On June 2nd, Spirit Airlines (SAVE) announced a $6.6 billion dollar merger with low fare carrier Frontier. This merger will make the company the 5th largest airline in the United States. Originally, the companies had scheduled a meeting to discuss business plans on June 30th. However, with major air carrier, JetBlue, jumping into this deal with revised offers over the course of April through June, today’s delayed vote only sparks a larger flame in this heated fight over Spirit Airlines. The vote for Spirit Airlines is now scheduled for July 8th, with this decision coming only hours prior to today’s scheduled meeting.
This news came only after the airlines had been under fire from President Joe Biden who had “sued American Airlines (AAL) and JetBlue Airways over their partnership in the Northeast”. Biden had mentioned that the two companies had created a partnership in order to reduce competition and increase flight costs. Spirit Airlines denied this and explained that the merger was to “combat other large air carriers and address travel problems in congested areas such as Boston, New York, and Los Angeles”.
With both of these companies now looking for a deal with Spirit Airlines, let’s look at the economics behind this $470 billion dollar industry along with the timeline of events that led up to today’s news.
Growth of Spirit Airlines
Spirit Airlines has been one of the mainstream airlines within the United States. With its headquarters centered in Florida, the company focuses on scheduled flights from the United States to Latin America. Spirit has a market cap of $2.59 billion and grows at a rate of 20% annually. As of June 2022, Spirit serves 57 domestic destinations and 34 international destinations within 18 countries. They view themselves as an “ultra-low-cost carrier” and utilize low fare prices to appeal towards their customers.
Spirits Business Model
Spirit Airlines business model is centralized around a maximum asset utilization strategy. This is primarily done through: single fleet types, high seat density, and route maximization. With a single fleet type, Spirit saves a ton of money on training crew members. It creates a simple system as the crew members do not have to navigate through the hassle of operating different types of plane types and models. The airlines have designed the plane to allow for maximum seating along with an average aircraft utilization rate of 12.7 hours a day. This is substantial for Spirit as the aircrafts represents a large liability for airline companies. The longer these planes sit in the air carrier, the more money these companies are losing.
The graphic above depicts the market split between domestic and international flights. The pie chart shows how Spirit Airlines is centered around domestic flights with lower travel times allowing for more customers onboard.
JetBlue Business Model
Compared to Spirit Airlines and other LCC’s (low-cost carriers), JetBlue utilizes a hybrid business model that prioritizes cheap costs with quality service for longer rides. JetBlue offers both a business class and economy class sections, with long distance rides generating the most revenues. The company serves as an intermediary, acting as both an LLC (low-cost carrier) and HCC (high-cost carrier) depending on the service choice. JetBlue has seamlessly penetrated both of these marketplaces with strong recoveries since the pandemic. Since 2020, JetBlue has gained 5 billion dollars in revenue with consistent YOY (year over year) growth as of December that year. Clearly, JetBlue has distinguished itself as a leader in the airline market space.
The Bidding War
The latest part of this bidding war began, on June 6th, where JetBlue (JBLU) announced a revised deal to Spirit Airlines which gave shareholders $33.50 a share. This was an increase from their initial offer of $31.50 a share. The new deal had also offered a “reverse break-up fee” worth $350 million paid to Spirit Airlines if the deal doesn’t get finalized due to antitrust concerns. These antitrust laws were originally put in place to avoid unlawful mergers that pose a monopoly on a specific market or industry.
About 2 weeks later, on June 24th, Frontier fired back a counteroffer for 4.13$ per stock, and an increased reverse breakup fee of $350 million. This $2.9 billion dollar deal, however, provided Spirit shareholders with a 48.5% stake in the new combined company, whereas JetBlue’s sizable offer at $3.4 billion looks to buyout Spirit Airlines.
With looming concerns of antitrust laws, on June 27th, JetBlue had raised the reverse breakup fees in their deal to $400 million, along with paying $2.50 a share in advance, as a revised offer for Spirit Airlines.
Outlook of the Companies Merging
Compared to both of these airline giants (Spirit and JetBlue), Frontier Airlines is a much smaller company which has a business model that resembles Spirit Airlines. They too identify as an “ultra-low-cost carrier” with cheap tickets to appeal towards their customers. With outlooks on Spirits pending offers it originally seemed that the deal would be closed with Frontier. In fact, Sprint CEO, Ted Christie had mentioned to CNBC how, “the Frontier tie up would be the superior transaction”. Spirit Airlines had also rejected JetBlue’s previous offer, on June 27th, due to the unlikeliness in being passed by regulators.
Although Spirit has declined JetBlue’s previous offers to become the 5th largest airline, today’s delayed vote shows that they are thinking hard about JetBlue’s offer. This points towards the fact that a merger with either one of these companies is a big decision, and one that is definitely not easy to make.
About the author
Vyom writes about economics, finance, and education. He hopes to bring awareness for financial literacy through his posts and inspire other teenagers to take initiative and begin saving their own money! He is currently a rising sophomore at American Heritage, in Plantation Florida.