Pontifications: A bad feeling for the JetBlue-Spirit merger

By Scott Hamilton

Aug. 8, 2022, © Leeham News: I don’t normally report on airline mergers except as these may relate to aircraft fleet planning and the impacts on Airbus, Boeing, and Embraer.

However, the JetBlue-Spirit Airlines merger is an exception.

Much has already been written about the questions arising about whether the US Department of Justice will approve the merger; the incompatibility of the two business models; the cost to reconfigure Spirit’s airplanes to the JetBlue cabin standards; and, to some degree, the disparity in labor costs.

It’s the latter I will focus on today.

Pan Am-National example

When JetBlue launched its hostile takeover of Spirit, the first thought that came to my mind (other than it was a stupid move for the reasons stated above) was the example of the bidding war for National Airlines in 1980. Texas Air Corp. accumulated a stake in National, a Miami-based carrier, ultimately disclosing it wanted to buy the airline. Eastern Airlines, also headquartered in Miami, saw a takeover of a major competitor by Texas Air as a threat to its existence. It made a counter-offer.

Pan American World Airways, which unsuccessfully tried to take over National in the early 1960s, had been the USA’s unofficial flag carrier since the pre-World War II era. Pan Am’s principal US competitor was TWA.

However, in the 1970s, the US agency that then regulated the airlines and awarded routes began granting US domestic carriers foreign routes. Braniff International, up to then limited to Latin and South America, received its first trans-Atlantic route award to London. American Airlines, Delta Air Lines and United Airlines also received routes in competition with Pan Am, or inland direct service to Europe that bypassed Pan Am’s international hub in New York. American added Caribbean routes, also in competition with Pan Am.

While the domestic carriers had vast route systems to feed their international routes, Pan Am didn’t have one. It relied on interline traffic from the airlines that now were becoming increasingly stronger competitors.

National Airlines had a few European routes from its Miami hub and solid a solid domestic system. However, the system was concentrated across the southern United States, with a secondary hub in Houston. None of this helped Pan Am’s New York hub.

Bidding War

A bidding war ensued for National. Texas Air eventually bowed out, making $40m in profits for its efforts. Eastern was outbid by Pan Am, which paid $437m ($1.6bn in today’s dollars). National had 59 airplanes at the time, consisting of McDonnell Douglas DC-10s and Boeing 727s. Texas Air bought its shares for about $25 each. Pan Am paid $50 each.

Analysts and observers at the time believed Pan Am paid too much for National. The two route systems didn’t efficiently feed each other, which Pan Am sorely needed for its international network. Merger integration was difficult, which is not unusual, but this one was more difficult than expected. But an element of the merger was that Pan Am agreed to raise the wages of National employees to Pan Am levels. This added millions of dollars a year to Pan Am’s costs. Pan Am’s long decline to dismemberment, bankruptcy, and cessation of operations in 1991 had begun.

JetBlue and Spirit

Back to JetBlue and Spirit. I looked at their 2019 full-year financial statements, the last normal year before the COVID pandemic hit in March 2020. The pandemic upended everything in all business sectors, making comparisons today skewed.

In 2019, wages and benefits accounted for 31.8% of JetBlue’s expenses. Over at the younger and cheaper Spirit, the same line item accounted for 25.9% of expenses. (I did look at JetBlue’s six-month 2022 figures; wages and benefits had declined to 29.6% of expenses. Fuel costs almost tripled, skewing percentages. Spirit’s costs remained constant at 25.9%.)

I haven’t reviewed the fine print of the merger agreement if it’s available to outsiders. But if JetBlue agrees to increase Spirit wages to its level in the name of labor piece, that will add nearly $194m a year in labor costs, based on the 2019 normal year. And JetBlue already has a cost problem. And, JetBlue overpaid as a result of its bidding war to win the deal. JetBlue also takes on new debt to finance the transaction.

The carrier previously missed out on a merger when Alaska Airlines outbid it for Virgin America. JetBlue and Virgin business models were similar, and the fleets were both Airbus. The Alaska and Virgin business models were close, but the fleets were incompatible. Alaska was all Boeing and Virgin was all Airbus. But many elements, such as Virgin’s San Francisco hub going against United Airlines and a route from Dallas Love Field to New York La Guardia Airport, didn’t make sense for Alaska to take on. Despite anomalies like these, the Alaska merger worked.

I have a bad feeling about the JetBlue-Spirit deal, assuming Justice will bless the union.

 

53 Comments on “Pontifications: A bad feeling for the JetBlue-Spirit merger

  1. I agree it smells Pan Am long way. Maybe having most A320neo’s allocated to JetBlue and the A220’s to Spirit can work, also letting Spirit do all Caribbean and South America flying can make a natural split avoiding a turf war.

  2. I’m not sure what the author was referring to when he said the “younger” Spirit but Spirit has been around longer than JetBlue has.

    • Seeing as he was discussing wage costs, it may have been a reference to the average employee age. In Europe, LCCs (also) tend to have younger employees than more mainstream carriers.

  3. One thing that is very different now is that airlines have a labor shortage – especially in pilots.
    In the 1980’s, pilots were a dime a dozen.
    I suspect that is one reason JetBlue is doing this.

  4. Another issue to cite about this merger is how JetBlue’s metrics relating to operational performance and reliability are among the worst in the industry.

    Merging the two carriers into one when their own business is so poorly managed is going to be their ruination.

    • This is the main reason we have trepidation. I work for JB. Without a complete overhaul in management, this will implode.

      • I agree as a former employee of JB, their management style and business etiquette has something to be desired. This is a repeat of the Pan Am disaster merger; the airline consumer will be the major one to suffer, rates will go up. Have you seen JB’s last quarter profits? What a mess; Hopefully the Feds will quash this deal.

  5. imho, Jetblue just don’t want to be left out of another wave of merger&acquisition, especially after losing Virgin America takeover to Alaska.

    The US airline market is saturated and even D.Neeleman is running out of ideas to grow market share. Traffic rights and OEM slots are scarce. At some point, acquisition is almost inevitable to grow and keep up with the big 4.

    I can’t name any major carrier that hasn’t gone the merger route but happy to learn something new.

  6. I suspect JetBlue is buying planes, pilots and perhaps slots. Spirit will disappear as a brand. But yes they overpaid for a poor fit. Frontier-Spirit made more sense in so many ways but I suppose that was the other rationale – to prevent Frontier from growing into too much of a threat to JetBlue.

    • Spirit has a lot of leased planes (perhaps all are leased?), so it should be a relatively easy exercise to keep Spirit’s slots and pilots (and other staff), while allowing excess fleet to boil off.

      • You got a point, JetBlue can let Spirit A320/A321ceo return to owners and take over its A320neo’s while replacing JetBlue A320ceo’s with A321neo’s. Hence getting the same economy with its A321neos’s as Delta/American flying its A321neo’s. There is more demand for A321neo’s than production capacity giving an advantage to those airlines having/getting them. JetBlue could take over the ex. Virgin America Alaska Airlines A321neo’s as they want to be 100% Boeing in a historical twist

  7. Scott, I guess one of the benefits of our ages and interest in our industry is the ability to see historical parallels. Good analysis on your part. It is hard to put such different cultures together. Labor union seniority issues are always a thorny problem. I can really only think of one very smooth, successful combination in my lifetime: Western and Delta. The rest of them are a mess for shareholders. It all works very well for the investment bankers who pocket the fees and escape all the merger problems.

  8. The idea to buyout Spirit and dissolve it into into jetBlue is another Titanic in the making. Bigger is not bette. Scott Hamilton rightly points out the debt load the combined carrier will have. The increased debt coupled with reconfiguring 170+ aircraft will require profit margins that are unrealistic in the foreseeable airline business market. Another point highlighted by Hamilton is the labor cost of the combined pilot contracts. It does appear more apparent as time clicks off that jetBlue is in a desperate position and it keenly knows it. This is why they are overpaying for the purchase of Spirit. They are aware that they are being squeezed in the market and hopefully a bigger airline will-might-provide time to right a listing ship. I think Robyn Hayes and the board at jetBlue already see their demise without buying a competitor. Therefore, this over-priced purchase is a strategic move designed to forestall the inevitable while hoping that some how “bigger is better” will lend itself to a path of prosperity.

    Spirit is doing just fine as a stand-alone carrier and it’s product-despite media attacks and some unhappy passengers-is highly sought. Most flights are completely full. Their advertising budget is a drop in the bucket compared to Southwest, who has to spend millions annually to lure passengers to their planes. Meanwhile some internet advertising and some radio adds and cheap fares seem to do the trick in filling nearly 86% of Spirits available seat miles. The passengers just keep coming back. The proof is in the growth of this gem of an airline. JetBlue has a nice product but it is struggling for each and every dollar of profit-and they know it. Adding increased debt, higher labor costs and increased fleet modifications certainly cannot help the bottom line. The Titanic analogy is apropos. Bigger is not always better. These are uncharted waters!

  9. Scott, are you aware that Spirit uses contractors for almost all of their ground operations? Did you factor that in? Except for FLL all rampers, ticket agents, and gate agents are outsourced. That’s maybe 1000 to 2000 “employees” unaccounted for in the labor line item.

    • I looked at the SEC filings of Spirit and JetBlue, looked at the wages/benefits and made the calculations.

      • I’m not sure I understand your reply. The whole point of your post was “…..the disparity in labor costs……I will focus on today.”

        So are you now saying your analysis is of no value since you simply compared two line items that are not representative of the actual costs of labor at Spirit?

  10. jetBlue just secured aircraft, pilots, and slots in an industry
    that is being squeezed by a shortage of all three. They will be
    able to grow while other airlines hit a brick wall due to these shortages.
    Seems like a good move . Also Spirit stock was at $85
    before covid. Paying$33.50 seems like a deal with great value.
    Also, there is no dilution of shares as jetBlue is paying cash, not using stock for the purchase. Great long term earnings per share and stock upside.

  11. This was horrible from the start, a merger with Frontier may have worked out to make both companies stronger and give options for cancelled flights they did not have before. And staying independent would have been the next best option. But Jet Blue with it’s hostile take over is the worst option I have seen so far for the consumer, as a stock holder it may give me a few bucks more as a consumer this is nothing more than another monopoly that if the government was doing their job, they would ax this deal from happening.

  12. I got my start in the industry be placing two repossessed Pan-Am Airbus widebody’s with a start-up. Creative destruction.

  13. Spirit is not a younger company. Probably best to research that a bit more. JetBlue was founded in 1998. I was Spirit Airlines first woman pilot in 1996 and they had already been flying for years before I showed up. I became their first woman Captain in 1998, before JetBlue existed. Facts are facts. Best to report them properly, otherwise what else in your article is false?

  14. “American Airlines plans to take delivery as early as Aug. 10 of a Boeing 787 , snapping a nearly 15-month pause for the North Charleston wide-body jet.
    The Texas-based carrier said it expects to pick up the 787-8 “as early as” Wednesday.

    “This will be American’s first 787 delivery since April 2021,” the airline said in a statement to The Post and Courier and other media outlets. “The aircraft, with registration number N880BJ, will be delivered from Charleston and is expected to enter commercial service in the coming weeks.”

    The delivery would bring the number of Dreamliners in American’s operating fleet to 47, with another 42 on order. The airline recently announced that it planned to pick up two 787s in August and more throughout the rest of the year..”

    https://www.postandcourier.com/business/boeing-sc-american-airlines-to-end-787-delivery-halt-as-early-as-wednesday/article_c7c3d9e4-178c-11ed-b753-5bd9a33092b8.html

    I wonder when, or if, we’ll ever get the details on the inspections and fixes for the affected Boeing 787s.

    • No, this info is proprietary to Boeing and the specific airline customers and of course the FAA, which are bound by law to sign NDA’s.

      • Good thing we can always trust those two entities (MCAS, 787, 777-X cert, regulatory capture..) .

        I’d rather find out for myself.

        • I agree.
          Where I live, public bodies like the FAA are obliged to provide such details to the public, under a freedom of information act: a request is filed (e.g. by a press organization), and the requested information must be supplied.

          In the case of the 787, experts in the public domain should be allowed to review/vet the issues/fixes at stake.

          • Why?

            Why is it important for the public ‘experts’ to view this data? To second guess from a media that’s clueless on everything aviation, a media that always turns to pilots for analysis 🤷‍♂️
            I was still working for Boeing when these 787 structural anomalies arose and disclosed.

            Boeing still has very competent engineering as do the airlines with engineering.
            Providing the public with very complex stress engineering calculations will, for most people, make them scratch their heads.
            The repairs and regulator oversight have ensured safety.

            I think a better question to be asking is why are the other 900+ previous deliveries for airlines in service exempt from this critical gap? No one has answered this other than they are ok for service. 🤔

          • @Airdoc
            The term “the public” includes engineers/researchers working at universities and other R&D institutions.
            If the FAA has done its job correctly, then it has nothing to fear/hide…right?

            Better to be absolutely sure that no shortcuts are being taken (again).

          • @Bryce

            Eventually we have to trust the system right?
            I’m sure you fly on the public airlines wherever you live. The reliability rate for airlines around the world is incredible and that’s a tribute to both airline processes and manufacturing engineering. That being said, do I trust the mad max? Here in the US I would fly on one given the training of pilots and mechanics, same for Europe.

            Ask me to get on one in Indonesia, no way.

          • Airdoc:

            Well put though I am baffled as to relevancy of 787 in the Spirit/ J Blue discussion.

            As for me, my head would explode from detailed data of the type that seems to be desired. As far as I can tell I am the only one here that has used a feeler gauge (possibly Duke).

            I don’t know what calcs went into valve clearances. I don’t have to know. What I need is how to use the feeler gauge and how to make the adjustment. The rest is beyond anyone but the engineer that specified the engine valve clearance. They in fact may not know how to use a feeler gauge. I worked with one guy who had no background or training but was a natural at it. I knew hugely more about it, he was better and faster than I was and he did the rest of the valve sets. I just did a quick check after each one. That was just a quality check.

            Does the FAA use NDA or do they have an oath? I know the state and federal agencies that deal with oil and gas maintain confidentially of the oil company information. In turn the oil companies have to turn over all the assessment and operation data.

            The FAA inspectors are going to sign off on each aircraft until the FAA administration is satisfied that Boeing can continue their quality control as obligated under the production certification .

            Airline execs don’t care what the fix is (nor would they understand the details) , as long as it does not impact their maint then the details are irrelevant. They are managers not engineers. Even the maint people won’t care unless they get involved (fixing the ones already delivered and the managers still only want to know when and how long)

            99.999999% of people flying don’t care. Is it safe? Lots of MAX flying these days and its a big yawn now. Bjorn is the only one here that could calculating any of the engineering.

            In the end its the guy with the feeler gauge that will do the work and his end will have been done by an engineer who will have a quality control program behind him.

            The tech who makes the checks does not make the feeler gauges. He would not know how. That in turn is a whole mfg process by itself and quality controls to ensure the feeler gauges are correct.

            While I never came across a bad gauge, you would know as you use 3 or 4 on each measurement and it would be quickly evident one was off.

            Aircraft mfg would check each gauge as it came in and before it was used.

          • @TW

            Thanks.
            There is no relevance to the the named topic. We always tend to get skewed don’t we in our commenting.
            The end of the day all of us care deeply what’s going on today.

            I appreciate everyone who comments no matter how off topic. All good stuff

          • Airdoc:

            You are welcome. Good posting should be recognized.

            I am working on treading carefully! I believe Scott will have a Post tomorrow on the 787. I have no use for Calhoun and the board but I do care about Boeing. A big part of my life Boeing was Washington State.

            But yes, Aviation is why we are here. I did not work directly in the Industry but AK whole world revolves around aviation. I was on and around FedEx ramp since 1989 (no longer, unlike Scott it was time for me to hang it up).

            Anchorage Motto once was Air Crossroads of the World. Arguably its the freighter crossroads of the world now.

            Kind of a shallow knowledge on Jetblue/Spirit, I follow AK Airlines and Delta much more closely as those two affect AK very directly. Western and Northwest both got taken over by Delta.

            Back in the day AK Airlines had a really bad rep, Wein Airlines was very good but got run into the ground during the post Wein family transition. AK has been good for some time though the issues with pilots is a negative right now.

          • -> Boeing still has very competent engineering

            Hmm but the manufacturing side is a bit sloppy!?!

            -> The reliability rate for airlines around the world is incredible and that’s a tribute to both airline processes and *manufacturing engineering*.

            Kind of ironic on the eve of the resumption of 787 delivery after being halted for close to two years due to *serious* manufacturing *defects*.

          • @Airdoc , @TW
            As regards relevance: it may have escaped your attention in the past but, when it comes to “Pontifications” and “HOTR” articles here on LNA, Scott tends to allow excursions into other aviation-related “news du jour”. And, at the moment, the resumption of 787 deliveries is a hot item, isn’t it?

            As regards checks and balances: the FAA screwed up monumentally on the MAX, the 787 and the US 5G rollout — so extra eyes are always welcome. We needn’t expect any self-monitoring from BA, because it’s desperate for cash.

  15. So much ‘analysis’ from the previous commenters.
    Since my son and brother in law are pilots with Frontier I would have liked to have seen the Frontier/Spirit come to fruition. But we have a saying in the airline industry, money talks, BS walks.

    In the end JetBlue pulls it out – will it cost them lots of money, yes.
    Do they care, no.
    The merger will be approved, airplanes will be painted, business models will migrate, in a couple of years it will all be forgotten.

    The biggest hurdle, from my personal experience, beside the maintenance bridging program will be the integration of the pilot/mechanic union contracts and the seniority lists. This can take years.

    • Remember the days of people-benefitting Antitrust actions in the US?

      Ahh, memories..

  16. I think it was Pedro who provided this link awhile back:

    “..For companies that make parts for the 787 or the 737 MAX, the uncertainty is a real problem.

    Aboulafia laid out at the conference the larger strategic vacuum at Boeing. Its leadership is not talking about future airplanes, which has allowed the Airbus A321neo to run away with orders in the large single-aisle market.

    “I still think Boeing could come up with a killer product that really does great,” Aboulafia said. But Boeing, hunkering down to fix its problems and low on cash, won’t commit to launch one.

    The company’s spending on research and development fell by 30% in 2020 and by an additional 20% last year, Aboulafia told the conference.

    It’s been 18 years since Boeing last launched an all-new airliner design. Such launches decide the future shape of the industry and of the region’s airplane manufacturing base.

    “Something has to happen this year,” Aboulafia said. “If it doesn’t, then the market-share situation just gets much worse and you can expect this to be a 70/30 market (split in favor of Airbus) in say a dozen years. It then just becomes a question of time before someone replaces Boeing in 20 or 30 years, or whatever it takes.”

    And Aboulafia added another worry: The outflow of machinist skills and engineering talent in the downsizing of the past two years will be difficult to reverse in the post-pandemic labor market..”

    https://www.seattletimes.com/business/boeing-aerospace/wa-aerospace-companies-hopeful-and-nervous-about-boeings-woes-labor-shortage/

    It’s good that they’ll be shipping 787s soon, at least.

    • “Something has to happen this year”

      There’s no money for something to happen.
      BA had only 26 deliveries in July. If/when 787 deliveries resume, it will only be at a trickle. Does that sound like a Q3 profit to you (after losses in Q1 and Q2)?
      BA has $5.4B in current / short-term debt — which needs to be repaid in the next 12 months. It has only $10B in cash.
      The company is living from hand to mouth.

  17. AAL had been expecting its 787 since May 2021. Time flies.

    OTOH WN expects to receive just half of its 737 MAX planned for this year!

    • I suspect that AA may actually receive 1 or 2 787s this month. However, what’s far more interesting is what happens with 787 deliveries from September onward. BA is touting 5 deliveries per month — but how credible is that?
      It only delivered 23 MAXs in July, despite a parking lot full of inventory and a (nominal) rate of 31 new frames per month.

      • > BA is touting 5 deliveries per month — but how credible is that?
        It only delivered 23 MAXs in July, despite a parking lot full of inventory and a (nominal) rate of 31 new frames per month. <

        Yes, I noticed that, too. "Don't listen to what they say; watch what they do" seems fitting.

        • In 2021, AAL expected to receive as many as 13 787 by last winter.

          Currently, it expects up to 9 787 in 2022 only.

  18. The Seattle Times
    With China’s help, Airbus in July flew past Boeing in jet orders

    “We don’t need to make a lot of noise, we can do business quietly”

  19. > “VIRGIN SEEKS LOW-HOUR PILOTS TO CREW NEW 737 MAXS”

    Reassuring.

    /s

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