The Main Squawk: JetBlue will be OK; Spirit, not so much.
Late last-night, Judge William Young of the U.S. District Court of Massachusetts, announced his ruling that the merge of JetBlue and Spirit would hurt consumers. Today, let’s break down the main points in his decision, and what it means for JetBlue and Spirit.
The big issue at-hand is: JetBlue is a low cost carrier ($$), and Spirit is an ultra-low cost carrier ($). (Think of the dollar signs as you would if you were searching for a restaurant on Google Maps: 1 – cheap, 2 – moderate, 3+ expensive.) If the merger was allowed to succeed, customers wouldn’t just have one less carrier to pick from when buying a ticket, but rather they’d lose out on having the ability to shop at one of the cheapest alternatives ($) around.
Interestingly enough, the judge can’t violate the merger on that fact alone. What he can violate them on, however, is that the two airlines primarily operate on overlapping routes. This is an argument that is codified in laws that date back to 1915 and are supported by both case law and multiple Supreme Court rulings that have upheld them over the course of the last 100 years. Translation: any chance of appeal under this argument is slim.
What does this mean for Spirit?
Spirit was already in trouble before this whole thing came together. With increased competition in the ULCC market coming from the Majors with products like Basic Economy, its earnings have been in the toilet. The easiest way out of its hole was to look for a buyer, and so it is left with two options: it can look for another buyer, or it can undergo Chapter 11 bankruptcy.
If the airline marches down the Chapter 11 path, there are two ways this can go:
- 1) It can restructure and try to rebuild, or;
- 2) It can get bought by a competitor during bankruptcy.
If we rewind to 2005-2008 when everybody was bankrupt, mergers when any one airline was bankrupt were extremely popular largely because when a company acquires another which is bankrupt, it’s is entitled to the same bankruptcy protections. Fast-forward to today: if JetBlue acquires Spirit while it’s in bankruptcy—which should then be less likely for scrutiny by the courts—JetBlue would be able to acquire Spirit’s planes, pilots, gates, shoddy crew rooms, and hardly have to deal with any requirement to drop routes pending the outcome of the bankruptcy proceedings.
Of course, that would be a phenomenal outcome for both JetBlue and Spirit, and especially Spirit’s pilot group. But what if Spirit isn’t so lucky? What if JetBlue opts to invest in itself and won’t be able to come up with the money to buy Spirit when if they go bankrupt?
In that case, Spirit would truly need to find a way revitalize itself. Frontier (and its private equity alter-ego Indigo Partners) may be an option, but the rumor is that once their shot at merging with Spirit fell through, they started investing elsewhere. (How can you blame them?)
What does this mean for JetBlue?
On the other hand, JetBlue needs to shift its focus back to its good ideas and abandon what wasn’t working. The Queens-based carrier always had a strong operation in Long Beach, C.A., but when they expanded and opened up shop up the freeway at LAX, they were in this horrible fight with themselves where they’d see their own fares directly compete with one another. And LAX isn’t the only focus city it’s having trouble in. It needs to exit from these types of markets and center its attention on bases where Major carriers are struggling because of the competition its very presence provokes in cities like Boston, Austin, and for the short-term Nashville.
Outside of the U.S., we’re going to get a good glimpse into JetBlue’s revenue on its international market this year. If it winds up being favorable—and that largely depends on the cost of its slots in Amsterdam and London—with careful tailoring of its operation in “gateway cities” like Boston and New York-JFK, it may truly become the international LCC it strives to become. If those routes aren’t profitable, it needs to abandon them and focus on reworking the Northeast Alliance, which would also be a win for AA.
Overall, the outlook for JetBlue isn’t nearly as bleak as it is for Spirit. But it needs to turn inward to bolster its “core” business—whatever that may be.
Revisiting the Northeast Alliance
What I found most interesting about the nearly 100-page ruling was that the judge didn’t hold back from comparing this merger to JetBlue’s previously failed joint venture: the Northeast Alliance with American. In fact, he more-or-less insinuated in pretty specific language that JetBlue grew up and is now doing what it should have been doing all along: maximizing profit for shareholders.
It can do that if it explores opening its agreement with American again, albeit on a more codeshare-friendly scale (similar to the agreement American has with Alaska). If it opts to go down this path, I don’t see it filing an appeal to merge with Spirit.
Looking ahead
The silver lining in all of this is that it’s actually great news for Alaska and Hawaiian. Those two airlines are both Major carriers. Neither is considered an ULCC, and none of the airports they operate at are heavily slot restricted, paving a fair argument for the merger to proceed if the DOJ tries to block it, with this case proving those points precisely.
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