Spirit and Frontier agree to end merger proposal
Spirit Airlines and Frontier Airlines agreed to pull out of a proposed merger today without announcing the results of a scheduled shareholder vote, months after JetBlue Airways made its own bid.
The decision to withdraw came after the vote was postponed four times, making the merger increasingly uncertain.
“While we are disappointed that Spirit Airlines shareholders have failed to recognize the value and consumer potential inherent in our merger proposal, the Frontier Board of Directors has taken a disciplined approach throughout its negotiations with Spirit,” said William A. Franke, Chairman of the Board of Frontier. directors and the managing partner of Indigo Partners, Frontier’s majority shareholder, said in a statement. “We have been focused on delivering the appropriate value for Spirit, while putting consumers and the best interests of Frontier, our employees and our shareholders first. As we enter our next chapter, Frontier remains strong. positioned to deliver significant value to our shareholders as we serve the growing demand for affordable air travel.
Today’s decision paves the way for the approval of a competing takeover bid from JetBlue, which will give Spirit shareholders more money than Frontier’s offer, but could be subject to scrutiny by regulators.
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How we got here
The corporate intrigue began in February when Spirit and Frontier announced plans to merge into one super-low-cost giant carrier.
With similar corporate cultures and fleets, they were on their way to becoming the fifth largest airline in the United States.
“From a corporate culture point of view and from an equipment point of view, that is, the number of seats on the planes and the way the planes are equipped, they are a perfect fit”, said George Ferguson, senior aerospace and airline analyst at Bloomberg Intelligence. “I think Frontier and Spirit, separately having difficulty keeping staff, just because of the size and the opportunity they could give pilots, they thought, ‘Hey, if we put this together, we could stop competing with us.”
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For a few months, the deal seemed all but certain, and travel industry watchers predicted the combined airline would offer competitive low fares and a unified experience for the most cost-conscious US passengers.
JetBlue enters the fray
But in April, JetBlue reversed the deal by presenting its own offer for Spirit.
“JetBlue probably said ‘whoa, it’s about to become the fifth-largest airline in the country,'” Ferguson said. “Not at any cost, but at high cost, 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 go into debt to present a higher offer than Frontier.
Since then, the two airlines have gone hand in hand to increase their deals, and the market has been mixed as to which deal would be the best outcome.
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Spirit’s board favored Frontier’s offer, but some market watchers and institutional investors said JetBlue’s all-cash proposal could offer shareholders the best return, especially in the current uncertain economic climate.
“We have always said that the evaluation of the acquisition of Spirit by Frontier is based on the synergies and the increase in value of the combined airline in a few years,” said Ferguson. “Meanwhile, JetBlue has said they will go into debt for this and pay cash… We think it will be really difficult for shareholders not to vote for JetBlue’s offer.”
The decision to end merger talks with Frontier means a deal with JetBlue becomes an even more likely outcome.
“There’s still a lot of work to do. You can’t pronounce this as a victory for JetBlue yet,” said Henry Harteveldt, president of Atmosphere Research, a strategic travel industry research firm. “Spirit and JetBlue need to enter into formal negotiations, and then they need to get the merger approved by the DOJ. I don’t think we’ll get a decision on that in less than a year.”
What’s next for Spirit?
While the decision to pull out of Frontier’s offer means shareholders are likely to approve JetBlue’s offer, a formal vote has yet to take place, 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 previously flagged concerns about JetBlue’s alliance with American Airlines. For its part, JetBlue said it does not plan to end this partnership, but it is not clear if regulators will approve its takeover bid for Spirit if American stays in the game.
For now, however, Harteveldt said, airline passengers will see no change.
“It’s business as usual for JetBlue and Spirit in the short term,” he said. “They remain competitors with each other,” and they are going to be limited in what they can do, commercially, until they conclude formal negotiations and receive regulatory 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 passengers. JetBlue competes more directly with older full-service carriers than the ultra-low-cost airline it is considering buying. This could mean higher rates in some markets.
Combining cultures and fleets will also take a long time and could have serious problems in the next few years. While JetBlue and Spirit fly similar planes, they are configured very differently, and it will take time to reconfigure Spirit’s current planes to JetBlue standards.
The flow of in-flight service on the two airlines is also different, and Spirit staff will likely need to be retrained on JetBlue’s practices.