MERGER VOTE AT SPIRIT AIRLINES DELAYED, COULD RESHAPE DISCOUNT AIRLINE MARKET
The prospect of a takeover of Spirit Airlines threatens to upend the cheap-fare end of the industry much like a series of mergers among big airlines reduced choices for travelers.
Spirit is the largest budget airline in the United States, but its days as a stand-alone company appear numbered. The big question is whether it is sold to fellow discounter Frontier Airlines or to JetBlue, which operates more like the four giants that dominate the U.S. airline business.
Late Wednesday, Spirit delayed a shareholder vote on a merger with Frontier from today until July 8. Spirit said it would use the extra time to continue talking with Frontier and JetBlue Airways about their rival bids for Spirit.
The outcome could determine how many choices travelers have for the lowest fares. That’s particularly important to leisure customers, the group that Spirit targets.
Spirit shareholders are looking at a stock-and-cash offer from Frontier that is currently worth about $22 per share, or $2.4 billion, and would give Spirit shareholders 48.5 percent of the combined airline. Spirit’s board has continued to support the deal in the face of a hostile bid from JetBlue worth $33.50 per share, or $3.6 billion.
JetBlue says its all-cash offer is financially superior. Frontier argues
that its proposal will be better for Spirit shareholders in the long run, assuming that airline stocks recover to pre-pandemic levels.
Both covet Spirit because of its relatively young f leet of more than 170 planes and its roughly 3,000 pilots — even more valuable during a pilot shortage that could last most of this decade.
Antitrust regulators are sure to examine either deal closely. Frontier and JetBlue both claim that consumers
will benefit if they win the Spirit sweepstakes. A Frontier-Spirit combination would operate about 5 percent of the nation’s flights, and JetBlue plus Spirit would operate more than 7 percent, based on July schedules, making either one a stronger competitor to American, United, Delta and Southwest.
People who follow the industry closely are divided over which deal would help consumers more. Those
who prefer a Frontier-Spirit deal point out that both are “ultra low-cost carriers” that charge rock-bottom fares — although they add many fees. They say JetBlue has become too much like the bigger airlines.
“You end up either with another big, high-cost, regular-fare airline (with JetBlue), or you end up with a truly nationwide ultra-low-cost-carrier
that’s twice the size of anything today,” says Robert Mann, a longtime airline executive and consultant. Consumers, he said, “should be looking for continuation of a true low-fare, austere environment with the SpiritFrontier combination.”
Scott Keyes, the founder of Scott’s Cheap Flights travel site, doesn’t like either deal, “but I like the JetBlue option even less.”
Keyes said removing a competitor always tends to push up fares, but the impact
won’t be as bad if the buyer is another budget airline like Frontier.
“Even if you never fly Spirit or Frontier, you still owe them a debt of gratitude for causing your Delta or American flight to be cheaper than it would be otherwise,” he said.
Spooked by the growth of the discount airlines, bigger carriers started to sell “Basic Economy” fares in recent years, although they limit the number of bargain-bin seats on each flight.
JetBlue CEO Robin Hayes
counters with a decade-old study by MIT researchers who found that JetBlue flying a particular route did more to reduce prices than did service by budget airlines, which account for a small portion of the market. He has taken to calling it “the JetBlue effect.”
Michael Linenberg, an airline analyst for Deutsche Bank, said if JetBlue succeeds in buying Spirit, some of the cheapest fares might go away, but a bigger JetBlue could replace them with seats that appeal to other kinds of
travelers. He pointed to JetBlue’s “Mint” business-class service, which has been so successful on transcontinental flights that it forced bigger rivals to cut prices on their premium seats.
“It’s not all about catering to people who want to pay $29 or $59 fares. There are passenger segments that JetBlue will serve that Frontier and Spirit do not,” Linenberg said. “There are going to be lots of seats out there, and it’s not like JetBlue will stop offering low fares.”
Spirit had the highest rate of consumer complaints to the government in the latest figures from the Transportation Department, covering April.
Neither would-be buyer seems likely to improve Spirit’s poor record. Frontier had the worst complaint rate the other two years, and JetBlue’s rate last year was higher than everyone except Spirit and Frontier.