At the end of a planned shareholders’ meeting on an acquisition of Frontier Airlines, Spirit Airlines said on Wednesday night that they are postponing the vote and will continue to talk to both Frontier and a rival suitor, JetBlue.
The postponement, until July 8, was a fantastic turnaround in a battle that analysts say could reshape the aviation sector. The decision is a blow to the leaders of Frontier and Spirit, budget companies that want to combine so that they can compete more effectively with the country’s four dominant airlines.
The Frontier share-and-cash proposal values Spirit at about $ 2.4 billion, while JetBlue’s cash offer is around $ 3.6 billion. There are also competing carrots for investors, such as how much rivals would pay shareholders if regulators blocked the deal – $ 350 million in the case of Spirits and $ 400 million in the case of JetBlue.
“This says that both marriage proposals are attractive,” said Samuel Engel, senior vice president and aerospace industry analyst at ICF, a consulting firm. “They want to see what the maximum dowry is they can get.”
Frontier did not immediately respond to a request for comment on Spirit’s announcement.
JetBlue’s CEO Robin Hayes celebrated the postponement, the second time Spirit has pushed for a shareholder vote on the transaction. “It is clear that Spirit shareholders have now given the Spirit board an undeniable mandate to reach an agreement with JetBlue,” Hayes said in a statement.
Frontier claims that despite the offer’s lower nominal value, the shareholding allows Spirit investors to benefit further if the shares in the combined company rise. It has also attacked JetBlue’s bids as less likely to win regulatory approval. JetBlue claims that both bids are likely to be investigated.
Nevertheless, Frontier’s offer will also face a tough look from the Biden administration, which has taken a skeptical view of major corporate mergers. The number of major airlines has dropped drastically over the last two decades as airlines have merged, and customers are currently upset over airlines when they struggle with cancellations of mass flights.
Shares in Spirit were up 2.2 percent, to $ 22.90, in after-hours trading on Wednesday, but still well below the $ 33.50 that JetBlue has offered.
Spirit and Frontier announced a proposal to merge in February. Weeks later, JetBlue opposed its offer. What followed were rounds of one-upmanship and at times bitter words. Spirit dismissed JetBlue’s offer as a “cynical attempt” to disrupt the merger with Frontier, while JetBlue targeted Spirit’s board, claiming that Frontier’s ties prevented its objectivity from evaluating the agreement.
Frontier’s CEO, Barry Biffle, was a top executive at Spirit from 2005 to 2013. William A. Franke, chairman of Frontier, is also the managing partner of Indigo Partners. the private equity company that once owned both companies. He is expected to lead the board if the Frontier-Spirit agreement is approved. Frontier, now public, remains majority-owned by Indigo.
Last week, the influential advisory firm Institutional Shareholder Services Spirit recommended shareholders to vote for Frontier’s bid, a reversal from an earlier recommendation based on a revised Frontier offer. On Tuesday, JetBlue presented another sweet offer.
Together, Frontier and Spirit will be the fifth largest American airline, with a market share of 8.2 percent, placing it behind American, Southwest, Delta and United.
“If our shareholders do not approve the Frontier agreement, we are back to a stand-alone,” Spirits CEO Ted Christie said this week in an interview with The New York Times. “We have clarified the issues we have with the JetBlue transaction.”
Spirit’s primary complaint about the JetBlue bid is that it would not secure regulatory approval, especially given the antitrust control that JetBlue has received from the Department of Justice over the alliance with American Airlines. The agency said in a lawsuit that American, the largest U.S. carrier, would use the partnership to “co-opt a uniquely disruptive competitor.” JetBlue and American deny that their agreement is anti-competitive and are fighting the case in court.
Frontier and Spirit claim that with cost savings and a larger network, their combined operator will be able to compete for more customers while still offering very low prices, pushing larger rivals to keep prices down.
One argument against a merger is that continued competition between Frontier and Spirit would force them to keep prices low. With a merger, some of this pressure will be eased, which could lead to them not only increasing prices, but also fees – especially on routes that serve airports where both now operate, such as Orlando, Florida.
Any acquisition of Spirit must be reviewed with federal regulators. One reason they may oppose a merger of Spirit and Frontier is that forcing companies to remain rivals will push them to keep prices low.