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

In a stunning blow to JetBlue’s growth ambitions, a federal judge has blocked the airline’s $3.8 billion acquisition of ultra-low-cost carrier Spirit Airlines on antitrust grounds. The deal, announced in July 2022, was intended to create the fifth-largest airline in the US, but ran into opposition from the Biden administration over concerns about reduced competition and higher fares.

Background of the Proposed Merger

JetBlue has long wanted to expand beyond its main bases in New York, Boston and Florida to compete more directly against the four largest US airlines – American, Delta, United and Southwest. Acquiring Spirit and its extensive network in major US cities and leisure destinations in Latin America and the Caribbean represented an opportunity for JetBlue to grow rapidly without the pains of organic expansion.

Spirit was an attractive target thanks to its ultra-low cost model that delivered industry-leading profit margins even as it offered some of the cheapest fares in the market. Combining JetBlue’s popular service model with Spirit’s low costs had appeal for both airlines.

After a brief bidding war with fellow discounter Frontier Airlines, JetBlue and Spirit announced an agreement for JetBlue to acquire Spirit for $33 per share last July. The combined airline would have a fleet of 458 aircraft, making it similar in size to American or United.

However, there were concerns about the merger from the start. The deal faced skepticism from the investor community over execution risks. There were also doubts about antitrust clearance from the Department of Justice. Combining two maverick low-cost carriers raised red flags about reducing competition and consumer choice. Nonetheless, JetBlue CEO Robin Hayes expressed confidence the transaction would close as planned in the first half of 2024.

That optimism faded in late 2022 as DOJ antitrust chief Jonathan Kanter ramped up his scrutiny of the deal. The department filed suit in federal court in December to block the acquisition on antitrust grounds. This set the stage for a legal battle playing out over the past few weeks.

Judge Torruella Blocks the Merger Citing “Irreparable Harm” to Consumers

In a sternly worded ruling on January 16th, Judge Gustavo Gelpi Torruella of the US District Court in Massachusetts sided with the Justice Department and permanently enjoined JetBlue from acquiring Spirit. The judge determined the merger was likely to substantially reduce competition and lead to higher fares, especially on nonstop routes where JetBlue and Spirit compete head-to-head today.

In the 48 page ruling, Judge Torruella wrote “The merger of JetBlue and Spirit would result in irreparable harm to consumers through the loss of head-to-head competition between the airlines.” He noted the combined airline would control nearly 50% of scheduled seats in major markets like Boston, Fort Lauderdale, Orlando and Las Vegas. The lack of viable competition on these routes after a merger could enable the new airline to “to profitably impose higher prices and reduce service.”

The judge concluded this was likely to significantly hurt consumers and the public interest through price increases totaling hundreds of millions of dollars per year. He thus ruled to permanently block the transaction to prevent this harmful consolidation in the airline industry. This forceful rejection represents a major setback for JetBlue as it sought to expand by acquiring Spirit’s extensive domestic and nearby international route network.

Spirit Stock Craters as Airline is Left Twisting in the Wind

Shares of Spirit Airlines crashed after the ruling dashed plans to be acquired by JetBlue at a significant premium. Spirit stock plunged by over 50% to around $7 per share following the judge blocking the deal. This wipes out about $4 billion in equity value and leaves Spirit twisting in the wind as a standalone airline once again.

Spirit now faces being a small discount airline competing in many markets against behemoths created by mergers like American-US Airways, Delta-Northwest and United-Continental over the past two decades. Analysts fear Spirit could struggle to compete and end up needing to file for bankruptcy.

Cowen airline analyst Helane Becker wrote in a client note that if Spirit isn’t acquired soon, “We see a path to Chapter 11 and potentially a liquidation” for the airline. Other analysts echoed this view that without a merger to give it greater scale and resources, Spirit may lack a viable path forward as losses mount in 2024.

This ruling creates huge uncertainty for Spirit employees, customers, suppliers and creditors who could get caught up in a potential court-led restructuring. It also calls into doubt Service’s growth plans which relied heavily on achieving greater economies of scale through combining with JetBlue.

For now, JetBlue investors appeared to breathe a sigh of relief at dodging the troubled acquisition. JetBlue shares rose nearly 8% as investors saw the judge’s ruling as sparing the airline from making a risky overvalued purchase of Spirit. But this leaves JetBlue still yearning to expand meaningfully beyond is current Northeast and Florida networks.

Consumers Benefit from Preserving Competition Says Biden Administration

The Biden administration praised the court ruling, noting it preserves competition in domestic air travel and protects the interests of consumers. White House Chief of Staff Ron Klain said in a statement “This decision protects consumers and ensures customers don’t pay higher fares because of less competition.”

Attorney General Rob Bonta, who coordinated the states participation in the Justice Department’s legal challenge of the merger, echoed this sentiment. “The travel corridors in and out of California and other states would have been negatively impacted from this merger that is why we stand ready to challenge other mergers that could reduce competition and take more money out of consumer’s pockets.”

The ruling appears to validate the administration’s vigorous use of antitrust laws to promote competitive markets across industries from airlines and meat packing to technology and hospitals. This pro-enforcement approach views protecting existing competition as preferable to the alternative of having regulators try to constrain monopoly power after mergers consolidate entire industries.

Consumer advocacy groups also applauded the court’s move to preserve choices for air travelers around the country. Bill McGee of the American Economic Liberties Project said “This merger was clearly anti-competitive from the start – combining two upstart low-fare airlines into one giant airline would have harmed consumers through reducing options and higher prices.”

What Does This Mean for Consumers and the Industry Going Forward?

So where do things go following this huge shock that the judge blocked JetBlue acquiring Spirit?

More volatility ahead for Spirit

The outlook for Spirit Airlines and its low-cost model faces renewed uncertainty now that its proposed sale to JetBlue was permanently halted on antitrust grounds. Analysts see potential for Spirit’s financial situation to deteriorate rapidly amid high fuel prices and competitive pressures. Bankruptcy is a real possibility in 2024. Spirit could end up acquired out of bankruptcy or potentially liquidated if losses mount too high.

This is an unfortunate outcome for Spirit employees and the airline’s hub communities in South Florida, Las Vegas, Atlantic City and elsewhere. But the judge and DOJ determined it was still preferable to approving a merger that would reduce competition across dozens of domestic routes frequented by millions of air travelers per year.

Relief for JetBlue as risks are avoided

Meanwhile, JetBlue avoids – at least temporarily – the risks associated with taking on billions in additional debt and integrating two very different airlines. Analysts see JetBlue’s stock potentially recovering back toward the $15 level where it traded prior to announcing the deal last summer.

But for JetBlue, this return to square one means going back to the drawing board in terms of plotting an expansion course beyond the East Coast. Analysts speculate JetBlue could take another run at acquiring Spirit in a couple years if bankruptcy or failed mergers leave the airline desperate for a buyer once again.

Consumers benefit from maintaining competition

The biggest beneficiaries fromJudge Torruella’s ruling are air travelers across the US who will continue enjoying competitive options and reasonable fares on dozens of routes where JetBlue and Spirit go head-to-head today. Protecting this competition was front and center in the judge’s thinking as he blocked consolidation in an already concentrated airline industry.

While this may be disappointing news for JetBlue and Spirit’s hopes of competing more effectively through greater scale, travelers weary of high ticket prices amid reduced competition since 2005’s Delta-Northwest merger will welcome slowing further consolidation. Maintaining six large national airlines and multiple smaller discounters should support fare affordability even with higher fuel prices.

So while this ruling came as a major shock and represents a roller coaster turn of events, the outcome aims to let consumers continue benefiting from airlines battling vigorously to offer competitive fares. This caps off a years-long quest by JetBlue to chart an expansion course which the judge ultimately decided would risk irreparable harm from lost competition if Spirit was acquired.

The saga has more plot twists likely ahead – but for now vigorous rivalry survives among America’s airlines thanks to this latest chapter where antitrust enforcement carried the day to block more consolidation.

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