Spirit Airlines Inc.’s decision to stick with the plan to merge with Frontier Group Holdings Inc. was welcomed by Wall Street analysts on Monday, as they reiterated concerns about regulatory risk if the ultra low-cost air carrier were to accept JetBlue Airways Corp.’s offer.
Immediately after the news, JetBlue kept its all-cash offer at $33 a share but sweetened the deal somewhat, committing to any needed divestitures and other enticements, and insisted that the deal is both of “superior financial value and greater certainty than the Frontier transaction.”
Investors appeared to support the idea that the merger wouldn’t be good for JetBlue: in a sea of red in airline stocks, which tracked weakness in the broader market, shares of JetBlue were nearly 1% higher in midday trading Monday.
The “momentum for Spirit’s board was with the Frontier transaction,” said Raymond James analyst Savanthi Syth. Spirit shunned “the blue bird in the hand, for a green one in the bush,” Syth said.
The surprise, however, was that Spirit did not use JetBlue’s offer to improve the deal with Frontier, Syth said in a note.
As Spirit shares were trading about 5% above the implied Frontier offer and 28% below JetBlue’s, “this appears to be largely consistent with the market’s view,” Syth said.
JetBlue attempted “to make the case that the regulatory hurdle for approval is not significantly different and that the financial projections underpinning the transaction with Frontier are based on unrealistically optimistic assumptions,” the analyst said.
JetBlue made its surprise offer for Spirit in early April, with Spirit and Frontier announcing their plan to merge in February.
From the start, Wall Street zeroed in on the greater execution risk that a JetBlue-Spirit deal would carry, and also questioned JetBlue’s assertions that the deal would lead to lower fares.
“JetBlue’s increased efforts to participate in M&A likely look a little surprising to industry observers,” considering that it is already a co-defendant in a Justice Department’s lawsuit related to its alliance with American Airlines Group Inc.
said Stephen Trent with Citi.
“Moreover, there seems to be a lack of clarity on how JetBlue’s M&A plans would actually benefit the consumer,” Trent said in his note.
JetBlue operates more than one aircraft type, serves major airports, and offers on-board amenities such as free live television and free snacks, and even keeps a business-class service with lie-flat seating, Trent said.
“As such, it seems hard to argue that JetBlue is ultra-low-cost, let alone a discount carrier,” the analyst said.
It’d be also hard to argue that JetBlue acquiring an ultra-low-cost-carrier such as Spirit “would somehow reduce fares for consumers, unless of course the carrier plans no adjustments to the target company’s business model.”
Although it is possible that legacy carriers “could reduce some fares in response to JetBlue’s potential expansion, this comment does not seem to consider the potential disappearance of ULCC-oriented fares,” Trent said.
For American, JetBlue’s pursuit of Spirit might be “an unwanted distraction” from the alliance it is trying to forge with JetBlue. The efforts could also “amplify” antitrust concerns coming from United Airlines Holdings Inc.
and Delta Air Lines Inc.