JetBlue outbids Frontier with a $3.6B offer for Spirit, because both airlines need gates to grow

Thursday, April 7, 2022 by Snacks

Flight costs $40… carry-on + sandwich costs $400. This week JetBlue made a $3.6B offer to buy budget airline Spirit, topping the $2.9B bid made by rival Frontier in February. Awkward, since Spirit and Frontier had already agreed to a merger that would’ve created a budget behemoth. Spirit said its board would discuss the offer before accepting either bid.

  • JetBlue says its offer is best for investors, at a 37% premium over Frontier’s. JB wants to spruce up Spirit planes and add ’em to its fleet, not run a separate carrier.
  • Frontier says a JB merger would boost flight prices and reduce options for fliers, since the airlines have similar routes.
  • Odd couple: Analysts called the bid a “headscratcher” because JetBlue is known for perks like free Terra chips while Spirit is known for free nothing. JB also offers a business-class tier, while Spirit… doesn’t.

Spirit in the sky… needs a companion. Four carriers dominate the US airline industry: American, Delta, Southwest, and United control 80% of domestic flights. But headwinds are now forcing smaller airlines to merge to survive:

  • Not enough pilots: A shortage has caused costs to soar for smaller airlines and resulted in hundreds of canceled flights.
  • Not enough gates: Gates at major hubs like ATL are often reserved for the Big Four, which makes it hard for smaller airlines to add new routes.
  • FYI: President Biden’s antitrust crackdown is targeting airlines, and that could ground either merger.

In sight, in mind… Presence is key for airlines and reminds consumers that they exist. You can’t book your LA weekend with an airline that doesn’t have gates at LAX. JetBlue and Frontier need access to more gates to expand into new markets. But they can’t buy gates — at least not directly. That’s why they’re willing to pay a premium for Spirit: it’s an indirect way to buy gates at major airports, a scarce resource they both need.

Subscribe to Snacks