During an antitrust trial that began this week in Federal District Court in Boston, Spirit CEO Ted Christie testified about how and why the merger agreement came to pass.
Although Spirit had initially agreed to merge with ULCC competitor Frontier Airways, JetBlue made a compelling and unsolicited offer involving significantly more cash.
However, Spirit's board wasn't interested.
The board saw JetBlue's Northeast Alliance partnership with American Airlines as a major regulatory risk, one likely to kill any merger agreement that it might reach with JetBlue.
Even so, the board recognized that with some modifications, JetBlue's offer could trump Frontier's — a "superior proposal." This meant that under the terms of the existing agreement with Frontier, the board could begin engaging with JetBlue.
Spirit's board demanded a "come hell or high water clause," as Christie described it, before agreeing to consider JetBlue's offer.
Such a clause, according to Christie, would entail JetBlue agreeing to do virtually anything 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.
JetBlue did not initially agree, prompting Spirit to urge shareholders to approve Frontier and reject JetBlue.
Although there were several rounds of counter-offers, two events convinced Spirit's board to move forward with JetBlue.
First, a shareholder vote appeared to be going against the Frontier merger. The board halted the vote before it was completed, anticipating the negative result.
Second, JetBlue submitted a final offer that included "an express obligation to litigate and to divest assets of JetBlue and Spirit up to a material adverse effect on the combined JetBlue-Spirit, with a limited carveout to this divestiture option for actions that would be reasonably likely to materially and adversely affect the anticipated benefits under JetBlue's Northeast Alliance."
In other words, JetBlue would commit to doing nearly anything necessary to meet regulatory thresholds for the merger, up to the point of doing anything that would actively hurt the combined airline.
Spirit's board took this to mean that JetBlue had "significant latitude to offer very significant divestitures" and accepted.
JetBlue abandoned the NEA after a judge ruled earlier this year that it was anti-competitive, following a similar trial last fall. While American Airlines chose to appeal the mechanics of the ruling, JetBlue initiated the alliance's termination, saying at the time that it would focus its attention on the Spirit merger.
JetBlue additionally included a $470 million reverse termination fee in the event of the merger not going through. It agreed to surrender Spirit's slots and gates in New York, Boston and Fort Lauderdale.
Spirit was interested in merger opportunities in 2016
Although the competing merger offers happened in early 2022, Christie testified that merging with another airline has long been considered Spirit's best opportunity to grow large enough to compete with the legacy airlines.
Between November 2016 and August 2018, Spirit and Frontier had periodically discussed the possibility of merging to become the fifth-largest airline in the U.S. as a super-sized ULCC, Christie testified. The two airlines saw the potential of forming a potent challenger to the four major domestic carriers — American Airlines, Delta Air Lines, United Airlines and Southwest Airlines — that control roughly 80% of the U.S. market.
The pre-pandemic talks between Spirit and Frontier eventually broke down over price disagreements, Christie testified, but Spirit was nevertheless interested in merging to be more competitive. Christie's team and Spirit's board of directors looked into several other airlines at the time — such as Allegiant, Sun Country Airways and several carriers in Latin America, including Viva Colombia — in addition to Jetblue.
The pandemic put a pause on merger exploration, Christie said. Given financial headwinds and supply chain constraints, it made a potential merger appealing as an existential measure as much as a competitive one.
The trial is expected to continue through much of November, so be sure to check back for the latest from TPG.
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