JetBlue's president defends Spirit bid, downplays expected regulatory challenge

JetBlue's bid to purchase the ultra-low-cost Spirit Airlines surprised many industry observers earlier this week. Although JetBlue laid out its rationale, arguing that the acquisition would be a way to quickly expand its fleet and network, analysts and others remained skeptical.

Among the reasons: It remains far from certain that regulators would approve such a deal.

JetBlue already faces an antitrust lawsuit from the Department of Justice over its alliance with American Airlines, and the proposed merger with Spirit seems likely to draw further pushback from a Biden administration that has taken a staunch pro-competitive position.

However, Joanna Geraghty, JetBlue's president and chief operating officer, insists that the merger would benefit consumers.

"Take a step back and look at what benefits this particular transaction would have for the consumer," she told TPG by phone this week. "It allows us to compete on a more effective national scale and not a regional scale."

Now what? Does JetBlue's bid for Spirit put its American Airlines partnership at risk?

"We know that the DOJ will see that," she added.

Geraghty did concede, however, that the Justice Department's review of the merger was likely to be substantial.

"With this administration, any consolidation or perceived consolidation in the airline industry will undergo what we believe is a pretty rigorous DOJ review," she said. "We're going in eyes wide open."

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One clear challenge getting the merger approved is the airlines' shared presence in Fort Lauderdale. Combined, the two airlines would have 50% of the departing flights and 51.4% of the capacity at Fort Lauderdale, according to Cirium, giving the combined carrier significant pricing power. When a single airline controls that much market share at a particular airport, fares tend to rise.

Geraghty insisted, however, that having a significant presence at the airport shouldn't be a problem for regulators.

"It's important for a lot of customers to have multiple frequencies a day," she said. "Customers who might choose a legacy carrier that does operate multiple times a day in those same markets might choose JetBlue [instead]."

Overall, Geraghty's primary argument was that by absorbing Spirit and growing fast, JetBlue would be better able to compete with four biggest U.S. airlines — American, Delta, United and Southwest — which have emerged following decades of mergers and now control about 80% of the domestic passenger market.

"The DOJ has created this environment where you have four large airlines," she said. "If JetBlue combines with Spirit, we're still only 10% of the domestic [capacity]."

Since the bid was announced, analysts on Wall Street have expressed surprise and skepticism, with one analyst succinctly saying it to CNBC: "Wait; what?"

Indeed, there was a tone of incredulity during an investor conference call on Wednesday.

"I'm just trying to square away how removing seats right now is pro-consumer over the long haul," Connor Cunningham of MKM Partners asked, referring to the removal of capacity from the market as Spirit's dense A320 family aircraft get converted to JetBlue's less-dense configuration.

Aside from the consumer aspect, analysts have pointed to high costs not only to acquire the airline, but also to retrofit the Spirit planes.

Related: Skepticism on Wall Street as details emerge on JetBlue's bid for Spirit

"We've got a strong balance sheet, we've got $9 billion of unencumbered collateral, so we're confident we can make this happen," Geraghty said. "All while maintaining quite a comfortable liquidity position."

"The focus is always going to be, as we return out of COVID, to make sure that our financial metrics and our liquidity metrics are in line with investor expectations," she added.

Although some analysts appear to be open to the idea, it's still far from certain that a JetBlue-Spirit merger will happen. Spirit said late Thursday that it would consider JetBlue's offer and see if it could constitute a "superior offer" as defined by its previous merger agreement with Frontier.

For myriad reasons, it's possible that JetBlue's plan never comes to fruition. But, if it does, travelers will likely see a lot less of Spirit's yellow in the sky, and a lot more blue.