The vote, which is part of an extraordinary meeting of shareholders, even arrives as a rival JetBlue (JBLU) escalates the drama with Frontier by trying to water down its own last-minute deals for Spirit. Then there are questions about whether regulators, under a more resilient Biden administration, would approve either deal.
“If Spirit shareholders vote against Frontier’s proposal, Spirit’s board will have to reconsider the very clear benefits of our offer,” JetBlue CEO Robin Hayes said in a letter to crew members on Wednesday. .
Airline stock analysts say the friction between the three airlines has little comparison in the modern, already consolidated form of the industry. JetBlue, which some say has limited options for organic growth after an unsuccessful bid for Virgin America several years ago, has accused Spirit’s board of being too closely tied to Frontier’s majority shareholder and “poor corporate governance”. Frontier said JetBlue attacked Spirit’s card with “a tapestry of pejoratives rich in thesaurus.“
“At least certainly in the modern airline industry, it rivals some of the drama you see on ‘Real Housewives’ programs,” said Atmosphere Research Group analyst Henry Harteveldt.
Airline stocks were mixed in the stock market today. Spirit Airlines shares fell 1.8% to 22.41. ULCC stock rose 1% to 9.51. JetBlue climbed 2.6% to 8.96.
Prices go up no matter what
Spirit’s board of directors has given its support to Frontier’s offer. Any deal, if approved, would create a much larger low-cost airline. This airline would likely have more staff, planes and airport slots to compete against the four major US airlines: Delta Airlines (DAL), American airlines (AAL), United Airlines (LAU) and South West (LUV).
A tie-up could bring more of what airline stock investors love. In other words, more restraint on expansion and a playing field with fewer competitors overall.
But the vote comes as airlines face reduced staffing levels, higher fuel costs, flight cancellations and scrutiny from lawmakers. And there are questions about whether either deal would actually lower prices and improve service to consumers.
“No matter who Spirit partners with, airfares will go up,” Harteveldt said. “It’s because once you take two airlines and combine them into one, you just have less direct competition.”
Terms of the offer
Frontier’s most recent offer for Spirit, announced Friday, would give Spirit shareholders $4.13 per share in cash, up $2 from its previous offer, as well as 1.9126 Frontier shares. This equates to $22.27 at Wednesday’s close.
Frontier also increased its breakage fee to $350 million, payable to Spirit “in the unlikely event that the combination is not consummated for antitrust reasons,” Spirit Airlines said in a statement.
Meanwhile, JetBlue on Monday raised its breakage fee to $400 million. The airline also increased its prepayment charge to $2.50 per share, structured as a cash dividend for Spirit shareholders. He said his total offer was “$34.15 per share,” taking into account new monthly per-share payments to shareholders.
Frontier and Spirit first agreed to merge in February. But the drama escalated in April, when JetBlue made its own bid to acquire Spirit. A handful of more juicy deals from JetBlue followed. And while Spirit postponed its special meeting of shareholders until June 30 to receive offers from the two suitors, it ultimately stuck to plans with Frontier.
Spirit argued that regulators are more likely to strike a deal with Frontier, given that the Justice Department has already taken legal action to block a pact in the Northeast between JetBlue and American. The DOJ called this arrangement anti-competitive.
The “JetBlue Effect” on Airline Stocks
JetBlue has agreed to offload certain assets to push the deal through the regulatory process. In April, he described a combination with Spirit as “the most compelling domestic low-cost challenger to the big four dominant US carriers in accelerating JetBlue’s growth and expanding the reach of the ‘JetBlue effect’.”
This effect, JetBlue said, occurred when it entered a new market and forced the big four airlines to lower airfares more than they would when a carrier entered a very low price. JetBlue also argued that a deal with Frontier carries similar regulatory risk.
“Spirit controls many aircraft and has a large team that can be absorbed into JetBlue,” Helane Becker, airline stock analyst at Cowen, said in a brief email. “This solves a shortage of planes and pilots.”
Other airline stock analysts cast further doubt on JetBlue’s bid for Spirit.
“JBLU describes its offering as ‘unambiguously a superior proposition’ to Frontier’s, but we’re not so sure,” CFRA analyst Colin Scarola wrote in a research note this month. “That would certainly be true if the deal was done in a few months. But 18-24 months is a more realistic time frame, and it’s not very clear to us that Spirit can independently meet its financial commitments for that long. “
“Spirit needs near-term relief from its over-indebtedness and over-committed position in flight equipment purchases, in our view,” he added. “JBLU’s offer will not provide that, but Frontier can, in our view, make Spirit shareholders likely to opt for Frontier’s offer.”
Spirit had long-term debt of about $3.2 billion as of March 31.
Legislative scrutiny of airline actions
Still, lawmakers fear a deal between Spirit and Frontier could also drive up prices.
In a march letter at the Justice Department and Transportation Secretary Pete Buttigieg, lawmakers — including the senses. Elizabeth Warren and Bernie Sanders, along with representatives Alexandria Ocasio-Cortez and Rashida Tlaib – said a deal between Spirit and Frontier would drive up rates.
“For decades, the airline industry has been plagued by increasing consolidation, producing massive airline giants while leaving consumers and workers behind,” they said.
Any deal would come as airfares rise and airlines struggle to retain staff – in part due to the pandemic and airline efforts to steer pilots into voluntary departures in 2020. However, the airlines remained optimistic about travel demand.
Some Democratic lawmakers have become more wary.
In a letter to Buttigieg On Tuesday, Sanders cited allegations by the American Airlines pilots union that “airlines are intentionally scheduling flights that they cannot staff due to a shortage of pilots.” Meaning. Edward Markey and Richard Blumenthal, in a separate letter to US airlines Tuesday, claimed that many flight delays this year were “apparently due to circumstances within the control of the airlines.”
More drama among airline stocks could follow tomorrow’s vote.
“If shareholders reject Frontier’s offer, do Spirit sit down with JetBlue tomorrow or shortly thereafter to begin merger discussions, or do they reject JetBlue’s offer?” said Harteveldt. “And does that become, you know, an even more hostile combination proposal?”
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