Spirit saw Northeast Alliance as biggest threat to JetBlue merger, testimony reveals

New details have emerged regarding Spirit Airlines’ initial resistance to a merger offer from JetBlue Airways, shedding light on what ultimately led the ultra-low-cost-carrier to change its mind and sign on with the New York-based JetBlue. The information came to light during an ongoing antitrust trial in Federal District Court in Boston, where Spirit’s CEO, Ted Christie, testified about the events that led to the merger agreement.

Initially, Spirit had agreed to merge with its ultra-low-cost-carrier competitor, Frontier Airways. However, JetBlue made a compelling and unsolicited offer that involved significantly more cash, which caught Spirit’s attention. Despite the enticing offer, Spirit’s board was initially hesitant due to concerns about JetBlue’s partnership with American Airlines in the Northeast Alliance (NEA), which they saw as a major regulatory risk that could potentially kill any merger agreement with JetBlue.

However, the board recognized that with some modifications, JetBlue’s offer could surpass Frontier’s, making it a “superior proposal” under the terms of the existing agreement. This allowed the board to begin engaging with JetBlue. However, before considering JetBlue’s offer, Spirit’s board demanded a “come hell or high water clause.” This clause required JetBlue to agree to do everything in its power to achieve regulatory approval for the Spirit deal, including abandoning the NEA if it appeared that both the alliance with American and the merger with Spirit could not both be approved by regulators.

Initially, JetBlue did not agree to the clause, prompting Spirit to urge shareholders to approve the merger with Frontier and reject JetBlue. However, there were several rounds of counter-offers, and two events ultimately convinced Spirit’s board to move forward with JetBlue. Firstly, a shareholder vote on the Frontier merger appeared to be going against the merger, leading the board to halt the vote. Secondly, JetBlue submitted a final offer that included an express obligation to litigate and divest assets if necessary to meet regulatory thresholds for the merger.

This offer indicated that JetBlue was willing to do whatever it took to secure regulatory approval, up to the point where it would actively harm the combined airline. Spirit’s board interpreted this as JetBlue having significant latitude to offer significant divestitures and accepted the offer. As part of the agreement, JetBlue abandoned the NEA after a judge ruled it was anticompetitive, and also included a $470 million reverse termination fee in case the merger did not go through.

The decision to pursue merger opportunities was not a recent development for Spirit. CEO Ted Christie revealed that the airline had considered merging with another carrier as early as 2016. Between November 2016 and August 2018, Spirit and Frontier had discussions about merging to become the fifth-largest airline in the United States as a super-sized ultra-low-cost-carrier. The goal was to create a potent challenger to the “Big 4” airlines that dominate the US market. Talks eventually broke down over price disagreements, but the interest in merging to compete directly with the major airlines remained.

The pandemic put a pause on merger exploration, but it also made the idea of a potential merger more appealing as an existential measure to navigate financial headwinds and supply chain constraints. As the trial continues, more details may emerge about the decision-making process and the potential impact of the merger on the airline industry.

In conclusion, Spirit Airlines initially resisted a merger offer from JetBlue Airways due to concerns about regulatory risks associated with JetBlue’s partnership with American Airlines. However, with some modifications and the inclusion of a “come hell or high water clause,” Spirit’s board was convinced to consider JetBlue’s offer. Ultimately, a shareholder vote against the Frontier merger and JetBlue’s commitment to meeting regulatory thresholds led to the board’s acceptance of the merger. The decision to explore merger opportunities had been considered by Spirit prior to the pandemic, with the goal of competing more directly with the major airlines.

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