A US federal judge has blocked JetBlue Airways from acquiring budget carrier Spirit Airlines, concluding that the merger – first announced in July 2022 - would substantially damage competition.
Following four weeks of testimony and three weeks of consideration, the US District Court for the District of Massachusetts found the proposed $3.8bn acquisition of Spirit to be unlawful as it “does violence to the core principle of antitrust law: to protect the United States’ markets – and its market participants – from anticompetitive harm”.
Principal Deputy Assistant Attorney General Doha Mekki of the Justice Department’s Antitrust Division believes the ruling “reaffirms that the antitrust laws vindicate the economic liberty of the American people”, with concerns that the merger would have resulted in higher prices for passengers.
In a joint statement, both JetBlue and Spirit voiced their disagreement with the ruling, believing their combination to be “the best opportunity to increase much needed competition and choice”. Additionally, “JetBlue’s termination of the Northeast Alliance and commitment to significant divestitures have removed any reasonable anti-competitive concerns that the Department of Justice raised,” added the airlines.
Analysts from JP Morgan highlight the outcome as representing “the cleanest possible outcome for equity holders,” freeing JetBlue from a costly merger they believe “management and the Board were no longer wed to”. With Spirit able to focus on the (albeit difficult) path back to profitability, “we expect the market to increasingly focus on Spirit liquidity, following its successful sale-leaseback [raising $419 million in cash] earlier this month,” note the analysts.
However, recognising that they can “not reasonably identify a viable return to profitability any time soon,” JP Morgan experts continue that Frontier “would be better served to re-engage with Spirit through a bankruptcy process if one materializes”. They also believe that it would be difficult to envision a “strenuous, winning appeal being waged by JetBlue”.
With a surplus of capacity coming into the US domestic market in the second half of 2023, pricing is already feeling the pressure. Despite the industry rationalising capacity, experts believe demand in Q1 will be flat to down with Q1 2023.
TD Cowen analysts also believe that although Spirit may look for another buyer (noting that Frontier may step forward), a Chapter 11 filing and subsequent liquidation process is the more likely option and the “best case scenario” for Spirit. “We may see some shocking prices on major Spirit routes as the carrier tries to bring as much cash in the door as possible,” adds TD Cowen.
Given the elevated demand for narrowbody aircraft (particularly given ongoing issues with the Boeing MAX), lessors would be more likely to repossess aircraft than renegotiate leases, concluded TD Cowen; adding that “JetBlue could lease in Spirit’s aircraft from lessors during the company’s likely restructuring”.
The airlines state that they are “reviewing the court’s decision and are evaluating [their] next steps as part of the legal process”. However, one thing remains certain: Joanna Geraghty, who will succeed Robin Hayes as JetBlue’s chief executive officer from February 12, is certainly going to have a challenging landscape ahead of her.