.
Those are no-frill seats, and you pay for everything extra. If you don’t want a middle seat, you pay more. If you want to board early, you pay more. Everything is a la carte, very much like Spirit prices. The big airlines have started offering a portion of their pricing to meet that market. And if JetBlue is no longer merging, they won’t have as much ability to compete with them and offer low-cost seats.
Third, Spirit is not in great financial shape. Spirit has been losing money. They’ve lost a half-billion dollars in the last year or so. They are heavily in debt. I have some information of their balance sheet, and if you look at their balance sheet at the end of December 2023, they had a long-term debt of $3.3 billion, about $316 million was due in the short term within the year. Their shareholder equity was only $1.1 billion. In other words, they had three times as much debt as equity. … Interest expenses were about $50 million a quarter, so when you add it all up in terms of cash flow, they had negative cash flow. So you have a situation where they need to sell around $1.5 billion of seats revenue per quarter, they’re only making around $1.4 billion.
The merger with JetBlue would have given them a better balance sheet. They would have a little bit more breathing room because JetBlue was not as leveraged.
So, I think that’s going to be an issue. How is Spirit going to meet its debt commitment, and pay for the new planes it’s ordered?
If you are looking for a low-cost airline, your worry is that Spirit may have to raise prices in order to break even. Right now, it’s losing money. So, the low costs won’t be as low as before.
The other is that some of the routes may disappear. What I mean is that if Spirit has to cut back because of bankruptcy, they may have to close some of their routes. And so whenever they close routes, there is less competition for low fares. And in those routes, those fares could go up.
Third, JetBlue may not feel the need to cut its fares because remember, [they said], “The idea is that we will join hands with Spirit, and we will essentially have two brands.”
Car companies have a premium brand and then they have a lower-price brand. Similarly, JetBlue and Spirit might have two kinds of brands, and JetBlue may no longer be able to offer a lower-cost alternative.
There’s a theory in antitrust about contestable markets. The theory is that as long as somebody can compete in your market, that’s important for the consumer. The problem with airlines is that it’s not an easily contestable market; there’s too many barriers to entry. You need planes, which are expensive. There’s a pilot shortage. There’s a slot shortage at airports, etc. It’s also regulated. You need to get FAA certification.
It’s not as easy as saying, “I’m going to start an airline tomorrow.” … It takes time. You need permission, a slot at the airport, you need aircrafts, you need pilots, crew etc. So it’s not easy to contest.
So in that sense, I think the Justice Department has said, “It’s not a contestable market, and what JetBlue and Spirit are doing is reducing the level of competition, and so we are on the side of the consumer.”
But if Spirit goes bankrupt, I’m not sure how the consumer ultimately will come out ahead. So, the challenge becomes how should Spirit’s financial difficulties have shaped that decision?
But the law looks as the law as written in the books and precedent. And on that basis, I think the Justice Department wasn’t concerned about the potential that Spirit has to declare bankruptcy. It was simply that if Spirit merges with JetBlue, then what happens to the consumer.