JetBlue Airways Dodges a Bullet with Failed Merger

Favorable Outcome for Low-Cost Carrier

JetBlue Airways may have lost its court battle with the Justice Department over the proposed merger with Spirit Airlines, but it’s not such a bad outcome for the low-cost carrier all things considered.

The shares jumped 4.9% Tuesday after a federal judge blocked the $3.8 billion deal as it would harm cost-conscious travelers who rely on Spirit’s low fares. Spirit stock plunged 47%.

A Lucky Escape for JetBlue

But it’s not just the share-price move that suggests it’s a lucky escape for JetBlue. Ahead of the verdict, Wall Street was becoming increasingly certain that JetBlue would seek to renegotiate the price of the deal, if it was approved.

Spirit’s string of disappointing earnings over the past year, and estimates for five consecutive quarterly losses ahead, made the original deal look like a bad one. It valued Spirit at $33.50 per share–the stock was trading at around $15 before the court ruling and slumped to $7.92 after.

Analysts Praise the Ruling

J.P. Morgan analyst Jamie Baker said JetBlue “dodged a bullet” with the ruling. “It frees JetBlue from a costly merger and we believe management and the board were no longer wed to (unless at a markedly reduced price, a complex scenario not easily achieved,” Baker said.

Optimistic Outlook for JetBlue

Baker also predicts that JetBlue's stock, currently trading around $5, could climb to high single digits following the ruling. “Its balance sheet affords it greater flexibility, and it leans into both international and premium markets,” he added.

Spirit Airlines Faces Challenges After Stock Slump

Spirit Airlines (SAVE) may be in trouble after experiencing a significant slump in its stock value. Following Tuesday's 47% drop, the stock tumbled another 8% on Wednesday.

This leaves Spirit in a vulnerable position, potentially paving the way for rival airlines, such as Frontier Group, to make a bid for the ultra-low-cost carrier. It's worth mentioning that Frontier was previously involved in a bidding war with JetBlue for control of Spirit in 2022.

However, financial analyst Becker highlighted a potential setback for Frontier. If it were to acquire Spirit, it planned to pay for the merger using its shares. Unfortunately, since then, Frontier's shares have plummeted by over 60%.

Becker suggests that the most favorable outcome for Spirit at this point would be to file for Chapter 11 bankruptcy followed by liquidation. Spirit has not provided any comment on this matter as of early Wednesday.

Though both JetBlue and Spirit have expressed disagreement with the ruling made by the U.S. District Court, it is unlikely that an appeal will be successful. According to Raymond James analyst Savanthi Syth, such an appeal process could take 4-5 months.

This decision has sent ripples throughout the broader airline sector, leading to a decline in the stock prices of Delta Air Lines (-1.3%), American Airlines (-1.4%), United Airlines (-1.4%), and Southwest Airlines (-1.6%).

The court ruling only adds to the existing uncertainty engulfing the U.S. low-cost airline industry.