• Wed. Sep 21st, 2022

Airline pioneer Frank Lorenzo says the JetBlue-Spirit deal would increase costs. JetBlue says consumers would win.

ByKimberly A. Brochu

Jun 3, 2022

One of the airline industry’s best-known entrepreneurs says he doubts antitrust regulators will approve the proposed JetBlue-Spirit merger.

“In evaluating the proposed merger, the Department of Justice may well consider what it is doing to Spirit as a low-cost carrier, driving up its costs,” Frank Lorenzo, former CEO and majority shareholder of Continental Airlines, said in a statement. an interview. “The story of a higher cost airline merging with a lower cost airline is not great.

“All you have to do is look at the acquisition of National Airlines by Pan Am in 1979, where – largely due to union opposition – PanAm was forced to raise labor costs work of National at its own top level,” Lorenzo said. “JetBlue would probably have the same union problem.”

“Of course, to be fair, in comparing cost structures, you also have to consider Spirit’s seating density and the product itself and the cost of extras that may be included in JetBlue’s costs and not in those of Spirit,” Lorenzo said.

The main obstacle to a merger, Lorenzo said, is the Biden administration’s apparent opposition to mergers. The exchange apparently agrees, given the gap between JetBlue’s offer price and where Spirit is trading.

JetBlue disputes Lorenzo’s points. The airline said a merged airline would spread costs over an expanded single-fleet A320 carrier. In an interview, Glenn Pomerantz, a partner in the Los Angeles office of Munger, Tolles & Olson and a seasoned antitrust attorney, said, “An acquisition of Spirit by JetBlue offers a unique pro-competitive advantage” because JetBlue’s entry into a market leads to lower tariffs.

The 1980 acquisition of National by Pan Am is widely believed to have failed not only because it increased the combined carrier’s costs, but also because it did not sufficiently address Pan Am’s lack of domestic capacity. and because cultures have clashed.

Lorenzo, who had bid for National, led Continental from 1981 to 1990, after it merged with its Texas International Airlines. Under his leadership, Continental built the Houston and Newark hubs which are now key parts of United’s route system. But he also earned the enmity of airline unions as he sought to cut costs after industry deregulation in 1978 allowed new lower-cost airlines. Now 82, Lorenzo runs Savoy Capital, an investment company. She does not own JetBlue, Frontier or Spirit stock.

In February, Spirit and Frontier announced their intention to merge. This transaction valued the shares of Spirit at $25.83. In April, JetBlue attempted to bid for Spirit, offering $3.6 billion or $33 per share. Last week, JetBlue made a hostile takeover bid to Spirit shareholders. Spirit shares closed Thursday at $21.11

The Justice Department’s Antitrust Division, which has already announced its opposition to the Northeast Alliance between JetBlue and American Airlines, would review any future merger proposals, including Spirit-Frontier.

“I don’t think Spirit-Frontier is a walk in the park, but it makes sense,” Lorenzo said. “We have a new Justice Department that is very anti-merger. Whether they realize these are two low-cost carriers making each other stronger through the merger is an open question – I have a feeling that in the end they will.

Pomerantz said: “I think the current administration has made it clear that any airline merger could face challenges. (Whether it is) JetBlue/Spirit (or) Frontier/Spirit, no one can predict with certainty the outcome of this challenge. He said the “JetBlue Effect,” recognized by the Justice Department in its complaint against the North East Alliance, forces competing carriers to cut fares in a JetBlue market.

“JetBlue has a strong case,” Pomerantz said. “JetBlue’s acquisition of Spirit (would provide) a unique pro-competitive advantage, an expansion of the JetBlue effect. This means more passengers and more routes would have lower fares.

As for the cost impact of a JetBlue-Spirit merger, JetBlue CEO Robin Hayes spoke to them in an April 6 call with analysts and reporters.

Primarily, Hayes said, “We have a really compelling backlog of high performing, flexible and fuel efficient aircraft. And certainly, there are a significant amount of benefits that we have achieved [in] scaling around a single type of fleet. Likewise, he said, a combination carrier would benefit from the supply of pilots and other employees in a tight labor market.

For Lorenzo, JetBlue’s takeover bid brought back memories. In 1981, Texas Air made a tender offer for 50% of the outstanding shares of Continental. At the time, Continental was attempting to merge with neighbor Western Airlines and awaiting shareholder approval.

Lorenzo and his team saw Continental as a good complement to Texas International. At the same time, Wall Street had taken a dim view of the second attempt at a merger between Continental and Western, which was reflected in the fall in Continental’s share price and the decision of shareholders to accept the offer. from Texas.

It’s possible to think of Texas Air in 1981 as a predecessor to JetBlue today, making a takeover bid that upsets an ongoing merger effort between two supportive parties, Spirit and Frontier. One difference is that Texas Air was the smallest of the original Civilian Aeronautics Board-certified carriers, one-third the size of Continental, and the CAB quickly approved the deal.

“Continental and Western had already requested the merger of the two airlines in 1979, but the CAB [Civil Aeronautics Board] dismissed it as anti-competitive,” Lorenzo said. “The street hated the case. Western and Continental were two unprofitable high-cost carriers located in close proximity to each other [in Los Angeles] and the deal really offered nothing. We made an offer in the hope that it would be rejected by the shareholders, which was the case.

“We offered to break up an ongoing merger, just like JetBlue did,” Lorenzo said. Until JetBlue’s takeover bid for Spirit, it was apparently the only formal cash takeover bid in major airline history.