How JetBlue prevailed in the battle with Frontier for Spirit Airlines

How JetBlue prevailed in the battle with Frontier for Spirit Airlines

At the end of June his defense began to crumble. Ted Christie, Spirit’s chief executive, and Mac Gardner, its chairman, flew to New York during the first week of July to meet their colleagues at JetBlue at a hotel near John F. Kennedy International Airport.

According to people familiar with the matter, they met in person with JetBlue Chief Executive Robin Hayes and Chairman Peter Boneparth for the first time since JetBlue made a higher offer for Spirit. The aim was to set the tone in a bitter public hearing.

Three weeks later, the companies announced that JetBlue would buy Spirit in a $3.8 billion deal, creating the fifth largest US airline. Airline executives who have spent nearly four months as staunch opponents are now uniting to convince US antitrust authorities to allow them to merge.

How JetBlue prevailed in the battle with Frontier for Spirit

Some have questioned the fit between Spirit’s no-frills offerings and JetBlue’s amenities.

Photo: David Paul Morris/Bloomberg News

“Much has been said, but business is business,” Mr Christie said in an interview after the new deal was made public.

The deal — years in the making for JetBlue — is expected to bring the airline closer to the challenge faced by the big four U.S. carriers, which control about 80% of the domestic market. Without a merger partner, JetBlue could eventually become a takeover target, according to analysts.

Nevertheless, the combination faces hurdles. Many analysts and industry watchers doubt regulators will approve the deal, and some have questioned the fit between JetBlue’s service — known for convenience and lower fares — and Spirit’s no-frills offering.

“It’s like Nordstrom buying the Dollar Store,” said David Siegel, a longtime airline executive who once served as chief executive of Frontier and is chairman of another low-cost airline. JetBlue and Spirit have “completely different products, customers and cultures,” he said.

Spirit shareholders resisted the airline’s view that the merger with Frontier was a better deal despite the lower price.

1659309485 746 How JetBlue prevailed in the battle with Frontier for Spirit

Amid the Covid-19 pandemic, airlines turned their attention inward to shore up their balance sheets.

Photo: SHANNON STAPLETON/Portal

Mr. Christie said in May that JetBlue’s cash offer was a cynical attempt to keep Spirit and Frontier from becoming a more formidable enemy. As late as June, he was still arguing that a deal with JetBlue would almost certainly be blocked by regulators, resulting in “two years of strategic abyss” for Spirit.

Frontier sweetened its bid in hopes of garnering shareholder support ahead of the shareholder vote, throwing in more money, raising the breakup fee it would pay if regulators blocked the deal, and promising to pay a portion of the price right away to be paid after shareholders approved the deal.

JetBlue quickly countered with a higher breakup fee, higher upfront payment, and the addition of a ticking dividend-like payment starting next year to address uncertainty about how long it might take to close a deal.

Investors preferred JetBlue’s cash to Spirit’s arguments. As votes came in ahead of the June 30 shareholder meeting, it became clear that the frontier deal was on the brink of failure. Even traditional money managers like BlackRock and Fidelity voted against the merger, some of the people said.

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Spirit postponed the shareholders’ meeting — the second such delay — to regroup.

Those in charge gradually realized that they were no longer faced with a choice of being acquired by JetBlue or Frontier, but between a deal with JetBlue or no deal at all, and formed one with his advisors, some of the people familiar with the matter said new plan.

Spirit continued to push for the frontier deal, but talks with JetBlue were also moving forward, and Spirit postponed the shareholders’ meeting twice more to speak with prospects and investors. Frontier Chief Executive Barry Biffle wrote to Spirit on July 10 that Frontier had made its best and final offer, solidifying the new phase of the deliberations.

“Ultimately, we were not headed for shareholder approval for the Frontier merger,” Mr. Christie told Spirit employees in a message Thursday. Mr. Christie said he was trying to get the best deal for Spirit and its shareholders and that the final agreement was better than what JetBlue originally offered, with more protection.

1659309486 811 How JetBlue prevailed in the battle with Frontier for Spirit

JetBlue CEO Robin Hayes said the proposed merger may address some concerns about a lack of competition in the industry.

Photo: Hollie Adams/Bloomberg News

The deal price has not changed since JetBlue offered it in late June, but recent discussions have focused on how the two airlines would work while the deal is under review, safeguards should it be blocked and formalizing the pledge of JetBlue says Spirit employees can stay in Florida, people said. JetBlue and Spirit reached a final agreement after Spirit and Frontier ended their merger on July 27th.

JetBlue agreed to pay Spirit an additional $70 million if regulators block the deal, in addition to the already offered $400 million exit fee for Spirit shareholders.

While industry watchers had been anticipating a deal between Frontier and Spirit for years, JetBlue had also had its eye on the Florida-based discounter.

New York-based JetBlue missed a chance to buy Virgin America after losing a bid war against Alaska Air Group Inc. in 2016.

In early 2020, JetBlue’s board of directors held extensive discussions about the prospect of purchasing Spirit, and by February 2020, JetBlue was poised to approach Spirit about a possible deal, according to people familiar with the matter. The Covid-19 pandemic had previously turned the industry upside down. Airlines quickly turned their attention inward to shore up their balance sheets to weather the steep downturn.

1659309487 390 How JetBlue prevailed in the battle with Frontier for Spirit

Customers check in for a Spirit flight in Oakland, California.

Photo: Justin Sullivan/Getty Images

When Spirit and Frontier announced plans for a $2.9 billion merger in February, Mr. Hayes knew he had to act fast. He called counselors that day, one of the people said.

JetBlue consultants worked on a number of questions. Did Frontier have enough money to withstand a bidding war? Would the Northeast Alliance, JetBlue’s partnership with American Airlines Group Inc., be a hindrance? This order has already been challenged by the Justice Department.

The JetBlue team concluded that a run at Spirit could work. By agreeing to a Frontier acquisition, Spirit’s board has signaled that it’s up for sale and may be open to a better offer, they argued.

Spirit’s investor base was heavily biased toward individual investors, which JetBlue’s team believe could make it difficult for Spirit to find enough support to win a contested vote. And even when the Justice Department questioned JetBlue’s alliance with American, it touted JetBlue as a disruptive competitor.

Mark Ahasic, an aviation consultant and former JetBlue executive, said buying Spirit will give JetBlue the weight it needs to become more relevant in places like the center of the country where it doesn’t offer enough flights to pose a threat to larger airlines . “I think JetBlue really needs to grow to be more of a national player,” he said.

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JetBlue’s Mr. Hayes said Spirit’s pilots, fleet and order book for new aircraft are a big part of the airline’s appeal and are accelerating expansion that it would otherwise take JetBlue years to achieve.

JetBlue executives have said the two airlines have more in common than meets the eye. JetBlue has said it lowers fares as it enters new markets and offers a base product aimed at the most budget-conscious travelers, like Spirit’s customers.

The airlines are likely to face intense scrutiny from the Justice Department, which has for years worried that airline competition is waning and has been criticized by consumer groups and antitrust advocates for allowing so many combinations.

Mr Hayes said a merger between JetBlue and Spirit could alleviate some concerns about a lack of competition in the airline industry. “We believe that the approval of this transaction will increase competition much more,” he said last week.

Gordon Bethune, former Continental Airlines chief executive, said a larger JetBlue would provide more effective scrutiny for the big airlines that dominate the industry.

“If we combine Frontier and Spirit, we’ll just have one big low-cost airline,” he said. “The best thing for the consumer in the United States would be a boost in JetBlue.”

write to Alison Sider at [email protected]

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