Insights

JetBlue May Be Biting Off More Than It Can Chew

Monday marked a big day for JetBlue Airways (NASDAQ: JBLU). Not only did the airline announce expanded service to London — and that it had received permanent slots at Heathrow Airport — JetBlue also increased its bid for Spirit Airlines (NYSE: SAVE).

JetBlue’s European expansion and its effort to acquire Spirit represent two prongs of a strategy to become a serious rival to the biggest U.S. airlines. However, JetBlue may be getting too ambitious for its own good. Let’s take a look.

Moving forward in Europe

JetBlue entered the transatlantic market last August with a single daily flight from New York to London’s Heathrow Airport, using temporary slots at Heathrow that became available because of the COVID-19 pandemic. A month later, JetBlue added service to Gatwick Airport (the second-busiest London airport). This April, JetBlue confirmed that it would begin flying from Boston to both London airports later this year, giving it four daily roundtrips between the U.S. and London.

Image source: JetBlue Airways.

This week, JetBlue said that it will add a second daily flight between New York and Gatwick Airport in late October. Even more importantly, the airline revealed that it has secured permanent slots at Heathrow, ensuring that it can continue operating at least one daily flight to the region’s top airport beyond 2023.

Including the new flight announced on Monday, JetBlue now expects to operate five daily roundtrips to London this fall. Furthermore, CEO Robin Hayes anticipates the airline entering continental Europe next year with new flights to Paris.

Europe could eventually become a lucrative market for JetBlue. But for now, its limited schedule split between two London airports likely won’t appeal to most business travelers. From New York in particular, JetBlue’s London flights are poorly timed for business travel. While JetBlue could still find success with wealthy leisure travelers, missing out on the business market will limit the upside from its move into Europe.

Going all-in on Spirit Airlines

On Monday, JetBlue also increased its bid for Spirit Airlines to $33.50 per share after reviewing due diligence information from the budget carrier. That compares to its initial bid of $33 and a more recent tender offer to shareholders of $31.50. JetBlue also increased its divestiture commitments in an effort to quell doubts about potential antitrust risk.

This enhanced offer increases the likelihood that Spirit will spurn its merger partner Frontier Group for JetBlue. But even with additional divestitures, there’s a high risk that antitrust regulators would successfully block a JetBlue-Spirit combination. If so, JetBlue would be on the hook for a hefty $350 million “reverse break-up fee” to Spirit Airlines.

Even if the deal goes through, JetBlue would be paying $3.7 billion for Spirit, nearly $1 billion more than JetBlue’s own market cap. The acquisition would leave JetBlue overloaded with debt and facing a difficult integration (considering that the two airlines have completely different business models).

JetBlue shareholders are rightly skeptical about the company’s unexpected pursuit of Spirit Airlines. JetBlue stock has lost about 40% of its value since the buyout offer became public in early April.

Taking unnecessary risks

In a best-case scenario, expanding into Europe while simultaneously bulking up by buying Spirit Airlines could make JetBlue a much more formidable competitor to the top four U.S. airlines. The increased scale could have significant revenue and cost benefits for the combined company.

That said, JetBlue has struggled just to staff and reliably operate its existing business recently. Managing through the current staffing shortage — not to mention sky-high fuel prices — while continuing the airline’s expansion into Europe will be extremely tricky. That makes the attempt to buy Spirit Airlines a dangerous distraction for management.

JetBlue entered 2022 with a solid growth plan focused on its core markets of New York and Boston (including its transatlantic expansion). As a JetBlue shareholder, I hope that Spirit Airlines continues to reject JetBlue’s overtures. JetBlue would probably do better to focus on executing its existing strategy as well as possible.

Adam Levine-Weinberg has positions in JetBlue Airways and Spirit Airlines. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.

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