Listen in as Aviation Week Network editors discuss the news of JetBlue and Spirit's dissolved merger and what it means for both carrier moving forward, the proposed Alaska Airlines-Hawaiian Airlines linkup and the U.S. market as a whole.

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Rush Transcript

Aaron Karp:

Hello everyone, and thank you for joining us for the Window Seat Podcast, our Aviation Week Network air transport podcast. I'm Aaron Karp, a contributing editor to the Aviation Week Network and a senior editor with Air Transport World, and we're delighted that you're with us today.

Joining me today are two of my colleagues, Christine Boynton, a senior editor for Aviation Week, and CAPA senior analyst, Lori Ranson. Christine and Lori, thank you for joining us.

Today we're discussing the dissolution of the JetBlue-Spirit merger. The merger has been abandoned now by the carriersjust a few weeks after a federal judge blocked the merger between the airlines. An appeal that we now know was essentially pro forma was filed, but JetBlue has decided that the obstacles to acquiring Spirit are now too onerous to keep the merger alive.

Christine, you covered this very closely, including being in the courtroom for parts of the federal antitrust trial. What happened this week and why?

Christine Boynton:

So as we know, as you just recapped, the merger was blocked by that January 16th ruling. Both airlines did appeal. But contained in that original agreement back in July 2022 was a deadline by which that merger had to be finalized. And that was coming up. That deadline was on July 24th. So what JetBlue has said is that even if that appeal was successful, and the appeal court was scheduled to sit in June to review the briefs and potentially allow oral arguments, even if that was successful, JetBlue and Spirit didn't see a path to regulatory approval by that July deadline. So JetBlue, who of course now also has a new CEO, in their statement called the uncertainty"distracting" and said it was taking resources away from other priorities, particularly returning to profitability and reinvigorating its brand. So that's essentially where we are today. And by 5:00 PM on March 5th, JetBlue will owe Spirit a cash payment of $69 million. That's a breakup fee mandated in their agreement should it fall through for antitrust reasons.

Aaron Karp:

So Lori, where does JetBlue go from here? They have a new CEO Joanna Geraghty who has inherited the airline at this time. What is she going to do and what are the plans going forward for JetBlue?

Lori Ranson:

She laid out some plans on the last earnings call. And I think it's interesting that even though they were going through the appeal process, she didn't discuss the merger very much. She definitely was pressing for a standalone plan, stressing that. So they have initiated cost reductions, they're slowing aircraft deliveries, they're pushing deliveries out. I think what they need to do now at this point in time is have a definitive network strategy for how they can return to profitability in this market at the size that they are at the moment, and they're slowing their growth. So that's the biggest thing that I think they need to communicate to the markets right now.

She's trying to distance herself, I think, from this whole merger process. She brought back Marty St. George, who was the former chief commercial officer. He's returned as president. So she is laying the groundwork to try to forge a solid standalone plan. The issue is we just don't know how successful JetBlue can be in the current marketplace. The whole point of the merger was to build up scale. And that's not happening anymore for either airline.

Aaron Karp:

And as you said, JetBlue had said many times that in order to grow and compete with the Big Four US carriers that they needed to have this merger. Now obviously, the merger hasn't happened. So what paths is she considering to move forward?

Lori Ranson:

I think that we'll get more details regarding the specific path in the future. I believe that they have to consider more partnerships. I saw some news yesterday that American during its Investor Day said they would be open to another partnership with JetBlue. What kind of form would that take? We don't know because obviously we've seen the DOJ force them to break up their alliance, but they have to forge partnerships. I don't know if that means joining an alliance. I don't know if that means trying to develop deeper ties with larger US airlines. I think probably everything is on the table for them for review to try and get to the scale that they need. And JetBlue needs to do something innovative to show that it's still relevant in the marketplace going forward.

Christine Boynton:

I think one thing that stood out to me in their fourth quarter earnings call, something Joanna said, she had a great quote. She said, "It's not business as usual." So she mentioned a few things. They're going to be more data driven in the months to come, they're going to be more creative. And I believe the other word she used was intense. So I think it'll be really interesting to see where they go from here.

Aaron Karp:

And Christine, what about Spirit? They talked a lot in the trial about how poor their financial situation was. What are they going to do going forward?

Christine Boynton:

In court, they had a lot of things to say about their ability to compete in the marketplace. There were some pretty dire projections that they in their representation had to say in front of the judge. But following that trial, they have since outlined some steps they're taking to return to liquidity to be able to more effectively compete, and to be able to return to that profitability. They're working their way there. They've been making network adjustments. They've been making cost decisions to recover margin production. But they're on, I think what is right now, eight consecutive loss making quarters. So they've got some work to do there. They've laid out their plan.

Lori Ranson:

Let's not forget that Spirit has $1.26 billion in debt maturities due next year. I believe their liquidity at the end of last year was $1.3 billion. So they've got to figure out a way to take care of that debt that's coming up very soon, and it's going to be a big challenge for them in terms of getting their balance sheet in order in a very short period of time.

Aaron Karp:

And Christine, Frontier Airlines initially was the one that went after Spirit and then that merger fell through when JetBlue made their bid. Could Frontier make another run at Spirit to try and have a megamerger of ULCCs?

Christine Boynton:

Well, maybe not Frontier. When it made its original bid for Spirit, it proposed at least funding part of that transaction through its shares, and the value of those have since fallen considerably. But it's interesting. In court, Spirit’s CEO told the judge that it had been exploring merger options for years, actually as early as 2016. And it had assessed, as potential combinations, not only Frontier and JetBlue, but also Viva in Columbia, Sun Country Airlines, and Allegiant Air. Viva, of course, is no longer in the pictures. But do the others make sense? I don't know. Maybe Allegiant, it's another ULCC with an all-Airbus fleet and has a more similar strategy.

Lori, what do you think about Allegiant? You think that might be a combination that makes sense?

Lori Ranson:

It could possibly make sense. I think the issue is with anyone considering Spirit, as I mentioned, you just have that debt overhang. And coming out of the pandemic, you don't want to take on that much debt for growth. And Allegiant at the moment is stressing that its model is working. It's heavily leisure focused. They don't have a lot of competitive overlap with large network carriers. They're profitable. So it might be worth looking at some point in time. I just don't see it happening at the moment with that debt overhang. I don't know if anyone would find Spirit attractive right now, just given its balance sheet situation. They might find the aircraft that Spirit has on order attractive, and that could be a way for Spirit to raise some cash. It's already done that through some sale and leasebacks, but I don't know that an outright purchase of Spirit by anyone right now would be viewed as a logical step forward.

Aaron Karp:

And let's look at the merger environment in the US in general with the airline industry. Hawaiian and Alaska are now on the dock trying to merge. I wonder if the US DOJ right now is just completely against airline mergers, full stop. And they're just so skeptical of them and perhaps think that the industry became too consolidated through the last round of mergers that they're not going to approve anything.

Christine, what do you see as the DOJ's just general position on mergers? Is there any merger that can get through? Because I would think Hawaiian and Alaska, where you're basically combining Alaska's domestic network and Hawaiian's long-haul network, if any merger would go through it would be something like that. But is that possible now in this environment?

Christine Boynton:

Well, it's such an interesting question, and I think we'll be in a better position to answer this later this month. DOJ right now is reviewing Alaska/Hawaiian. Those two airlines kicked off their own antitrust clearance process in early January and about a month later, DOJ requested more information. So there's a 30-day waiting period that follows as they review those details. They may be in a better position. There are a few key differences in this deal. Of about 1,400 flights a day combined Alaska and Hawaiian’s network would have just 12 overlap markets. And of course, they've also committed to maintain both brands following the merger. So it is a different deal, but yeah, it remains to be seen whether this will be a position they take against all airline mergers in general.

Aaron Karp:

Lori, do you think the environment is such now that Hawaiian and Alaska can get their merger through or any potential merger, another Spirit merger?

Lori Ranson:

I think it's tough, and I think it's uncertain. I think if you just look outside the industry, the Biden administration has been very antimerger. The Federal Trade Commission just filed suit to block the Kroger-Albertsons merger between two major supermarket chains. So I just don't think the appetite is there to evaluate the benefits of mergers.

But again, we could be surprised, as Christine says, and I agree with here tha it's a different type of merger with minimal overlap. They're going to maintain the Hawaiian brand. Whether that can convince the DOJ that this is beneficial to consumers remains to be seen.  I think it boils down to if they have to go to court, how a judge would interpret antitrust law as we've seen with the JetBlue-Spirit merger.

Aaron Karp:

So where does that leave the US market now? We still have the Big Four, Southwest, American, United and Delta controlling more than 80% of the market and these other carriers trying to find their footing. We have new entrants like Breeze and Avelo. You mentioned Allegiant. We have Frontier Airlines out there, Sun Country Airlines. Where does the market stand and is it better for consumers now than it was before the merger was blocked?

Christine Boynton:

Well, one thing the Department of Justice said in blocking the merger was they were doing this to protect the ULCC fares in the marketplace for the consumer. So certainly from their perspective, the consumer who needs ULCC fares, who's looking for that unbundled option, the DOJ is saying that, "Because of this ruling, they are being protected."

What the airlines, Spirit and JetBlue, would say, one thing that CEO Ted Christie has said in recent remarks, is now more than ever, I believe he said, after two decades of working with low-cost carriers, it appears to be an uneven playing field. So we have those Big Four as you've mentioned, who themselves have gotten to be that large through their own series of mergers and acquisitions. So I think it depends what perspective you have.

Lori Ranson:

I think one thing to think about as we go forward is this growing preference for higher-end products by consumers. And so perhaps this gives JetBlue an opportunity to really shore up its products that are actually customer favorites. JetBlue's been a longtime customer favorite. So I think that we have to think about that shift going forward and if it is permanent. And I think that ULCC fares will remain in the market, obviously because this merger has been blocked. But those airlines are also gravitating towards a more higher-end product within that ULCC space. Frontier has changed its product around and has different class offerings, not like legacy carriers. But I think that if the DOJ wanted to preserve ULCC fares in the marketplace, that can happen. But I think that the product attributes, or lack of product attributes, that ULCCs have will change.

Aaron Karp:

How has that happened? Because Spirit had a real heyday for a while where they were doing really well. It seemed at that time like ULCCs, this was say between 2007 and 2015, were really going to have a foothold on the U.S. market. What have the majors done to push them more to the side?

Lori Ranson:

Well, the major airlines introduced their own versions of basic economy, which are product-wise a bit better than the ULCC bare bones. You also have loyalty credit cards that the major airlines have that are much stronger than the ULCCs. You have network breadth that you can offer. So you're offering all these benefits at a similar price, you can get to more places. There's more comfort, and there just has been a shift, consumer preference to more high-end products. I think the big question going forward is this a permanent shift? Because the ULCCs will argue, "Well, in the next cycle our model will emerge stronger." So that's the big question going forward.

Are they right? If you talk to legacy airlines, they believe that this is a permanent shift in the marketplace. I think that there's also for legacy airlines, once you get them in the basic economy product offering, there's a lot of upsell. So passengers come in at basic economy, but then they buy up to Main Cabin Extra or something along those lines. So I just think that with their size, American, Delta and United can offer a lot more than the ULCCs that are competing directly with them. If you look at Allegiant and Sun Country, their models are a bit different. They don't compete as much and they can keep their products the way they are. But larger ULCCs need to think about how to offer a better product within their cost base that they're trying to achieve.

Aaron Karp:

And it should be noted also that Avelo and Breeze have more and more adopted a strategy of not competing. In other words, Avelo, I think over 90% of their routes now are noncompetitive. And so one option for airlines that are trying to compete, especially with a lot of the majors pulling out of the regional markets, is simply to operate on routes that are not being operated on by the mergers. So just wanted to throw that in there. And talking about the ULCC sector, Christine, Frontier was the original player as we talked about, involved in this. What do they do going forward? Are they going to have to change their model?

Christine Boynton:

Sure, so they're actually transitioning their network a bit. They're modeling themselves on their counterparts in Europe where they're looking to achieve a more out and back model. So that's something that will help them manage their costs if their aircraft are returning to base nightly. And so that's their focus for the year ahead. They've already made some strides and I believe they're trying to get to about an 80% out and back model by peak summer flying this year. That's where they're headed.

Adding on to Lori's answer, there's something that United continues to mention, which is cost convergence, which is giving the larger airlines in their view a competitive advantage. And so the idea behind that is ULCCs formerly had this competitive advantage with the low fares. Well, if everyone's costs are rising because of the shared constraints, the very familiar constraints at this point, that includes though pilot pay, which we've seen some very lucrative contracts being finalized within the last year. If all of the costs are rising together, then the ULCC fares will have to rise alongside that in order to be able to manage these costs. And so that cost convergence has also been an element here.

And JetBlue's pilots, now that that deal has fallen through with Spirit, are looking to negotiate their own standalone contract. They had signed a two-year extension previously, but they could be negotiating their own standalone contract as soon as the end of this summer. So we'll see what comes out of that.

Aaron Karp:

Great. Well, I think that's a good note to end on, a fascinating discussion. And I want to thank Lori and Christine for joining us today. Thank you everyone for listening. Please follow us on Apple, Spotify, or wherever you listen to your podcasts. This is Aaron Karp disembarking from Window Seat.