Why JetBlue wants to shell out $3.6 billion for Spirit’s discount

A view of JetBlue aircraft at Terminal 5 at John F. Kennedy International Airport on May 12, 2020 in New York, New York.

Pablo Monslav | Getty Images

Jet Blue On Wednesday it announced its entire cash offer of $3.6 billion for an ultra-low-cost airline Spirit Airlines It would help it grow across the country and better compete with larger airlines.

The tender, which Spirit described as “undesirable,” casts doubt on the planned partnership with the latter. Frontier Airlines. Spirit shares rose more than 22% on Tuesday after news of the bid spread, but were down 3% in pre-market trading on Wednesday. JetBlue is down 4% while Frontier is down 3%.

Frontier and Spirit have similar business models: discounted fares, little service on board, and fees for everything from hand luggage to seat selection.

JetBlue, on the other hand, has spent years building a business class service Mint that includes flat beds and full meals. On the same day it announced its surprise offer to buy Spirit, JetBlue also announced the start dates for its first flights from Boston to London.

But JetBlue is mostly focused on domestic travel. Executives said Wednesday that the Spirit deal, if approved by Justice Department antitrust officials, would give JetBlue more breadth and ability to compete with larger carriers.

It will also allow JetBlue to grow its fleet quickly thanks to the large Airbus order book that both carriers have as well as increase its number of employees, especially pilots. JetBlue CEO Robin Hayes said in a call with analysts Wednesday morning that he expects the pilot shortage in the United States to continue for several years.

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JetBlue has not disclosed the cost of reconfiguring its Airbus Spirit planes to match JetBlue’s interiors, which have in-flight entertainment such as seat-back screens with fewer seats, but the carrier said it would be a “multi-year” capital expenditure.

The airline’s offer to buy Spirit has baffled some analysts.

UPS called it a “headhunter”.

“Wait what?” Request MKM Partners.

Bank of America said that while JetBlue and Spirit both own Airbus aircraft, we are struggling to find additional advantages for JBLU.

Raymond James lowered JetBlue’s rating to market performance after the announcement and said it would be difficult to combine product and employment.

Raymond James Savanthi Seth wrote, “It is also likely that the process will distract or perhaps distract current initiatives, most notably the Northeast alliance with America.” “Furthermore, the prospect of higher debt, even if it can be controlled, is likely to be a drag on investor sentiment.”

The Biden administration has been scrutinizing mergers and other alliances.

The Biden administration filed a lawsuit last year to block JetBlue’s partnership with American Airlineswhich allows airlines to coordinate routes at airports in the New York City and Boston area.

Asked if JetBlue would abandon that alliance to get a deal with Spirit through the regulators, JetBlue CEO Hayes said on the analyst call that the deal is “complementary” to the American Airlines partnership.

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