Why Spirit Airlines Was Able to Gain Altitude in the First Half of 2022

What happened

Airlines were among the casualties in a dismal first half of the year for stocks, but Spirit Airlines was a noticeable exception. Shares of Spirit were up 9.1% in the first six months of 2022, according to data provided by S&P Global Market Intelligence, significantly outperforming the S&P 500's 20.6% fall.

So what

Spirit is a so-called "ultra-low-cost carrier" that has historically been the subject of late-night comedian jokes about its cut-rate fares and reputation for charging for frills other airlines include in the price. But a lot of execs in the airline industry apparently see value in this brand, sparking a bidding war for control of Spirit.

In February, Spirit agreed to be acquired by Frontier Group Holdings in a cash and stock deal worth about $24 per share at the time. In April, JetBlue Airways followed with its own $33 per-share cash deal, throwing the future of Spirit in doubt.

Simple math would say that JetBlue's offer is superior, but Spirit's board deemed that JetBlue would face a much more difficult time trying to win regulatory approval for its bid and decided to stay loyal to Frontier. In subsequent months, both suitors have sweetened their offers to include higher breakup fees and prepayments to Spirit shareholders prior to winning antitrust approval, and the outcome of the battle is not yet known.

The airlines have seen demand bounce back to near pre-pandemic levels, but a lack of pilots has limited growth. Both Frontier and JetBlue see a deal with Spirit as a way to jump-start growth.

Now what

Spirit shareholders were set to vote on the Frontier deal last week, but the vote was delayed until July 8 to allow Spirit's board more time to negotiate. It is far from clear that Spirit's board will change its preference away from Frontier, but the delay would imply that at the very least the board was uncertain that shareholders share its enthusiasm for Frontier's offer.

The airlines are also facing new headwinds that weren't around when Frontier and Spirit first agreed to merge, including higher fuel prices due to the Ukraine war and economic uncertainty due to higher inflation. While Spirit shares have held up well, US Global Jets, an exchange-traded fund (ETF) tracking the U.S. airline industry, was down 22% in the first half.

Despite the new challenges, both Frontier and JetBlue appear committed to getting a deal done. The takeover talk has so far insulated Spirit shares from the broader market fall. Investors are still waiting to find out what the eventual payout might be.