A federal judge in Boston on Tuesday blocked the $3.8 billion takeover of Spirit Airlines by JetBlue Airways, a ruling that will keep the Miramar-based discount carrier independent for now.
U.S. District Judge William G. Young, in a 113-page ruling, said that while the deal might well pressure American, Delta, United and Southwest — the four big airlines that control 80% of the nation’s commercial airline industry — it would hurt air travelers who rely on Spirit’s low fares.
“A post-merger, combined firm of JetBlue and Spirit would likely place stronger competitive pressure on the larger airlines in the country,” the judge acknowledged. “At the same time, however, the consumers that rely on Spirit’s unique, low-price model would likely be harmed.”
Young went on to note that both airlines “compete head-to-head throughout the country, and that competition, particularly Spirit’s downward pressure on prices, benefits all consumers.” JetBlue is the nation’s sixth-largest carrier. Spirit is in seventh place.
Upon hearing the news, investors sold Spirit stock in large volumes, with its shares plunging more than 53%. JetBlue’s battered shares rose by 5%.
In a joint statement, the airlines said they disagreed and are assessing their options.
“We continue to believe that our combination is the best opportunity to increase much needed competition and choice by bringing low fares and great service to more customers in more markets while enhancing our ability to compete with the dominant U.S. carriers,” the two companies said.
“We are reviewing the court’s decision and are evaluating our next steps as part of the legal process,” they added.
The carriers do have the option of appealing the ruling. It’s also possible they could try to make the deal more palatable to the Justice Department. But that would seem unlikely given a series of pre-trial deals JetBlue had arranged with third-party airlines to take over Spirit assets in the Northeast and South Florida to preserve competition.
In court, government lawyers suggested none of those moves was sufficient to allow the takeover to proceed.
“Today’s ruling is a victory for tens of millions of travelers who would have faced higher fares and fewer choices had the proposed merger between JetBlue and Spirit been allowed to move forward,” Attorney General Merrick B. Garland said in a statement Tuesday. “The Justice Department will continue to vigorously enforce the nation’s antitrust laws to protect American consumers.”
Although lawyers for New York-based JetBlue had argued that other low-cost carriers in the market would eventually fill the void left by Spirit, which would have disappeared after the takeover, the judge said that “Spirit’s unique position in the domestic scheduled passenger airline industry would be exceedingly difficult for another airline, or a combination of other airlines, to replicate, even with low barriers to entry …”
Young observed the federal Clayton Act “was designed to prevent anti-competitive harms for consumers by preventing mergers or acquisitions the effect of which ‘may be substantially to lessen competition, or tend to create a monopoly.’”
But he added: “There are no ‘bad guys’ in this case. The two corporations are — as they are expected to — seeking to maximize shareholder value. The Department of Justice is — as the law requires — speaking for consumers who otherwise would have no voice.”
No suitable replacements
“Summing it up,” the judge wrote, “if JetBlue were permitted to gobble up Spirit — at least as proposed — it would eliminate one of the airline industry’s few primary competitors that provides unique innovation and price discipline. It would further consolidate an oligopoly by immediately doubling JetBlue’s stakeholder size in the industry.”
“Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier,” he added.
Locally, the Broward County Aviation Department, which operates Fort Lauderdale-Hollywood International Airport, where both Spirit and JetBlue are predominant carriers, declined comment.
But during a mid-December appearance before Fort Lauderdale’s Downtown Development Authority, Mark Gale, the department’s CEO/aviation director, told authority board members that the airport is “poised for success going forward” whether the takeover deal was approved or not.
“If it doesn’t happen, Spirit and JetBlue will go back to competing like crazy and it’s good for our consumers,” Gale said. “If it does happen, we’ve made sure that if they to need to give up some activity and some other airlines come into play, that we will continue to grow as an airport and continue to provide competition and low fares.”
Late last year, the county and JetBlue formalized a partnership and broke ground to build a new Terminal 5 at the airport. There was no indication that those plans will change as a result of the ruling. The airline did not respond to a question posed by the South Florida Sun Sentinel about the project’s status on Tuesday.
One industry analyst said the deal had only a 50-50 chance of surviving the government’s challenge in court.
“It’s very clear the Biden Administration does not want to see further consolidation in industries it believes to be highly concentrated,” said travel industry analyst Henry Harteveldt, president of Atmosphere Research in San Francisco.
“JetBlue and Spirit had a very tough argument to make,” he added, pointing to the airlines’ assertion that combining two airlines that offer low fares would benefit consumers.
Harteveldt said he believed combining the two carriers would have yielded benefits to consumers. One is that the resulting bigger airline could deliver more low fares to more people. Another is that it could “compete more strongly against larger airlines.”
“What JetBlue did not make clear enough is that it has a basic economy fare to compete against major airlines,” he added.
He also said it’s plausible that Frontier Airlines, which lost the bidding war for Spirit, could return with another offer. Or, the discount carrier Allegiant Airlines could make a bid.
Allegiant declined a request for comment.
U.S. feared higher fares for consumers
The government sued in March of last year to stop the buyout, saying it would cost consumers up to $1 billion a year in more expensive fares while depriving them of a major choice in discount airlines. Spirit, which is based in Miramar and ranks as the busiest carrier at Fort Lauderdale-Hollywood International Airport, is the largest ultra-low-cost carrier in the nation.
If Young approved the buyout, Spirit indeed would have vanished, with JetBlue integrating Spirit’s estimated 10,000 employees into its work force and repainting its more than 450 yellow planes into JetBlue colors. JetBlue would also revamp the Spirit jetliners’ interiors to comport with JetBlue’s seating arrangements.
JetBlue had hoped to close the deal in the first half of this year.
For the Greater Fort Lauderdale area, the disappearance of Spirit likely would have left JetBlue as the airport’s biggest carrier, especially in light of JetBlue’s taking the lead to build a fifth terminal at Fort Lauderdale-Hollywood by 2027.
But the Biden administration’s Justice Department has been aggressive in curbing merger activity in the airline industry. Before Young reached his decision, the government won a case in the same Boston court to dismantle a marketing partnership between JetBlue and American Airlines known as the Northeast Alliance. The government alleged the arrangement was anti-competitive and the court agreed.
In the wake of that defeat, JetBlue scrambled to salvage the Spirit deal by entering into deals with other airlines to sell Spirit operational assets in Boston, Greater New York and in Fort Lauderdale.
Under one deal, JetBlue agreed to sell Allegiant Airlines two gates operated by Spirit at Boston’s Logan International Airport and two gates and takeoff and landing rights at Newark Liberty International Airport. JetBlue said it would also offload up to five gates at Fort Lauderdale-Hollywood International.
“JetBlue’s termination of the Northeast Alliance and commitment to significant divestitures have removed any reasonable anti-competitive concerns that the Department of Justice raised,” JetBlue and Spirit said in their Tuesday statement.
Now that the takeover has been blocked, it’s unlikely that those transactions will stand, since they were contingent on the deal being approved, according to statements last year by the airlines.
Turmoil ahead
The decision to reject the buyout leaves both airlines facing a number of challenges alone: They include overcapacity in the U.S. domestic market; discounting by American, Delta, Southwest and United, the very airlines that JetBlue and Spirit hoped to oppose; and continuing financial losses.
On Jan. 3, Spirit announced it had moved to pay down debt and raise cash through “a series of sale-leaseback transactions with respect to 25 aircraft, resulting in repayment of approximately $465 million of indebtedness on those aircraft and net cash proceeds to the company of approximately $419 million.”
The move came after management reported a third-quarter net loss of $157 million and top executives told analysts of headwinds posed by unfavorable industry capacity.
For the duration of this year, Spirit and JetBlue also face logistical issues with Pratt & Whitney engines that power Airbus jetliners in their fleets. Engine inspections will require both carriers to temporarily remove planes from service, a requirement that will affect scheduling and capacity, according to statements by both managements.
On the JetBlue side, CEO Robin Hayes, the architect and prime driver of the Spirit buyout, surprisingly announced Jan. 9 that he is retiring for health reasons effective Feb. 12. He is being replaced by Joanne Geraghty, the company’s president and chief operating officer.
How a proposed deal became an odyssey
Feb. 7, 2022: Frontier Airlines of Denver offers to buy Miramar-based Spirit in a stock and cash offer that reaches $2.65 billion. The two ultra-low-cost carriers assert consumers would enjoy $1 billion in annual savings.
April 5: 2022 JetBlue Airways, a discount carrier based in New York, launches a bidding war with an all-cash offer that reaches $3.8 billion.
July 27, 2022 Frontier and Spirit abandon plan after JetBlue increases its bid for Spirit multiple times.
Oct. 19, 2022: Spirit shareholders approve JetBlue offer. In a reference to American, Delta, Southwest and United, JetBlue calls the vote “a major milestone in our plan to join with Spirit to create a high-quality, low-fare national challenger to the Big Four airlines.”
March 6, 2023: JetBlue and Spirit enter into a settlement agreement with Florida Attorney General Ashley Moody, which calls for the combined airline to make major service commitments in the state as a price for staying out of the antitrust suit.
March 7, 2023: The U.S. Justice Department, joined by several states and the District of Columbia, sues to block the deal, saying consumers would lose a discount option and end up paying higher fares where Spirit flies.
Sept. 11, 2023: JetBlue says it agreed to turn over Spirit’s operations at Boston and Newark, New Jersey to Allegiant Airlines. JetBlue previously said it would sell Spirit’s operation at New York’s LaGuardia Airport to Frontier if the JetBlue-Spirit deal is approved.
Oct. 31, 2023: Antitrust trial starts before U.S. District Judge William Young in Boston.
Jan. 9, 2024: JetBlue CEO Robin Hayes announces resignation for health reasons, effective Feb. 12.
Jan. 16, 2024: Judge Young issues opinion blocking takeover.
