Spirit Airlines Flies High with Frontier, JetBlue Deal Nosedives

Ultra low-cost carrier Spirit Airlines (NYSE: SAVE) rejected the ‘enhanced superior proposal’ of JetBlue Airways Corporation (JBLU) to be acquired in a cash deal worth $3.6 billion. Spirit has stuck to its decision to be merged with Frontier Group Holdings Inc. (ULCC), another ultra low-cost carrier. 

According to both JetBlue and Frontier, the merger with Spirit will create the fifth-largest customer-centric and low-fare airline in the U.S., challenging the dominance of the four largest domestic carriers, which control over 80% of the market. 

Shares of Spirit and Frontier closed down almost 9.4% and 3.8%, respectively, lower on Monday, while JetBlue rose 2.6%. 

Detailed Terms 

Earlier last month, JetBlue offered $33 for each share of Spirit, which represented a 52% premium to the undisturbed share price on February 4, 2022, and a 50% premium to SAVE’s closing price on April 4, 2022. The offer was much higher than Frontier’s proposed cash and stock buyout valued at $2.9 billion. 

To get the deal consummated, JetBlue revised its offer to sell off assets to bag regulatory approval and agreed to pay $200 million on non-completion of the merger due to regulatory risk.  

Spirit’s board rescinded the offer attributing it to regulatory risks to getting the deal approved.   

Moreover, the JetBlue and American Airlines (AAL) partnership also became a concern for Spirit’s officials when contemplating the takeover bid. Though JetBlue has a strong foothold in New York and Boston through its Northeast Alliance (NEA) with American Airlines, this alliance has been sued by the Department of Justice (DOJ) last year, which alleged that the partnership will reduce competition and lead to elevated fares. 

Official Comments 

Chairman of Spirit, Mac Gardner, said, “After a thorough review and extensive dialogue with JetBlue, the Board determined that the JetBlue proposal involves an unacceptable level of closing risk that would be assumed by Spirit stockholders.” 

In conclusion, Spirit’s board commented that merging with Frontier will “do an even better job of delivering ultra-low fares to more consumers and competing more effectively against the Big 4 carriers, as well as against JetBlue.” 

Wall Street’s Take 

Recently, J.P. Morgan analyst Jamie Baker maintained a Hold rating on Spirit Airlines and a price target of $29. This indicates a 35.51% upside potential from Monday’s closing price of $21.4 per share. 

The rest of the Street is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on two Buys and five Holds. The average Spirit Airlines price target of $34 implies 58.88% upside potential. Shares have lost 38.61% over the past year. 

Ending Remarks 

Consolidation has become the key to survival and success within the ongoing macroeconomic backdrop. Therefore, Spirit Airlines’ decision to merge with Frontier is likely to be beneficial for the airline industry, which is currently dominated by big shots. Moreover, a new regime in the travel industry can be expected from the combined entity. 

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