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The Ratings Game: JetBlue’s ‘headscratcher’ bid for Spirit may be bad news for consumers, Wall Street says

JetBlue Airways Corp. made its case for buying Spirit Airlines Inc. to Wall Street on Wednesday, but analysts remained concerned that its “headscratcher” bid could result in a corporate-culture mismatch, struggle to get regulatory approval, and end in higher fares.

JetBlue
JBLU,
-7.51%

said late Tuesday it has made an all-cash offer to buy Spirit
SAVE,
-2.27%
,
valuing it at $3.6 billion and hoping to trump a merger agreement the ultra low-cost carrier has with Frontier Group Holdings Inc.
ULCC,
-6.88%
,
also a ULCC.

The airline painted itself as the better suitor for Spirit and for consumers, and its offer may be too good to pass up: it is not only all cash but also a higher price than what Spirit and Frontier worked out in February.

“We are extremely excited to share with you our bold vision to create the most compelling national fare challenger to the dominant big four airlines to our clearly superior proposal to acquire Spirit,” JetBlue Chief Executive Robin Hayes told analysts on a call Wednesday.

JetBlue executives said the deal is expected to add to the air carrier’s bottom line in the first year, and called for “synergies” of between $600 million and $700 million within three years.

For air travelers, a combined JetBlue-Spirit would mean they wouldn’t have “to choose between a low fare and a great experience,” Hayes said.

Hayes and other JetBlue executives may have been enthusiastic about their offer but “one of the main arguments that fares would decline seems challenging,” Stephen Trent with Citi said in a note Wednesday.

JetBlue’s fares are higher than Spirit’s, and as part of the merger JetBlue would have to convert Spirit’s “ultra dense” seat configurations to one that is more in line with JetBlue’s, which would require removing seats, he said.

And even though JetBlue said its “Blue Basic” fares are similar to ultra low-cost carrier fares, “not all JetBlue fares are Blue Basic,” Trent said.

JetBlue also deflected criticism that its planned deal would be a tougher sell to regulators, saying it was “highly confident” it would go through.

The airline’s agreement with American Airlines Group Inc.
AAL,
-1.96%
,
which is the subject of a lawsuit by the Department of Justice, would be complementary to the future combined business, the company said.

Still, there are “lots of questions” about cultural matches, the regulatory reviews, and labor challenges with a low-cost carrier taking over an ultra low-cost carrier, UBS analyst Myles Walton said in a note.

“JBLU for SAVE is a headscratcher,” he said.

A merger between Spirit and Frontier would be “straightforward,” with their similar cost structures, fare approaches, and culture, he said.

A “JBLU + SAVE merger seems to us a lot less straightforward,” Walton said.

Moreover, it is not clear “that the argument put forward by JBLU that its combination with SAVE would provide an opposing force to the ‘big 4’ will be the takeaway for regulators,” Walton said.

Instead, they’d be concerned about the fare differential between JetBlue and Spirit being a “risk” that consumers would face higher fares, and that the proposed alliance with American would present an “even greater concentration risk.”

Raymond James downgraded its rating on JetBlue stock to the equivalent of neutral, with analyst Savanthi Syth calling the bid an “indecent proposal” and one that increases uncertainty for JetBlue.

“While leverage levels appear manageable, the increase is likely to weigh on investor sentiment,” Syth said.

Financially, JetBlue’s offer is clearly the better one, but the question before Spirit’s board is whether it thinks it would pass regulatory scrutiny, Syth said.

In another scenario, Frontier would counter with a higher offer.

“Even at a modest discount the board may determine that the business model commonality and ability to participate in the synergy upside is sufficient to make this a more attractive offer for shareholders,” Syth said.

A JetBlue-Spirit deal could end up being beneficial to Frontier, “as it would be the only game in town with a high-utilization ULCC model,” Syth said.

JetBlue has been growing its footprint in the northeast, and Spirit has “minimal capacity” in the New York City area, said MKM Partners analyst Conor Cunningham. But Florida would be another story.

“Florida is where overlap with JetBlue and Spirit will be significant,” Cunningham said.

A combined company would have about 170 daily departures in Fort Lauderdale and about 130 in Orlando. A Frontier eventual deal would be “more of a compliment given (Frontier’s) West Coast orientation.”

“We struggle with the idea of a government approval for a combination between JetBlue and Spirit. There was already fear the Spirit/Frontier deal would face pushback,” the analyst said.

One thing may be clearer about the three-way deal-making, Sheila Kahyaoglu with Jefferies said in their note.

It reflects a need for scale amid labor and airplane delivery shortages, Kahyaoglu said. Aircraft delivery slots are “scarce” through 2025, particularly of Airbus SE narrow-body planes.

“The proposed transaction allows for faster expansion given a robust (Spirit) order book, quicker retirement of older aircraft, and a labor pool at growing leisure destinations, allowing for quicker expansion and economies of scale,” Kahyaoglu said.

All three stocks fell on Wednesday as part of broader equity market weakness. Shares of JetBlue have lost 41% in the past 12 months, while Spirit shares are down 31% and Frontier shares are off 44%.

That compares with losses of about 25% for the U.S. Global JETS ETF
JETS,
-3.07%
,
and contrasts with gains of around 10% for the S&P 500 index.
SPX,
-1.20%

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