Passengers know it is risky to take money from an airline to skip an overbooked flight. The next departure could be delayed or cancelled. The intervention of JetBlue in the merger of Frontier Airlines and Spirit Airlines confronts shareholders of the latter with the same dilemma.
In February, Spirit agreed to merge with Frontier in a deal paid for mainly with shares of its rival. Airline consolidation is largely verboten in the US. But the two so-called “ultra-low cost carriers” believed their combination would prove a formidable counterweight to the likes of Delta and American.
Late on Tuesday, JetBlue jumped into the fray offering a big premium in cash to Spirit shareholders that valued the business at $7.3bn, including debt.
JetBlue is another challenger to big legacy carriers. But it is not a cut-rate operator like Spirit or Frontier. With few meaningful targets left, JetBlue recognised that Spirit was now in play.
The cash premium makes the interloper bid look tempting. But Washington’s scepticism leaves Spirit’s board and investors guessing what deal would pass regulatory muster.
Frontier’s pitch was that network benefits would send the shares of the combined company higher. A stock-based deal therefore made sense as a way of allowing both sets of shareholders to share in hoped-for upside.
JetBlue claims big network advantages too. However, by taking cash upfront, Spirit shareholders would avoid execution risk. The JetBlue cash bid for Spirit is more than 40 per cent greater than the implied Frontier transaction, though this partly reflects a fall of a tenth in Frontier shares on Wednesday.
The premium only matters if JetBlue can close the acquisition. The New York based carrier said it was “highly confident” the deal would not be blocked. It has promised to pay a big break-up fee if it proves wrong.
Expect Frontier to argue loudly that because JetBlue is the biggest participant in this love triangle, it faces longer odds in defeating regulators.
That makes a lot of sense. However, antitrust regulators, who are increasingly twitchy about airlines, could easily leave both deals grounded.