What happened

Executives at JetBlue Airways (JBLU -3.67%) and Spirit Airlines (SAVE -10.76%) expect the Department of Justice (DOJ) to move to block their proposed merger. That news sent shares of Spirit into a tailspin. As of 2:15 p.m. ET Monday, with the broader market indexes up fractionally, Spirit shares were down by 6.3%.

So what

Last summer, JetBlue and Spirit agreed to combine in a cash-and-stock deal that valued Spirit at about $7.6 billion, including debt. JetBlue outbid Frontier Holdings Group for the prize, but from the start, there have been some concerns that the two airlines' overlapping route networks and dissimilar business models would lead regulators to oppose the merger.

Spirit, like Frontier, is an ultra-low-cost airline that has the ability to drive down ticket prices throughout the industry. Spirit and Frontier had argued that their proposed merger would be pro-competition because it would have created a budget carrier with more scale. By contrast, Frontier warned that if JetBlue bought Spirit, the impact would be to take a significant low-cost player out of the picture.

It appears that regulators share Frontier's concerns. In a Wall Street Journal article published Monday, JetBlue CEO Robin Hayes said he is bracing for a Justice Department decision to try to block the deal in the coming days.

"My expectation is that we will get sued by the DOJ this week," Hayes told the newspaper.

A lawsuit would not necessarily mean the merger is doomed, but if nothing else, it would delay the closing. If the airlines and the regulator can't come to a settlement agreement, it would be up to a judge to decide whether or not the deal can proceed.

Now what

JetBlue's agreement with Spirit calls for the airline to pay Spirit investors a $400 million breakup fee in the event regulators block the combination, on top of the $70 million that would be owed to Spirit. That would be some consolation for Spirit shareholders, but the airline as a stand-alone company is almost certainly not worth anything close to the $33.50 per share JetBlue agreed to pay for it.

It is impossible to say what happens from here. JetBlue believes it has a good case to argue about the consumer benefits of the combination, but the many mergers over the last decade and a half have left the passenger airline industry highly concentrated, and that has led to a considerable level of consumer complaints. The DOJ might be willing to allow the deal to go through if JetBlue agrees to walk away from a separate alliance it has with American Airlines Group (AAL -1.61%), but JetBlue has so far said that is off the table.

Given the uncertainty, it is no surprise many investors are apparently choosing to take what they can get for their Spirit shares now.