As the pandemic hit in early 2020, airlines cut back staff, current pilots retired, and fewer new pilots started their training . Those shortages have now left carriers scrambling to keep up with rebounding travel demand, and driven smaller airlines to merge with or buy rivals to make the most of a pared-back staff and surging customer base. Both JetBlue (JBLU 1.05%) and Frontier (ULCC -2.08%) are bidding hard for Spirit Airlines (SAVE) in this mad dash for consolidation. This battle between midsize carriers stands to make either of the bidders stronger and more secure in the future -- but now just might be the right time to get in on shares of Spirit before a winner emerges.
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Intense competition for acquisition
Mid-size carriers lack the soaring market caps and cash reserves of their bigger airline brethren, but the belt-tightening of the past few years has left them running leaner operations with an eye toward expansion on the horizon. Consolidation means a more diverse and numerous fleet, access to additional airports, and a reduction in overall competition in markets where both carriers currently exist.
Spirit agreed to merge with Frontier on Feb. 5, subject to an upcoming shareholder vote on June 10. The deal trades each share of Spirit for 1.9126 shares of the merged company, plus $2.13 in cash. In response, Spirit shares rose from $21.73 to $27.53 over the next few days, approaching the roughly $29.40 Frontier's offer was worth on the day news of the deal broke. Frontier's flight attendant union has already approved the move, but regulators and shareholders still need to follow suit to seal the deal.
In response to the potentially stronger competition, JetBlue's CEO Robin Hayes said on April 6 that the Spirit-Frontier deal "created a window of opportunity that if you don't act in it, it's gone." In early April, JetBlue offered a hostile bid of its own to buy Spirit, leaving airline stock investors uncertain about the eventual victor and hesitant to jump on the Spirit bandwagon.
After their initial uptick from Frontier's offer, Spirit shares have settled lower on uncertainty, and Frontier's stock has fallen from $14.26 to around $10. JetBlue first bid $30 per share for Spirit, but has sweetened that offer to $33 as the shareholder vote approaches -- more than $10 per share ahead of Frontier's, which adds up to $21.60 at the latter company's current prices.
How regulators could derail a done deal
There's more on the table than just the buyout price when it comes to evaluating a JetBlue offer, though. Because a combined JetBlue and Spirit would directly impact markets where JetBlue's partner American Airlines (AAL -1.77%) operates, any deal between JetBlue and Spirit may lead antitrust regulators in New York to intervene. The move would reduce the number of competing carriers in shared markets, creating a concern for regulators who seek to prevent monopolies in regional airspace. The Justice Department already filed suit against the JetBlue-American partnership deal, in which JetBlue would service many American flights, sharing terminal space and simplifying transfers with the larger carrier.
JetBlue has yet to complete an attempted merger, losing its bid for Virgin Airlines in 2016 to Alaska Air. JBLU share prices fell by 40% during the competition for Virgin, delivering the stock its biggest recent dip outside of the pandemic shutdown. This could leave investors wary that JetBlue has once again overextended itself in trying to woo existing Spirit shareholders, only to lose footing in key markets if Frontier's bid wins out.
Meanwhile, Frontier only debuted its IPO during the pandemic, making it a relatively new player on the public scene. Its inexperience could prove costly if it fails to secure the merger and the courts side with American and JetBlue in competitive markets.
Blue skies on the horizon
A hypercompetitive discount carrier market means that if either of these two consolidations complete, the emerging carrier likely gains an edge over other airlines in the same regions. The JetBlue takeover could either result in a quick win for investors, or draw out over time amid protracted legal issues. Similarly, those betting on Frontier's offer could see it rejected outright in the next month if JetBlue wins with a direct appeal to shareholders. Frontier looks to be closer to a successful buyout heading into the June 10 vote, while JetBlue likely faces a much more protracted and unlikely road to a successful takeover,.
Still, signs point to the announcement of an eventual winner in the competition, rather than all three carriers remaining separate entities. While wagering on Frontier or JetBlue's success looks risky, investors who get in on Spirit now could be well-positioned to either reinvest buyout funds from JetBlue in a stronger combined carrier, or enjoy immediate shares of a strengthened Frontier if and when consolidation completes. Regardless of the ultimate winner, jumping into Spirit now might offer investors an option to get in on the ground floor of a newly combined carrier before it begins to flex its muscle in the years ahead.
