Spirit Airlines and Frontier Airlines agreed to walk away from a proposed merger today without announcing the results of a planned shareholder vote, months after JetBlue Airways made its own bid.
The decision to walk away came after the vote was postponed four times, making the merger increasingly uncertain.
“While we are disappointed that Spirit Airlines shareholders failed to recognize the value and consumer potential inherent in our proposed combination, the Frontier Board took a disciplined approach throughout the course of its negotiations with Spirit,” William A. Franke, chair of Frontier’s board of directors and the managing partner of Indigo Partners, Frontier’s majority shareholder, said in a statement. “We were focused on offering the appropriate value for Spirit, while prioritizing consumers and the best interests of Frontier, our employees and shareholders. As we enter our next chapter, Frontier remains well-positioned to deliver significant value to our shareholders as we serve the growing demand for affordable air travel. “
Today’s decision paves the way to approval for a competing takeover bid from JetBlue, which will give Spirit shareholders more cash than the Frontier bid offered but could face heightened scrutiny from regulators.
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How we got here
The corporate intrigue began in February when Spirit and Frontier announced a plan to merge into one giant ultra-low-cost carrier.
With similar corporate cultures and fleets, they were poised to become the fifth-largest airline in the US
“From a corporate culture and from an equipment standpoint, meaning the number of seats on airplanes and how planes are outfitted, they’re a good fit,” said George Ferguson, senior aerospace and airline analyst at Bloomberg Intelligence. “I think Frontier and Spirit, separately having challenges keeping staff, just because of size and the opportunity they could provide pilots, they thought, ‘Hey, if we put this thing together, we could stop competing against each other.’ “
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For a few months the deal looked all but certain, and travel industry watchers predicted that the merged airline would offer competitive low fares and a unified experience for America’s most cost-conscious passengers.
JetBlue enters the fray
But in April, JetBlue upended the deal by putting in its own bid for Spirit.
“JetBlue probably went ‘whoa, this is about to become the fifth largest airline in the country,'” Ferguson said. “Not at all costs, but at high costs, they had to be willing to buy Spirit,” if they wanted to become a more central player in the US airline industry.
JetBlue also agreed to take on debt to introduce a higher offer than Frontier.
Since then, the two airlines have gone tit-for-tat in upping their bids, and the market has been mixed on which deal would be the best outcome.
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Spirit’s board favored the Frontier offer, but some market watchers and institutional investors said that JetBlue’s all-cash proposal could give shareholders the best return, especially in the current uncertain economic climate.
“We’ve said all along that the valuation of Frontier’s acquisition of Spirit is built on synergies and increased value of the combined airline a couple years out,” Ferguson said. “Meanwhile, JetBlue said they’re going to take down debt for this and pay cash … We think it’s really going to be hard for shareholders not to vote for the JetBlue offer.”
The decision to terminate the merger talks with Frontier means a deal with JetBlue becomes an even more likely outcome.
“There’s a lot of work that still is ahead. You cannot pronounce this a victory yet for JetBlue,” said Henry Harteveldt, president of Atmosphere Research, a travel industry strategic research firm. “Spirit and JetBlue have to enter into formal negotiations, then they have to have the merger approved by the DOJ. I don’t think we get a decision on that in less than a year.”
What’s next for Spirit?
While the decision to walk away from Frontier’s bid means shareholders are likely to approve JetBlue’s offer, a formal vote still has to occur, and there’s no set timeline for that yet.
The Federal Trade Commission and other regulators will have to approve the combination, and the DOJ has already signaled concerns with JetBlue’s alliance with American Airlines. For its part, JetBlue said it does not plan to unwind that partnership, but it’s unclear if regulators will approve its takeover bid for Spirit if American remains in the picture.
For now, however, Harteveldt said, airline passengers won’t see any changes.
“It’s business as usual both for JetBlue and Spirit for the near term,” he said. “They remain competitors with one another,” and they’re going to be limited in what they can do, business-wise, until they conclude formal negotiations and receive regulator approval for a merger.
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What would a Spirit-JetBlue merger mean for travelers?
A merger with JetBlue is going to be a big change for Spirit’s passengers. JetBlue competes more directly with legacy full-service carriers than the ultra-low-cost airline it is planning to buy. That could mean higher fares in some markets.
The combination of cultures and fleets will also take significant time and could have some serious pain points over the coming years. While JetBlue and Spirit fly similar airplanes, they are configured very differently, and it will take time to reconfigure Spirit’s current aircraft to JetBlue’s standards.
The inflight service flow on the two airlines is different as well, and Spirit’s staff is likely to need to be retrained on JetBlue’s practices.