JetBlue makes surprise bid to buy Spirit, could upend Frontier deal

JetBlue has made a bid to acquire ultra-low-cost carrier Spirit Airlines, a surprise move that could imperil Spirit's own plans to merge with Frontier Airlines.

The news of JetBlue's apparent interest in Spirit was first reported Tuesday afternoon by The New York Times, which cited "three people with knowledge of the matter."

The deal would be valued at about $3.6 billion and would trump Frontier's cash and share offer for Spirit, according to the Times.

Each of the airlines confirmed the offer in statements issued after the Times story broke.

"The combined company would maintain the JetBlue brand and continue to be based in New York City," JetBlue said in its statement. "The current merger proposal assumes the rebranding and retrofitting of Spirit's fleet as JetBlue, introducing a superior onboard experience to Spirit customers."

As for Spirit, it confirmed it had received an "unsolicited" offer and that it would "evaluate JetBlue's proposal and pursue the course of action it determines to be in the best interests of Spirit and its stockholders."

JetBlue's bombshell bid would come just two months after Frontier and Spirit agreed to merge in a deal that would create an ultra-low-cost juggernaut. That deal would still need to be cleared by regulators, but JetBlue's move may now throw that deal into doubt.

"This is very unexpected and is just as interesting and intriguing," Henry Harteveldt, a travel industry analyst and president of Atmosphere Research, said to TPG.

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

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"If the JetBlue offer is accepted by Spirit and if the Department of Justice approves this merger, it would enable JetBlue to expand dramatically by reallocating Spirit's aircraft on different routes, potentially even giving JetBlue enough aircraft to open another hub somewhere perhaps in the center of the country."

But it could prompt some to question what JetBlue's primary motivation is with its deal for Spirit — either to take over a competitor or to make Spirit's merger with another rival more costly.

Frontier and Spirit operate complementary route networks and business models, while JetBlue's overall fit with Spirit would be less obvious.

"(If) Spirit accepts this merger, it means the U.S. would lose one of its budget airlines and I'm honestly not sure how the Department of Justice would view this," Harteveldt added. "JetBlue sees this as a way to take out a budget airline competitor and one where the two compete extensively between Fort Lauderdale and Central and South America. That's one reason why I wonder if the Department of Justice would approve this merger."

The competition for Spirit is likely to drive up the acquisition cost for the carrier no matter who prevails. The Times calculated JetBlue's bid offers a premium of 40% more than what Frontier offered in its original deal. Frontier executives now will be forced to consider whether they should raise their bid to counter JetBlue.

And, for JetBlue, it also could face skyrocketing expenses if its bid is accepted, said Robert W. Mann, an aviation analyst and former airline executive based in Long Island, New York.

While Frontier and Spirit share similar products and labor costs, JetBlue would face costs related to integrating labor forces and retrofitting Spirit plane cabins to include roomier seats and live-TV enabled inflight entertainment at every seat.

"It's a very expensive proposition and it gravitates higher and not lower," he said in reference to JetBlue. "They're gonna pay twice on that. Once on the purchase and twice on the integration."

As for Frontier, it cast its own doubt on JetBlue's bid.

"The Spirit and Frontier transaction is in the best interest of consumers and shareholders," Frontier told TPG in a statement, adding that its deal with Spirit would be "creating America's most competitive ultra-low fare airline."

Frontier also cast doubt on whether the bid from JetBlue — which has already been sued by the Department of Justice over its Northeast Alliance with American — would pass muster with regulators.

"Unlike the compelling Spirit-Frontier combination, an acquisition of Spirit by JetBlue, a high-fare carrier, would lead to more expensive travel for consumers," Frontier said. "In particular, the significant East Coast overlap between JetBlue and Spirit would reduce competition and limit options for consumers. It is surprising that JetBlue would consider such a merger at this time given that the Department of Justice is currently suing to block their pending alliance with American Airlines."

Stay tuned ...

Additional reporting by TPG's Ethan Klapper.