What happened
On Monday, two U.S. discount airlines announced plans to merge. Shares of JetBlue Airways (JBLU +3.93%) surged by more than 5% in early trading on speculation that perhaps it could be the next acquisition target. As of 11:04 a.m. ET, the shares were up by 4.2%.
So what
Airlines were hard hit by the pandemic, but the industry is slowly recovering from its lows. The sector hit a milestone in that recovery on Monday, when discount carriers Frontier Holdings Group (ULCC +9.38%) and Spirit Airlines (SAVE +0.00%) announced plans to combine to create the nation's fifth-largest airline.
Image source: JetBlue Airways.
A combination would be more dangerous to attempt during a crisis, so the deal announcement signaled to investors that the companies believe the worst is behind them. It also led to inevitable speculation about what other airlines might be acquisition targets, and JetBlue placed high on a lot of lists.
JetBlue, like Spirit, has a niche product, though JetBlue has a reputation for high-end service. Its large presence in New York and Boston and its focus on premium fares would likely be of interest to a number of other airlines, including current partner American Airlines Group (AAL +4.61%).
American has a long history of acquisitions: Its current form was the product of a merger between American and US Airways, which itself was the product of a merger between US Airways and America West. The old America West management team, which was known for its aggressiveness, still occupies a number of key positions at the current airline.
Now what
The excitement is understandable, but investors shouldn't rush to buy JetBlue shares assuming a deal is imminent.
American has the highest debt-load in the industry, and it will need more time than most of its peers to fully recover from the pandemic. It is also in the middle of a management transition, with longtime CEO (and architect of both the America West/US Airways deal) Doug Parker set to step down on March 31. And the current alliance between American and JetBlue has already come under scrutiny by regulators on anti-competitiveness grounds, which gives reason to doubt that a full-fledged merger between the two would be allowed.
The good news for JetBlue -- and all the other airlines -- is that airline mergers tend to be messy, so if nothing else, this deal means that two low-cost competitors will likely be distracted over the next year. Assuming demand continues to grow as we approach the summer vacation months, JetBlue should be well-positioned to win more leisure traffic.
