The Jan. 16 federal court ruling blocking the merger of Spirit Airlines with JetBlue could have dire consequences for Spirit and leave JetBlue with a murky future.
Spirit has been unable to return to profitability in the post-pandemic period and is projecting losses of more than $460 million for 2023.
Spirit and JetBlue have the option to appeal the court decision, which was rendered by U.S. District Court Judge William Young. But barring a successful appeal, Spirit would likely look for another buyer at a price significantly lower than the $3.8 billion JetBlue had agreed to pay, analysts say.
One potential buyer is Spirit's largest ultralow-cost carrier (ULCC) competitor, Frontier, which had entered into a purchase agreement for Spirit in early 2022 before being outbid by JetBlue.
"I think Frontier would still be interested for the right price," said Brad Beakley, CEO of the consultancy Hospitio.
In the airline industry, scale matters, Beakley said, and acquiring Spirit would help Frontier right-size its capacity in the ULCC sector.
However, Cowen investment analyst Helane Becker wrote that Frontier in 2022 had intended to use its shares to pay for the acquisition. Since that time, Frontier share prices have declined by 60%.
A more likely scenario, Becker said, is a Chapter 11 bankruptcy filing by Spirit, followed by a liquidation.
"We recognize that sounds alarmist and harsh, but the reality is we believe there are limited scenarios that enable Spirit to restructure," she wrote, adding that Spirit has limited free cash flow.
An overriding problem for Spirit, analysts say, is that there is too much capacity among domestic discount airlines.
Meanwhile, Beakley said, the ability of ULCCs to separate themselves from major airlines on a cost basis has gone down due to labor scarcities that have driven up wages.
The outlook for JetBlue, should Young's ruling stand, is better, analysts say. Per the terms of their agreement, JetBlue will have to pay Spirit a $70 million breakup fee if the merger fails. But the failure of the merger would also prevent JetBlue from taking on approximately $3.5 billion in debt.
In the immediate aftermath of Young's decision, Spirit's stock dropped by more than 40%, but JetBlue stock bumped upward almost 5%.
"We think the relief rally in JetBlue's shares reflected the view that JetBlue was no longer on the hook for an expensive deal," wrote Deutsche Bank investment analyst Michael Linenberg.
A second setback for JetBlue
Still, failing to acquire Spirit would be JetBlue's second major jolt since May, when a court ordered the breakup of its alliance with American Airlines in the New York and Boston areas.
Brett Snyder, an airline industry analyst who pens the Cranky Flier blog, wrote that JetBlue might now want to consider joining American in its appeal of that court decision. JetBlue, he said, should also focus on improving its industry-lagging operational performance, place more emphasis on Boston where it is the leading carrier, and look for new U.S.-based opportunities as it takes on new aircraft.
Beakley said JetBlue, which will have a new CEO next month when president Joanna Geraghty replaces outgoing CEO Robin Hayes, will have to develop a new strategy to avoid being marginalized. The airline's product, which features the most economy legroom among the large U.S. carriers, places it in the premium leisure end of the market. But with its smaller loyalty program and size-limited network, JetBlue isn't able to command the fare premiums of Delta, United and American.
Beakley added that the real winners of Young's decision were the Big Three carriers, who won't have to face stiffer competition from a bigger and stronger JetBlue, should Young's ruling stand.