All about Investing

2 Big Reasons Why JetBlue Wants to Buy Spirit Airlines

Related categories

Buying Spirit Airlines represents JetBlues best shot at diversifying its route network beyond the Northeast.

Two months ago, Spirit Airlines (SAVE 2.19%) and Frontier Group announced merger plans. By combining to create a budget airline giant, the two companies hoped to gain scale and reduce their costs, thereby improving their profitability and bolstering their growth potential.

Now, JetBlue Airways (JBLU -0.92%) has thrown a wrench in their plans. Last Tuesday, JetBlue shocked the aviation world by offering to buy Spirit Airlines for $33 per share, easily topping Frontier's bid. Let's look at why JetBlue is so eager to swallow up the nation's largest ultra-low-cost carrier.

An odd couple

At first glance, JetBlue Airways and Spirit Airlines seem like a very strange match. JetBlue has historically tried to carve out a niche for itself by offering more amenities than rivals while keeping fares affordable. For example, it boasts the most legroom in coach of any U.S. airline (on average), free high-speed Wi-Fi, free satellite TV and satellite radio, and unlimited free snacks.

Image source: JetBlue Airways.

By contrast, Spirit Airlines has a bare-bones product. Spirit offers extremely low base fares that get you from point A to point B in a somewhat cramped seat. Everything else costs extra -- a bigger seat, Wi-Fi, carry-on or checked baggage, advance seat assignments, snacks and drinks, etc.

JetBlue's management has made it clear that the carrier will maintain its current business model and phase out the Spirit Airlines brand at the end of the integration process. Given that the two airlines appeal to different types of travelers -- although there is certainly some overlap -- JetBlue would get Spirit's assets but wouldn't necessarily be able to retain Spirit's customer base. Nevertheless, buying Spirit Airlines would help JetBlue immensely in two key areas.

Bulking up in Florida

First, combining with Spirit Airlines would allow JetBlue to dramatically expand its footprint in Florida, particularly in its existing focus cities of Fort Lauderdale and Orlando.

JetBlue and Spirit are by far the two largest airlines in Fort Lauderdale. Together, they carry about half of the airport's passengers. But while Fort Lauderdale is JetBlue's third-largest base, the carrier has struggled to find sustainable growth opportunities there recently due to tough competition (especially from Spirit).

Buying Spirit would instantly make JetBlue the dominant carrier in Fort Lauderdale, supporting a broader route network. That would, in turn, make JetBlue more appealing to business travelers in South Florida, bolstering the carrier's margins. It would be difficult to secure enough gate space to achieve the same result organically, and in that scenario, JetBlue would still have to contend with a fast-growing rival in Spirit Airlines.

Similarly, buying Spirit Airlines would greatly strengthen JetBlue's footprint in Orlando. While JetBlue considers Orlando a 'focus city,' it didn't even rank in the top five carriers there during 2021. By combining with Spirit, JetBlue would likely become Orlando's largest airline, just ahead of Southwest Airlines. That would enable it to tap into connecting traffic and business traffic in Orlando rather than relying entirely on point-to-point leisure travel, as it does today.

Image source: Spirit Airlines.

Making JetBlue a national airline

In addition to strengthening JetBlue's position in its existing core markets in Florida, buying Spirit Airlines would diversify the airline beyond its current focus on the East Coast. JetBlue has already targeted Los Angeles for growth, but that is a highly competitive and fragmented market. Moreover, gate space at Los Angeles International Airport is extremely scarce.

Acquiring Spirit would allow JetBlue to roughly double in size in Los Angeles, helping it tap into that enormous market in a more meaningful way. JetBlue would also become a clear No. 2 in Las Vegas, a big market where it has fewer than a dozen daily departures today.

To be sure, JetBlue would still be primarily an East Coast airline if it acquired Spirit. But it would have two focus cities in the West in cities with enough scale -- and enough demand for a premium airline experience -- to build up a base of loyal customers and support long-term growth.

In short, buying Spirit Airlines could be JetBlue's ticket to escaping its current reliance on the Northeast and creating a national platform for growth. That explains why it is willing to pay a big premium to beat Frontier Airlines' merger offer.

Leave your comment
Name
E-mail
Comment