Analysis: JetBlue, Spirit brace for tough regulatory review

By Diane Bartz, David Shepardson and Anirban Sen

(Reuters) – JetBlue Airways Corp and Spirit Airlines Inc face an uphill struggle getting U.S. regulators to approve their combination after Spirit talked up the chances of the deal being blocked when it was resisting the $3.8 billion acquisition bid.

Spirit flagged the regulatory concerns when it was resisting JetBlue’s overture in favor of a $2.7 billion deal to sell itself to Frontier group Holdings Inc. The Frontier deal collapsed after Spirit shareholders balked at supporting it in a vote on Thursday, pushing Spirit into the arms of JetBlue.

The combination will create the fifth-largest U.S. airline at a time when high energy prices, a tight labor market and swelling demand for travel following the COVID-19 pandemic have sent airfares soaring. U.S. President Joe Biden has also lamented the lack of competition in the airline sector.

This has spurred regulators to look for anticompetitive behaviors.

The U.S. Justice Department filed a lawsuit last year asking a judge to break up JetBlue’s “Northeast Alliance” partnership with American Airlines, arguing it would lead to higher fares for consumers. A trial is scheduled for September.

Six antitrust experts interviewed by Reuters said there was a good chance the Justice Department would sue to stop the planned transaction.

“It’s a tough climate for deals. … it’s a strong possibility” that the government will sue to stop the merger, said Seth Bloom, a veteran of the Justice Department who now runs his own advisory firm Bloom Strategic Counsel.

He said it was also possible a court would uphold the deal.

Spirit had cited the Justice Department lawsuit seeking to break up its Northeast Alliance as a reason to fear regulators would could block its sale to JetBlue when it was trying to persuade Spirit shareholders to back the deal with Frontier instead.

Nevertheless, many Spirit shareholders wanted the company to pursue the deal with JetBlue despite the regulatory risks, because they found the financial terms of JetBlue’s offer more attractive.

Spirit had also previously said that a deal with JetBlue would eliminate seats and raise fares in some markets – two factors that “make it a very difficult transaction to get done.”

JetBlue has acknowledged that the regulatory process could be drawn out, stating on Friday it did not expect the deal to be completed before December 2023. But its CEO Robin Hayes told Reuters on Thursday he believed the deal will withstand regulatory scrutiny, arguing it will prod legacy carriers to reduce air fares.

CONCERN ABOUT RISING FARES

The four largest carriers control more than 80% of the market, and JetBlue says that it will be able to better undercut their fares if it has more scale. Critics argue that Spirit will cease to be a low-cost airline under JetBlue and that the Spirit passengers are bound to experience a rise in fares as a result, even if their prices remain below those of the top four carriers.

“JetBlue’s efforts to acquire Spirit … are likely to exacerbate the appalling service, regional inequality, and diminishing trust in flying that now characterize the industry,” said William McGee, an aviation expert at the American Economic Liberties Project.

If the deal is blocked by regulators, JetBlue will owe Spirit a so-called breakup fee of $470 million. JetBlue has offered to divest some routes to increase the chances that regulators greenlight the combination with Spirit.

(Reporting by Diane Bartz and David Shepardson in Washington, D.C. and Anirban Sen in New York; Editing by Greg Roumeliotis and Howard Goller)