Failed JetBlue purchase leaves Spirit Airlines with difficult path ahead

Spiritual airlines is on unsteady footing after JetBlue AirwaysThe budget airline's proposed $3.8 billion acquisition was blocked this week by a federal judge.

Industry observers say the airline could be forced to further reduce its already low fares. Some Wall Street analysts argue that the discount company may have to restructure, if not liquidate.

Spirit shares fell 47% after the decision was issued Tuesday. They fell another 22% on Wednesday, hitting a new all-time low of $5.74 per share, before recovering slightly.

Spirit, whose last profitable year was 2019, had challenges even before the ruling: It is navigating the grounding of some narrow-body Airbus planes by Pratt and Whitney engine problems and faces weaker-than-expected demand in the wake of the pandemic, along with higher costs.

The airline could look for another buyer, “but a more likely scenario is a Chapter 11 filing, followed by liquidation,” Helane Becker, an airline analyst at TD Cowen, said in a note. “We recognize that this sounds alarmist and harsh, but the reality is that we believe there are limited scenarios that allow Spirit to restructure.”

A possible bankruptcy could force the airline, known for its low fares and fees for everything else, such as seat selection and carry-on luggage, to cut fares even further.

“We may see some price shocks on Spirit's major routes as the airline tries to bring in as much cash as possible,” Becker wrote.

Spirit and other airlines have been grappling with higher employee salaries and other costs, while an increase in domestic flight capacity has forced them to cut fares, particularly in off-peak periods. That dynamic might be good in the short term for consumers, but not for airlines that require large amounts of cash to operate.

“Weakening demand and rising costs are putting pressure on both sides,” said Samuel Engel, a professor at Boston University's Questrom School of Business and senior vice president at consulting firm ICF. “It's going to start reducing rates.”

In his ruling blocking JetBlue's acquisition of Spirit, Judge William Young, appointed by former President Ronald Reagan, said the combination would eliminate the discount airline famous for its rock-bottom fares and bright yellow planes. harming the most price-conscious consumers.

JetBlue planned to remove seats from Spirit planes and rebrand them as its own, which have more amenities and legroom.

JetBlue, facing a quarter-life crisis as it approaches its 25th year of flying, argued it needed Spirit's fleet, pilots and routes to grow and better compete with larger rivals. American, Delta, United and South west.

Those four airlines together control about 80% of the US domestic market and are themselves the result of years of megamergers approved by former regulators.

“I don't see how consolidating the oligopoly of the big four airlines will benefit consumers,” Engel said. “Organic [airline] Growth in this country is laborious and slow. “If mergers between second-tier airlines are prohibited, the big four will be consolidated.”

Engel noted that JetBlue itself has had a big impact on larger airlines, forcing them to revamp their premium cabins after it launched its lower-priced Mint cabin about a decade ago, and offering seat-back entertainment before that. .

JetBlue and Spirit said in a joint statement Tuesday that they disagree with the judge's ruling and are evaluating their options.

““We continue to believe that our combination is the best opportunity to increase much-needed competition and choice by offering low fares and excellent service to more customers in more markets, while improving our ability to compete with dominant US airlines,” the airlines said after the ruling.

JetBlue and Spirit did not respond to a request for comment Wednesday about their future plans.

Incoming JetBlue CEO Joanna Geraghty will be tasked with ensuring JetBlue returns to profitability and charting a growth path for the New York airline. The airline operates in the country's most congested airspace and airports, making adding flights a challenge.

The airline swooped in with a hostile takeover bid on Spirit in April 2022, weeks after Spirit announced a merger deal with another low-cost carrier. Border Airlines. Spirit shareholders ultimately rejected Frontier's cash-and-stock deal and opted for JetBlue's increasingly sweetened, all-cash offer of $3.8 billion.

Engel said a combination of Frontier and Spirit might have been easier to approve.

“If JetBlue had not been involved in this process, a Frontier-Spirit merger may have already occurred,” he said.