Podcast: The Battle for Spirit Airlines

Our editors discuss competing bids to acquire U.S. ultra-low-cost carrier Spirit Airlines and how the outcome could change the U.S. airline landscape.

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Rush transcript

Karen Walker:

So hello everyone and thank you for joining us for Window Seat Aviation Week air transport podcast. I'm Air Transport World and Group Air Transport Editor-in-Chief, Karen Walker. Welcome on board and enjoy.

        Today I'm joined by my colleagues, David Casey Editor-in-Chief at Routes and Ben Goldstein, North American Air Transport Editor at Aviation Daily and Aviation Week. Welcome both. And our topic today is the potential big shift in the U.S. ultra low cost carrier landscape after Denver-based Frontier proposed a merger with Florida-based Spirit Airline, potentially creating the fifth largest U.S. carrier. This is an ongoing news story that has already taken some interesting twists and turns. Ben give us the quick snapshot of what's happened so far.

Ben Goldstein:

Yeah. Thanks Karen. So Frontier Airlines and Spirit Airlines announced their intent to merge together in February. Frontier would be acquiring Spirit in a cash and stock deal fast forward a bit to April and JetBlue Airways announces its own unsolicited offer to acquire. Here it's a more pricey deal that comes at a substantial premium to the Frontier deal, but it's also a slightly more complicated deal in a few ways.

        One being its chances at getting regulatory approval. Spirit's board of directors had some reservations about JetBlue's partnership with American Airlines, and they requested that JetBlue modify its proposal, and essentially agreed to do anything necessary to receive regulatory clearance up to and including getting rid of the Alliance with American Airlines altogether. Earlier in May, JetBlue did revise the deal. It submitted an enhanced offer to Spirit and this enhanced offer included a reverse breakup fee and some limited Route divestitures in the Northeast, but it did not really touch on the NEA and ultimately that wasn't enough for Spirit.

        Spirit's board of directors issued a letter earlier this month to JetBlue, basically publicly rejecting the deal saying it doesn't think the deal is likely to get approval in Washington and Spirit's board urged the shareholders do instead vote in favor of Frontiers offer at a upcoming shareholder vote. So that's kind of where we stand now.

        The vote hasn't been scheduled yet. It's probably going to take place sometime within the next three to six weeks. JetBlue could still try and have the shareholders vote on JetBlue's proposal through a variety of maneuvers that it could use, but it's looking like the more likely outcome here is that shareholders are simply going to follow the leader of the board and pick Frontier over JetBlue.

Karen Walker:

Essentially what we've got here is a low cost carrier battle. The talk had been around for some time that Frontier was interested in a merger with Spirit, and those are two truly ultra low cost carriers. As Ben said, the surprise was when JetBlue came in and JetBlue is a low cost carrier, but not an ultra low cost carrier. It has premium seats and other things like snacks, et cetera, that are more in line with some of the majors. The real interesting of course aspect here is the network. What would the network look like for Spirit and Frontier versus JetBlue and Spirit? David, what's your thoughts on that?

David Casey:

Thanks Karen. Yeah, as you said, I mean, what we'd be getting with Spirit and Frontier is a true coast to coast ULCC that's going to be competing, not just in those smaller cities, but in some of the larger markets as well. And if you look at the two networks, they don't actually have a lot of substantial overlap bar a few cities like Las Vegas and Orlando given that Frontier has such a heavy exposure in the Western U.S. and Spirit's largely centered around the east. I was actually looking at some of the schedules' data for May and the combined networks they're offering about 650 nonstop routes. And they're only going to be competing in about 15% of them and on the routes where they do overlap and they're facing competition from one or more carriers on 97%. So there's not a great deal overlap.

        And there's only, I think, three monopoly airport pairs. So where there is overlap, there's already significant competition as well. So I think the combined scale is going to allow for a lot of competition in existing markets. If you look at, say Denver to Las Vegas, for example, I think the big four have about 14 scheduled departures per day, while Frontier has four and Spirit has two. So if you combine those two, six daily departure you're obviously getting more competition against those legacy carriers. So I don't think it's going to dampen competition. I think the two ULCCs could have quite the opposite effects and allow it to compete more aggressively on some of those routes. Looking now JetBlue and Spirit network, obviously JetBlue's focus is around New York and Boston. So it wouldn't create the same breadth across the U.S. as a Spirit Frontier deal.

        Although actually the carriers have less direct competition than Spirit and Frontier. Again, if you look at the schedules, I think there's about 600 combined routes and they compete directly on 10% of them, but where they do compete, there is a far bigger overlap in some of those markets. So Fort Lauderdale, for example, I think JetBlue and Spirit would account for more than half the capacity. And that's something that's going to draw focus from regulators and as well, you're probably going to be getting diminished international competition for Fort Lauderdale, particularly to central and south America, because that's where JetBlue and Spirit operate most of those routes from. In the North East as well Spirit's not a particularly large player in New York or Boston, but if JetBlue does absorb Spirit, it's only going to boost the Department of Justice's argument against the NEA.

Karen Walker:

This has been a surprise that JetBlue has moved, but maybe not once they saw that the Frontier deal JetBlue probably felt it had to come in because of what that means to... we all know that JetBlue some years ago really tried to buy Virgin America and Alaska Airlines won that. And that was seen at the time as a big loss potentially for JetBlue. JetBlue came out of that well, it's focused on the going into the transatlantic market and growing other markets in the U.S. and it's doing really well, but it probably doesn't like the idea of now finding itself up against this mega ultra low cost carrier that would be created.

        So let's just look at that idea of this sort of mega U.S. ultra low cost carrier, David you're based in the UK in Europe, of course there's Easyjet and Ryanair and Weirs everywhere you go they're at all the major airports, you see a real strong presence of all those ultra low cost carriers. Ben, do you think this is going to potentially change the landscape in the U.S?

Ben Goldstein:

Well, definitely. I mean, this is creating the fifth largest airline and these two carriers are bypassing Alaska and JetBlue completely. I think those two carriers in particularly are going to be very vulnerable here partially because of the rising popularity of the ULCC business model, which actually has been gaining market share year after year. There's a lot of research that shows that in the United States, consumers are increasingly becoming less and less loyal to individual airlines and are shopping more and more than ever before on price.

        I think that trend is going to continue post pandemic. And I think having a real mega ULCC like this with a truly national reach and keep in mind that Alaska is kind of strong on the West Coast and JetBlue is really oriented in the East Coast. But this airline like David mentioned is going to have kind of a claim to being a real national airline and I think that that's something that given its broader network and its business model, which I think is going to really threaten some of these middle tier carriers like Alaska and JetBlue in particular.

Karen Walker:

What about Southwest? What does this bring to competition for Southwest?

Ben Goldstein:

That's a good question. Southwest is a larger airline. It is the largest airline in the United States in terms of domestic capacity. I think Southwest is less immediately threatened, but this combined airline is going to be comparable in scale to Southwest, although smaller. And I think Southwest longer term is going to find itself in a similar sort of position because airlines like Southwest and JetBlue, they were billed as low cost carriers. They still are in a sense, but they're not really low cost carriers in the sense that the newer generation of ULCCs are true budget carriers.

        And I think some of these carriers like Southwest and JetBlue are going to have to do some soul searching and figure out what kind of airlines are we really going to be? And what's our niche going to be because the low cost market is going to be cornered by the ULCCs. And obviously business travel is concentrated with the big majors. So I do think longer term in a strategic sense, some of these airlines like JetBlue and even Southwest, despite it's larger size might be vulnerable to this combined airline.

Karen Walker:

I would personally argue that Southwest both in size and strategy has long proved it can more than stand up to competition in any form. In actual fact, I was on a webinar with the Southwest CEO Bob Jordan last week and that question was asked about Spirit. And while they're obviously monitoring the situation, I didn't get any sense that they see any overwhelming threat. And I'd also say that Alaska Airlines has an extremely smart leadership team and very strong network that's been boosted by a west coast partnership with American and the joining of the oneworld global alliance. What do you say, David? 

David Casey:

Yeah, I agree with that as well Karen. I think it is JetBlue that's gonna be feeling the pressure over the coming months and years. The DOJ challenge against the Northeast Alliance and the network is heavily concentrated on the east coast and they're gonna be coming up against a ULCC that's got a network that spans the breadth of the US and I think they're going to really find it quite challenging 

Karen Walker:

And all being said, it's still worth pointing out that the man behind the Frontier proposal of course is Bill Franke, and while that name's not as familiar outside of the industry as some of the other big players, he's an incredible force at Indigo Partners, which has been behind some of the world's newest and most successful ultra-low-cost carriers like Wizz Air. We certainly know he knows how to run these things, set them up and make sure that they make money. So I think it's all going to be very interesting to continue to watch this story and the ultimate outcome. David, Ben, thank you so much for your insights and thank you to our listeners. I hope you'll join us again next week for our next episode. Make sure you don't miss it by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen until then. I hope you're looking forward to your next flight. This is Karen Walker, disembarking from Window Seat.

Karen Walker

Karen Walker is Air Transport World Editor-in-Chief and Aviation Week Network Group Air Transport Editor-in-Chief. She joined ATW in 2011 and oversees the editorial content and direction of ATW, Routes and Aviation Week Group air transport content.

Ben Goldstein

Based in Boston, Ben covers advanced air mobility and is managing editor of Aviation Week Network’s AAM Report.

David Casey

David Casey is Editor in Chief of Routes, the global route development community's trusted source for news and information.