A judge has just ruled to block JetBlue’s takeover of Spirit, arguing that it’s bad for competition. This obviously has major implications for both JetBlue and Spirit, and barring a successful appeal, the airlines are going to have to figure out new strategies ASAP.
Understandably, many people are applauding this decision, saying that Spirit typically has the lowest fares in the markets in which it operates, and it’s important to keep the airline independent. I totally get that sentiment, but there’s only one major problem… I wanted to take a closer look at that in this post.
Spirit Airlines has been losing money for four years
Spirit Airlines hasn’t turned a profit since the start of the pandemic, so the airline has been losing money for 16 consecutive quarters. Obviously the first couple of years of the pandemic were rough for airlines. However, the past couple of years have been fantastic for many carriers, as we’ve seen a strong recovery in leisure demand.
Unfortunately ultra low cost carriers haven’t benefited from this in the same way as the legacy carriers, at least here in the United States:
- We’ve seen a massive increase in labor costs in the airline industry, and this has the biggest impact on ultra low cost carriers, since their business models are most reliant on a low cost structure
- Much of the leisure demand has been for both premium and long haul travel, and these are markets in which ultra low cost carriers typically can’t compete, due to their fleets and cabin products
- The legacy carriers make a large percentage of their profits from their loyalty programs and lucrative co-brand credit card agreements, and that’s something ultra low cost carriers can’t benefit from in the same way, since they don’t have many affluent, brand loyal consumers
- Ultra low cost carriers continue to face increased competition from legacy carriers, especially as they increasingly take delivery of larger jets (like A321neos), and therefore end up selling more basic economy fares that are competitive with the ultra low cost carriers
Unfortunately there are no signs of things changing for the better at Spirit. During the trial, the chairman of Spirit Airlines’ board testified that profits aren’t in sight for the airline without a deal.
Obviously this presents a major issue. Yes, Spirit offers amazing value for consumers, but if the airline can’t turn a profit, it won’t be around to offer those fares.
Can Spirit Airlines be independently profitable?
We talk about how we need more innovation from airlines, and I’d argue that Spirit has actually been incredibly innovative. The airline offers attractive fares, and has some cool features, like Wi-Fi and the Big Front Seat. Yet the airline can’t turn a profit.
Usually I enjoy playing armchair CEO, but I’m not actually sure I have a good answer as to how Spirit is supposed to become profitable. Does anyone want to take a swing at it?
- It’s not like Spirit isn’t doing everything it can to generate ancillary revenue
- Spirit would raise fares if it could, but obviously it can’t
- One of Spirit’s big issues is costs due to inflation and increases in labor costs, but that’s not necessarily such an easy thing to tackle
Does anyone want to take a swing at what Spirit could do to become profitable as an independent carrier? There are only a couple of things I can think of, but I’m not sure they’d make a material difference:
- Spirit struggles with operational reliability, and that’s something that should improve, but I’m not sure it’s the reason that the airline isn’t doing well financially
- Frontier has a similar business model to Spirit, and is currently working on transforming its business, by becoming more like Ryanair, setting up several mini-hubs, and focusing on having the same planes return to the same bases every day; maybe something like that makes sense for Spirit as well
Is Spirit Airlines’ only path forward through a merger?
We’ve seen several airline executives and analysts suggest that we’re going to see some more consolidation in the airline industry. In the case of Spirit, the judge’s ruling makes it pretty clear that a merger between a full service carrier and an ultra low cost carrier would be off the table.
However, could a merger between two ultra low cost carriers once again be a possibility? Keep in mind that this whole Spirit merger mania started in early 2022, when Frontier announced plans to acquire Spirit. The two airlines are highly complementary, as they’re both ultra low cost carriers operating Airbus fleets, and they for the most part have different hubs.
However, JetBlue was desperate to get involved, and to prevent that merger. The airline had tried to take over Virgin America back in the day, but Alaska outbid JetBlue, and JetBlue didn’t want that to happen again this time around.
In fairness, a lot has changed in the past two years. Frontier is struggling financially as well, and the carrier’s share price has also plummeted. However, arguably there would be some synergies, and a combined Frontier and Spirit could do a lot more to compete with the major carriers, and possibly be profitable.
Could we see Frontier once again expressing interest in acquiring Spirit? In the immediate future, the challenge is that JetBlue and Spirit will presumably be pursuing an appeal, given that this is a condition of Sprit getting its $470 million reverse breakup fee, and that could take quite some time.
But given the challenges that ultra low cost carriers are facing, it sure seems to me like the best path forward for both carriers might be to merge, and that likely won’t face regulatory scrutiny, since we wouldn’t see a net reduction in seats operated by ultra low cost carriers.
Admittedly the deal would likely be a lot less rich than when first proposed in early 2022. At the time, Frontier was going to acquire Spirit for the equivalent of $25.83 per share, in the form of $4.13 in cash plus 1.9126 Frontier shares. At this point, Frontier’s stock is worth less than half of what it was back then (as is Spirit’s stock). Based on today’s stock price, that same deal would be worth under $13.
Bottom line
JetBlue’s merger with Spirit has been blocked. Assuming an appeal is unsuccessful, I think the most interesting question is what this means for the future of Spirit. The airline hasn’t made money in four years, and there are no signs of that changing.
Yes, an independent Spirit is great for consumers, but an independent airline can’t stay in business if it doesn’t make money. So I think this is an interesting topic to discuss.
How do you see this playing out? How can Spirit become profitable independently? If it can’t, what’s the best path forward for stakeholders?
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