Judge Blocks JetBlue’s $3.8 Billion Acquisition of Spirit Airlines on Antitrust Grounds

A federal judge on Tuesday blocked JetBlue’s proposed $3.8 billion acquisition of low-cost carrier Spirit Airlines, siding with the Justice Department which argued the deal would lead to higher fares.

Background of the Proposed Merger

Spirit and JetBlue, the 6th and 7th largest U.S. airlines respectively, announced last July that they planned to merge. This came after a bidding war between JetBlue and Frontier Airlines to acquire Spirit. JetBlue ultimately made the higher offer worth $3.8 billion.

The merger was intended to create the 5th largest U.S. airline and a more competitive rival to the 4 giant airlines that control over 80% of the market – American, Delta, United and Southwest. JetBlue and Spirit argued that by combining forces, they could offer passengers more options and lower fares.

However, the Justice Department sued to block the deal last September, warning that it would reduce competition and lead to higher ticket prices.

Judge Finds Deal Violates Antitrust Laws

In a victory for the Biden administration, U.S. District Judge Hilda Tagle in Massachusetts sided with antitrust regulators in a December trial, ruling on Tuesday that the merger would substantially lessen competition in violation of antitrust laws.

In her 153-page opinion, Judge Tagle wrote that the merger would give JetBlue control of Spirit’s valuable airport slots and gate rights that power budget carriers:

“The merged airline would have both the incentive and ability to reduce capacity, raise fares, lower service quality, or restrict valuable loyalty program benefits on city pairs where Origin-Destination overlaps between Spirit and JetBlue exist today or where future overlaps would have existed.”

Her ruling cited internal company documents showing executives discussing plans to reduce flights in order to increase airfares after gaining control over Spirit’s operations.

“This ruling preserves competition in air travel and protects consumers from higher prices and reduced choices,” said Assistant Attorney General Jonathan Kanter.

Spirit Stock Plummets Over 50% as Its Future Looks Grim

Shares of Spirit Airlines plunged over 50% on Tuesday following news of the judge’s decision. The stock closed at $8.86, down from $24.25 on Friday.

Spirit now finds itself in a perilous situation, with few alternatives besides a potential bankruptcy. Analysts say Spirit lacks the resources to effectively compete on its own against larger rivals over the long term.

In a note, Cowen analyst Helane Becker wrote: “Spirit could end up in Chapter 11 or liquidate altogether.” She added that American, Delta or United could step in to acquire Spirit but are unlikely to offer a premium after the share collapse.

Meanwhile, JetBlue stock initially jumped nearly 7% as investors cheered the company avoiding a potentially overpriced acquisition. But shares gave up most gains to close 1.6% higher.

“Spirit is now on the brink whereas JetBlue retains ample liquidity,” JPMorgan analyst Jamie Baker wrote.

Justice Dept. Under Biden Gets Major Antitrust Win

The blocked airline deal hands President Biden’s Justice Department a big victory in its antitrust crackdown on consolidation across industries. It comes amid growing public frustration over higher prices from dominant companies.

Assistant AG Kanter said the ruling “preserves competition in air travel and protects consumers from higher prices and reduced choices.”

In another win last month, the Justice Department convinced a judge to block publishing giant Penguin Random House’s purchase of competitor Simon & Schuster.

While Democrats have pushed tougher merger oversight, the airline ruling drew bipartisan praise. “Capitalism without competition isn’t capitalism,” tweeted Republican Senator Marco Rubio. “It’s exploitation.”

What Happens Next With Airlines and Consolidation

With the JetBlue deal blocked, analysts expect Spirit will struggle to survive on its own without merging into a larger carrier.

JP Morgan’s Baker says American, Delta or United could still pursue buying Spirit for its operations in Florida and othervaluable routes. However, he says they won’t bid nearly as much as JetBlue’s offer.

There’s also a scenario where a private equity firm acquires Spirit out of bankruptcy. Or the airline could choose to liquidate altogether if other deals don’t materialize.

As for further industry consolidation, experts say the ruling will make airlines think twice about large mergers likely to get challenged on antitrust grounds.

But analysts say we’ll still see smaller regional tie-ups that strengthen connectivity between regional markets without reducing major competition.

Alaska Airlines is reportedly in talks to fold regional Sun Country Airlines into its operations. And ambitious budget startup Breeze Airways is seen as a potential buyer for Eastern Airlines’ Latin America routes.

So while an era of giant mergers between major airlines seems halted, market watchers expect ongoing maneuvers by second-tier carriers trying to gain more competitive footing.

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