JetBlue facing $470 million payment to Spirit Airlines after judge sides with government and blocks $3.8 billion merger

US District Judge William G. Young sided with the federal government and said the merger would harm cost-conscious travelers by eliminating the nation’s dominant deep-fare discount airline and drive up prices across the industry. Play Video

“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,” Young wrote Tuesday. “Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier.”

The ruling follows a closely watched trial in November, where lawyers for the government argued that the merger would eliminate a key incentive for bigger airlines to offer budget-friendly fares. It represents a major win for the Biden administration’s antitrust enforcers, who have taken a more aggressive approach to mergers and are currently reviewing Alaska Air Group Inc.’s proposed $1.9 billion acquisition of Hawaiian Holdings Inc. 

Spirit’s shares plunged 47% Tuesday in New York, the biggest decline since the stock began trading more than a decade ago. JetBlue climbed 4.9%.

JetBlue and Spirit contended that consolidation is the only way smaller airlines can effectively compete with the dominant carriers. In a joint statement, the companies said they “are evaluating our next steps as part of the legal process.”

The companies can either appeal the ruling or abandon the deal, though challenging the judge’s decision would be a longshot, especially with the merger agreement set to expire in six months. 

Strategy Rebuffed

Tuesday’s ruling was a major rebuff to JetBlue’s growth strategy under Chief Executive Officer Robin Hayes, who surprised investors last week with his decision to step down on Feb. 12. Joanna Geraghty, the airline’s president, will take over the top job. Hayes said such an acquisition was JetBlue’s only way to quickly grow large enough to affect pricing by industry leaders.

It’s the second time in less than a year that JetBlue has lost a federal antitrust challenge. Its Northeast Alliance with American Airlines Group Inc. was ruled illegal in May by a separate federal judge, who ordered the partnership dismantled. American is appealing the ruling. The carriers created the venture to compete more effectively against United and Delta Air Lines Inc. on routes to the New York City area and Boston.

Under the terms of the deal with Spirit, JetBlue will need to pay $470 million to the rival carrier and its shareholders if the merger isn’t completed for antitrust reasons. 

JetBlue and Spirit could appeal Young’s decision to the First US Circuit Court of Appeals in Boston. The final outcome could reshape the competitive landscape for low-cost carriers in the US. The agreement is set to expire in July.

“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,” JetBlue and Spirit said in their statement.

However, an appeal would be “an uphill climb” for JetBlue and Spirit given the way the judge interpreted the evidence in the case, and because there may not be enough time before the merger agreement expires, said Jennifer Rie, a senior analyst with Bloomberg Intelligence. “It would be very difficult to win this.”

The ruling also could spell trouble for the proposed Alaska Air-Hawaiian Holdings deal. Hawaiian shares dropped almost 2% Tuesday to close at $13.47, 25% below Alaska’s $18-per-share cash offer. The widening gap indicates traders are increasingly concerned the deal will run into antitrust challenges.

At trial, JetBlue executives said the company planned to eliminate Spirit’s low-fare business model and convert the carrier’s aircraft interiors to match JetBlue’s layout, reducing the number of seats per plane by 10% to 15%.

Young said that would result in substantial harm to cost-conscious travelers who rely on Spirit’s low fares — and to passengers on other airlines, which have been forced to offer lower fare options to compete with Spirit.

“Many such travelers would not be able to fly with higher-priced fares,” Young said. “If the proposed acquisition proceeds, these consumer benefits would not only disappear from Spirit’s existing routes, but also not reach consumers in markets in which Spirit planned to enter in the foreseeable future.”

To assuage antitrust concerns, JetBlue pledged to sell several airport gates and flying slots owned by Spirit to low-cost carriers Frontier Group Holdings Inc. and Allegiant Airlines. Such assets are notoriously difficult to acquire at high-traffic airports.

Industry Constraints

Young agreed with lawyers for the government that the proposed divestitures wouldn’t go far enough to replace the competition that would be lost, considering the multitude of issues facing the industry such as manufacturing delays, staffing issues and engine problems.

“Constraints on airline growth suggest that although other airlines are likely to enter markets left by Spirit and might even enter some within two to three years, such entry might not be sufficient to replace Spirit’s current presence in the industry,” the judge wrote.

The federal government sued to block the deal in March as part of a crackdown on consolidation in the airline industry. Decades of mergers have resulted in four airlines controlling 80% of the market for US ticket revenue: United Airlines Holdings Inc., American, Delta and Southwest Airlines Co.

JetBlue had considered a deal with Spirit since 2017, according to testimony at trial, but the company made an all-cash offer last year after Frontier made a bid to acquire Spirit.

Internal documents presented at trial showed leaders at Spirit questioned the sincerity of JetBlue’s bid and whether the true motivation was to break up Spirit’s pending deal with Frontier. Executives at Spirit had also raised concerns that a merger with JetBlue would face strict scrutiny from antitrust regulators.

Young declined to permanently bar JetBlue and Spirit from pursuing a deal, writing in his opinion that such a move would interfere with the free market. 

The airlines are welcome to “take another run at a merger at any time,” the judge wrote. “The courthouse doors remain open should the Defendant Airlines decide to try again, and the Government then wishes to prevent such an attempt.”

The case is US v. JetBlue, 23-cv-10511, US District Court, District of Massachusetts (Boston).

Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.