Overview:
JetBlue and Spirit, the 6th and 7th largest US airline companies respectively, are hoping to complete a merger worth roughly $3.8 billion, in order to subsequently become the 5th largest company within the industry. This comes after a bidding war between JetBlue and Frontier airlines, in which after several months JetBlue triumphed, and according to a JetBlue spokesperson, this will create “a national long-due low fare challenger” to the ‘big 4’ US airlines, that being American Airlines, Southwest Airlines, Delta Airlines and United Airlines. However, both parties are beginning to lose hope in the deal, as the Biden Administration are reportedly planning on suing the merger as they believe it is will hinder competitiveness within the market
Industry Analysis:
The US airline industry right now is reaping the benefits of a growing US economy, as growing economic activity is driving aviation-demand, coupled with consumers wanting to return to flying following COVID-19 travel restrictions. Nonetheless, all airline companies have been impacted by rising fuel and energy prices, making operations far more costly. We wait to see how airlines respond and if any operational changes will be made.
Strategic Rationale:
As touched upon, the rationale behind this merger is to create greater competition for the big 4 US airlines. As JetBlue grows, they can begin to charge lower prices for airline tickets and can undercut the ‘big 4’ in terms of prices, consumers will opt towards JetBlue, leading to greater market share and eventually greater profit margins.
Financial Analysis:
Both JetBlue and Spirit have bounced back from COVID-19 global airline restrictions, with total revenues during 2022FY amounting to $9.158 billion for JetBlue and $5.68 billion for Spirit. These are the largest total revenues generated by both companies within a single financial year. JetBlue is expected to generate over $10 billion in revenue during the 2023FY and the 2024FY, whilst Spirit are projected to generate over $6 billion in revenue within the same timeframe.
Currently, JetBlue has a value score of 69, which is considered to be undervalued, whilst Spirit has a value score of 80, also considered to be undervalued, as both companies have a higher price-to-sale and price-to-book ratio than its competitors. The overall value of the merger is $3.8 billion, yet many believe that this isn’t truly reflective of the companies’ worth.
Integration:
It is without doubt that within the difficult part of the integration process is the gate consolidation, as this requires high-level communication between the airports and the other airlines operating within an airport. Gate selection becomes perpetually more complex following a merger. Without efficient and clear communication systems in place, a customers’ flying experience will be massively hindered. According to the PwC airline industry merger report (2022), as airlines merge, operations improve. This is because as a firm grows it becomes more efficient, with better time-on performances, fewer cancellations, fewer mishandled bags etc.
Regulatory Approval:
However, despite the overwhelming benefits of this merger to both the firms and the consumers, the Biden Administration is likely to sue the pending merger. Since Biden’s arrival to the White House, Federal antitrust regulators have taken a militant approach towards powerful businesses, such as the Department of Justice (DOJ) lawsuit seeking to break up Google’s advertising, as Biden’s increased emphasis on increasing competition remains prominent. During the Obama-era, the DOJ received heavy criticism for allowing the merger between American Airlines and US airways. However, some staff members reviewing the merger, are understanding towards the fact that the merger may be necessary in order to increase competition and challenge the big 4.
Conclusion:
Overall, as we wait to see the outcome, airline customers should hope that the Biden Administration let this deal go through so they can enjoy lower prices and improved flying experiences. In the long-term, although smaller airlines may suffer, we will see greater competition between the big airlines, which could potentially shape the US airline industry for many years to come.