Two months ago, Frontier announced a deal to acquire Spirit Airlines. This is not an April fool's joke, but JetBlue has made a bid for Spirit that is 40% higher than Frontier's offer.
The shares of Spirit closed up 22% and 17%. The airline closed down 7%. The market sees any deal for Spirit going for more than Frontier had offered. The winner will suffer from the winner's curse if the airline closes the deal.
If the price of the JetBlue deal is high enough, and if the DOJ doesn't stop it, then the shareholders of Spirit will be better off. As an ongoing business combination, Spirit is more valuable to Frontier than to JetBlue. The Northeast Alliance with American Airlines could be affected by the Spirit deal.
A high fees carrier is Spirit Airlines. They have more seats in them than the legacy carriers.
Though less operationally reliable than American, Delta, and United, Spirit's model is based on low costs and is friendlier to customers. This is what the corporate culture of Spirit is built around.
Customers have a choice in the market, they can choose to pay more to fly other airlines, or they can choose to fly with Spirit. It's great that Spirit is able to compete even for consumers who don't fly it. Their model and culture are completely different from the one offered by JetBlue, which still thinks of itself as offering more of a premium product.
The costs of the legacy operation will go up. If they are meant to fly as JetBlue, they will need to be retrofit. If they are separate operations, there will be confusion. If there is some product compatibility between the two, costs would go up. You have merger costs.
A deal like this makes no sense as part of an ongoing JetBlue operation. The Department of Justice could object to the combination of planes and pilots that it gives JetBlue access to in congested airports.
There is anti-trust concern about the combination. The federal government is concerned that this will mean less low fare competition, but the carriers don't generally compete with each other as much as legacy carriers. We can safely assume that a Frontier-Spirit tie-up will mean more low cost flying in the future, since they are bringing on so many new aircraft.
If there is a concern here, it should be in re-Frankeifying Spirit which has invested heavily in its product the past several years, improving its operational reliability once out from under the thumb of the aviation king of cost-cutting. Franke's Frontier would be the surviving leadership.
If the Department of Justice shows displeasure about a combination of the two airlines, there will be a fight between them. The federal government is trying to block the American Airlines-JetBlue joint business venture, but the control of Spirit by JetBlue would mean higher costs, less low cost flying, and more concentration in South Florida.
Anti-trust concerns about the American-JetBlue tie-up in New York would be raised even more since it would give JetBlue a greater presence in the New York market. There is no way that American + JetBlue + Spirit would have been approved by the DOJ.
Delta had a song. United had something. They also had Shuttle by United on the West Coast. MetroJet was owned by US Airways. McKinsey was selling the same idea to airlines in exchange for big fees. They needed to start low cost carriers inside their carrier to compete.
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Airport security lines have been long over the past few months. When passengers miss flights and their seats are not used efficiently, airlines have unhappy customers and it costs them. The TSA is hiring more screeners.
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At the State of the Airline employee event following American's third quarter earnings call, Raja explained the strategy and offered that we may even see a whole row given out as an elite benefit for some ultra low cost carrier partners.
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