This week, JetBlue Airways (JBLU 0.88%) made public its plan to try to disrupt the planned merger between Frontier Group Holdings (ULCC 0.21%) and Spirit Airlines (SAVE 2.61%). But bidding wars tend to work out better for the targets than for the bidders, and investors in JetBlue and Spirit had very different reactions to the news.
As of Thursday afternoon, shares of Spirit were up 20% for the week, while shares of JetBlue were down by a similar percentage.
The animal spirits on Wall Street have begun to move airline stocks again after a tough couple of years for the industry. In February, ahead of an expected rebound in travel demand, Frontier and Spirit announced plans to combine in a deal under which Spirit shareholders would get a combination of cash and Frontier stock. At current prices, Spirit shareholders were set to receive about $24 per share for their stock.
But JetBlue hopes to crash that party. On Tuesday, it offered to acquire Spirit for $33 per share in cash, a significant premium to the Frontier offer. Spirit has acknowledged receipt of the offer and said its board is evaluating the merits of the proposed combination.
There's a lot of uncertainty about what happens next, in part because, at least on paper, JetBlue's offer seems more likely to attract regulatory scrutiny and could have trouble winning approval. Spirit and Frontier presented their deal as a merger of two like-minded regional players that would create a national airline better able to compete against larger carriers. But JetBlue and Spirit have a lot of overlapping routes on the East Coast, and JetBlue already partners with American Airlines Group in some regions instead of competing against the titan.
In the meantime, Spirit shares traded up on hopes that either the JetBlue offer will win out or that Frontier will be forced to sweeten its bid. It is worth noting that Spirit currently trades above Frontier's offer price, but well below what JetBlue has offered, reflecting the market's uncertainty about the outcome.
The JetBlue story is a little more complicated. Stocks of would-be acquirers often go down because of the added debt and integration risks that come with such deals, but there's a bit more going on here. Investors appear to view JetBlue's offer as an admission that the airline has no easy path forward from here.
JetBlue wins high marks from customers for its perks and high quality of service, but the airline is relatively small compared to its competitors and is largely hemmed into a few key airports in the Northeast and Florida. Spirit, which is known for its low-frills model, would be a poor cultural match, but it would broaden JetBlue's route network, give it bulk in more cities, and help it source planes and flight crews for growth.
The domestic airline industry is already fairly consolidated, with the top four carriers controlling about 80% of the U.S. market. If Spirit goes with Frontier, there is no obvious consolation prize for JetBlue to snap up.
JetBlue has navigated through difficult times before, and still enjoys much better consumer loyalty numbers than most airlines. It is too soon to hit the "eject" button on this stock. But investors should be careful buying into it on the decline, and understand that JetBlue is more likely acting from a position of weakness than of strength.