Spirit-Proposed Clause Voiced NEA Concerns, Helped Firm JetBlue Offer

BOSTON—In countering an initial merger proposal, Spirit Airlines asked that JetBlue Airways commit to do “everything within their power” to achieve regulatory approval—“up to and including the abandonment of the Northeast Alliance” (NEA) with American Airlines.

The ask was outlined under what Spirit CEO Ted Christie termed a “come hell or high-water clause,” during day two of an antitrust trial challenging the proposed $3.8 billion deal.

As he was questioned by lawyers for the defense, Christie described the NEA as Spirit’s primary concern while it considered JetBlue’s proposals. At the time, the partnership with American was the subject of ongoing litigation from the U.S. Justice Department (DOJ) as it sought—and ultimately succeeded—to dismantle the arrangement on antitrust grounds. The litigation was an action Spirit thought might “impede or cloud” the regulatory process for a merger with JetBlue, Christie said Nov. 1.

When it first received an offer from JetBlue in March 2022, Spirit was under a merger agreement with Frontier Airlines, the terms of which allowed Spirit to review other offers should they be deemed reasonable and competitive. JetBlue submitted several versions of its proposal as it went back and forth with Spirit on the offer.

“We were advising our shareholders that while we had concerns, there was a path by which we could see engaging in a transaction with JetBlue, and we outlined to JetBlue that path to satisfy our concerns with regards to the regulatory review process,” Christie said, noting, “We were rejecting the various proposals as they were coming in as not satisfactory to our requests.”

As terms were revised, successful Spirit asks included a reverse termination fee, and retention packages for management, the ULCC’s CEO noted. Should the merger fail on antitrust grounds, JetBlue agreed to pay Spirit $70 million and its stockholders $400 million, less any amounts paid prior to termination.

Spirit announced an agreement with JetBlue in July 2022, after its deal with Frontier was terminated for lack of shareholder support.

The South Florida-based ULCC began exploring the idea of a merger in 2016, Christie told the court, out of concerns that independent growth would not be enough “to be able to become a relevant ... fifth challenger in the U.S. space.” It evaluated several airlines in the U.S. and Latin America, pausing those assessments and conversations in 2020, at the onset of the coronavirus pandemic. In addition to Frontier and JetBlue, it also assessed Viva Colombia, Sun Country, and Allegiant as other potential combinations and investments, Christie disclosed. On its own, Spirit cannot effectively compete for market share with the Big Four airlines, an attorney for the carrier said during opening arguments on Oct. 31, with a financial performance keeping it from achieving planned growth.

Though Spirit had initially expected 2023 to be profitable and was optimistic that demand patterns and fleet utilization would both normalize, it has posted eight consecutive quarterly net losses as of the third quarter and anticipates full year 2023 to be a net loss as well. “I don’t have an estimate as to when we intend to return to profitability,” Christie said.

“As we’ve come out of the pandemic, the larger airlines have returned to profitability and the smaller low-cost airlines have not,” he said, pointing in part to diversified revenue streams including “very lucrative credit card affinity programs and loyalty programs.” He compared Spirit’s credit card program—today accounting for 1-2% of its revenues—with those of larger network airlines contributing double-digit percentages, and “giv[ing] them a much more stable revenue base compared to us.”

Other challenges Christie cited included rising costs of labor and jet fuel, a demand shift to premium and international traffic, and ongoing issues with the Pratt & Whitney geared turbofan (GTF) engine. The accelerated GTF inspections grounded three of Spirit’s aircraft at the start of the year, a number which has since swelled to 12 and which Christie projects to be “north of 40” by the end of 2024.

“It’s difficult to explain how damaging it is,” Christie says. “We’re expecting it to continue to get worse into 2025.” The jury-waived trial, being held in Boston before U.S. District Judge William G. Young, is scheduled to end on Dec. 5.