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.
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.
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.
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.