As I write this Spirit Airlines (SAVE) is trading at $16.70, while a JetBlue offer to buy it at $31 is pending. Whether Spirit shareholders will get that payout is of course pending the resolution of an antitrust lawsuit by the DOJ that is slated to start in mid-October.
Spirit was trading at roughly $20/share before Frontier’s original offer in early 2022, which was a cash + shares offer that JetBlue quickly trumped. So it’s hard to imagine price will return to that level if the merger is called off, but assuming Spirit drops to $10 if the DOJ wins, the market is pricing the likelihood of JetBlue winning in court and completing the deal at approximately 33%. Edit: In original post I forgot to mention that JetBlue is paying 10 cents monthly to SAVE shareholders while deal is in limbo, ex-div date is Aug 25 for this months payment.
That might seem like a reasonable handicap, and I’m not a lawyer, nor do I have any significant understanding of Anti-Trust law to say it’s wrong. But this is a merger of the 6th and 7th largest US airlines to create the 5th largest airline, which makes it seem very odd hill for the DOJ to defend. And the DOJ is only 2 for 5 in it’s merger trials so far in the Biden administration, as it seems to consistently overreach.
I understand concerns about regional concentration. But a major DOJ concern was JetBlue’s northeast partnership with American Airlines, and it was subject to another suit the DOJ won, but JetBlue dropped their appeal of that rule and dropped out of the partnership in order to maximize its opportunity to merge with Spirit. And JetBlue has also agreed to give up a significant number of Spirit gates if the merger is approved.
The absurd is the DOJ’s opposition to JetBlue plans to remove seats from Spirit planes post merger. First, Spirit’s tight seat pitch is border-line criminal and unhealthy. The DOJ should not be suing to propagate this misery. But their reasoning is even more wrong-headed. They believe that removing Spirit as a competitor will raise fares because its fares have historically been lower than competitors including JetBlue. But that is a massive misreading of the situation and the likely future.
Spirit Airlines has lost $1.5B over the last three years, and has only the slimmest of accounting profits over its last decade. And those accounting profits were a mirage, it’s free cash flow over the last decade has been a negative $2.3B. Spirit has thrown every penny into growth, and a big part of that growth has been enabled by selling seats below their economic cost. This can’t continue in the future, whether they merge with Frontier or JetBlue those seats have to cost more or they will go under and everyone will be able to raise prices. JetBlue is still a discount carrier, so even reconfiguring those seats for JetBlue comfort will still offer customers fares significantly discounted below the big four.
But it doesn’t appear that the DOJ really cares about what actually will happen to consumers here, and this trade will only work if they lose their suit. For disclosure: Make your own decision and do your own research. I currently own SAVE shares and options, and may or may not update this if I sell them.