For months, Spirit Airlines Inc. fended off JetBlue Airways Corp.'s advances in an attempt to preserve its deal with Frontier Group Holdings Inc.
In late June, its defenses started to crack. Ted Christie, Spirit's chief executive, and Mac Gardner, its chairman, flew to New York the first week of July to meet their counterparts at JetBlue in a hotel near John F. Kennedy International Airport.
They met face-to-face with JetBlue Chief Executive Robin Hayes and Chairman Peter Boneparth for the first time since JetBlue swooped in with a higher offer for Spirit, according to people familiar with the matter. The goal was to reset the tone in a negotiation that had been publicly acrimonious.
Three weeks later, the companies made the announcement that JetBlue would buy Spirit in a $3.8 billion deal that would create the fifth-largest U.S. airline. Airline executives who have spent nearly four months as staunch adversaries are now joining to persuade U.S. antitrust regulators that they should be allowed to merge.
"Many things were said, but business is business," Mr. Christie said in an interview after the new deal was made public.
The deal -- years in the making for JetBlue -- is seen moving the carrier closer to challenging the four large U.S. airlines that control about 80% of the domestic market. Without a merger partner, analysts have said, JetBlue could eventually become a takeover target.
Still, the combination faces hurdles. Many analysts and industry observers doubt regulators will approve the deal, and some have questioned the fit between JetBlue's service -- known for amenities along with lower fares -- with Spirit's no-frills offering.
"It's like Nordstrom buying the Dollar Store," said David Siegel, a longtime airline executive who once served as the chief executive of Frontier and is chairman of another low-fare airline. JetBlue and Spirit have "completely different products, customers, and cultures," he said.
Spirit's shareholders resisted the airline's view that the merger with Frontier was a better deal, despite the lower price tag.
Mr. Christie said in May that JetBlue's cash offer was a cynical effort to keep Spirit and Frontier from becoming a more formidable foe. Even in late June, he argued that a deal with JetBlue was almost certain to be blocked by regulators, leading to "two years of strategic abyss" for Spirit.
Frontier sweetened its offer, hoping to win shareholder support ahead the shareholder vote, throwing in more cash, boosting the breakup fee it would pay if regulators blocked the deal, and promising to pay a portion of the price right away after shareholders approved the deal.
JetBlue swiftly countered with a larger breakup fee, a bigger upfront payment, and the addition of a ticking dividend-like payment starting next year to counter uncertainty about how long it might take a deal to be completed.
Investors favored JetBlue's cash over Spirit's arguments. As votes came in ahead of the June 30 shareholder meeting, it became clear that the Frontier deal was floundering. Even traditional money managers such as BlackRock and Fidelity were voting against the merger, some of the people said.
Spirit postponed the shareholder meeting -- its second such delay -- to regroup.
Its leaders gradually realized that they were no longer facing a decision between being acquired by JetBlue or by Frontier, but between a deal with JetBlue or no deal at all, and formulated a new plan with its advisers, some of the people familiar with the matter said.
Spirit continued to advocate for the Frontier deal, but talks with JetBlue also progressed, and Spirit postponed the shareholder meeting two more times to speak with suitors and investors. Frontier Chief Executive Barry Biffle wrote to Spirit on July 10 that Frontier had made its best and final offer, solidifying the new stage in deliberations.
"Ultimately, we weren't heading toward stockholder approval for the Frontier merger," Mr. Christie told Spirit employees in a message Thursday. Mr. Christie said he'd been trying to get the best deal for Spirit and its shareholders, and that the final agreement was better than what JetBlue had originally offered, with more protection.
The deal price hasn't changed since JetBlue's offer in late June, but more recent discussions focused on how the two carriers would operate while the deal is being reviewed, protections if it should be blocked, and formalizing JetBlue's commitment that Spirit's workers can stay in Florida, the people said. JetBlue and Spirit came to a final agreement after Spirit and Frontier terminated their merger on July 27.
JetBlue agreed to pay an additional $70 million to Spirit if regulators block the deal, in addition to the $400 million breakup fee for Spirit's shareholders it had already offered.
While industry observers for years had anticipated a deal between Frontier and Spirit, JetBlue had also had its eye on the Florida-based discounter.
New York-based JetBlue had missed out on a chance to buy Virgin America after losing a bidding war to Alaska Air Group Inc. in 2016.
In early 2020, JetBlue's board had extensive discussions about the prospect of buying Spirit, and by February 2020, JetBlue was prepared to approach Spirit about a potential deal, according to people familiar with the matter. Before it did, the Covid-19 pandemic turned the industry upside down. Airlines quickly turned their attention inward to shore up their balance sheets in order to weather the steep downturn.
When Spirit and Frontier announced plans to merge in February in a $2.9 billion deal, Mr. Hayes knew he had to act quickly. He called advisers that day, one of the people said.
JetBlue's advisers worked through a series of questions. Did Frontier have enough cash to withstand a bidding war? Would the Northeast Alliance, JetBlue's partnership with American Airlines Group Inc., be an impediment? That arrangement was already being challenged by the Justice Department.
The JetBlue team concluded that making a run at Spirit could work. By agreeing to an acquisition by Frontier in the first place, Spirit's board had signaled that it was for sale, and could be open to a better offer, they reasoned.
Spirit's investor base was heavily tilted toward individual investors, something JetBlue's team believed could make it difficult for Spirit to corral enough support to win a contested vote. And even as the Justice Department was challenging JetBlue's alliance with American, it touted JetBlue as a disruptive competitor.
Mark Ahasic, an aviation consultant and former JetBlue executive, said buying Spirit will give JetBlue the heft it needs to become more relevant in places like the middle of the country, where it doesn't offer enough flights to be a threat to bigger airlines. "In my opinion JetBlue really needs to grow to become more of a national player," he said.
JetBlue's Mr. Hayes has said Spirit's pilots, fleet and order book for new planes are a big part of the airline's appeal, speeding up expansion that would otherwise take JetBlue years to achieve on its own.
JetBlue executives have said the two airlines have more in common than it might seem. JetBlue has said it brings fares down when it enters new markets, and also offers a basic product geared toward the most budget-conscious travelers, like Spirit's customers.
The airlines will likely face intense scrutiny from the Justice Department, which for years has been concerned that airline competition is dwindling and has been criticized by consumer groups and antitrust advocates for allowing so many combinations to go forward.
Mr. Hayes said a merger between JetBlue and Spirit could address some of the concerns about a lack of competition in the airline industry. "We believe competition is much more greatly enhanced by allowing this transaction," he said last week.
Gordon Bethune, former chief executive of Continental Airlines, said a larger JetBlue would be a more effective check on the big airlines that dominate the industry.
"If we put Frontier and Spirit together, we just have one big cheap airline," he said. "The best for the United States consumer would be JetBlue strengthening."
Comments