Airline Pioneer Frank Lorenzo Says JetBlue-Spirit Deal Would Raise Costs
June 3, 2022
Airline Pioneer Frank Lorenzo Says JetBlue-Spirit Deal Would Raise Costs. JetBlue Says Consumers Would Win
By Ted Reed Senior Contributor, Forbes
One of the airline industry's best-known entrepreneurs says he doubts that antitrust regulators will approve the proposed JetBlue-Spirit merger.
“In evaluating the proposed merger, the Justice Department may well consider what it does to Spirit as a low-cost carrier, raising its costs,” said Frank Lorenzo, former CEO and controlling shareholder of Continental Airlines, in an interview. “The history of a higher-cost airline merging with a lower-cost company is not great.
“All you have to do is look at Pan Am’s acquisition of National Airlines in 1979, where —largely because of union opposition — PanAm was forced to raise National’s labor costs to its own higher level,” Lorenzo said. “JetBlue would likely have the same union issue.”
“Of course, to be fair, in comparing the cost structures, one must also consider Spirit’s seat density and the product itself and the cost of extras that may be included in JetBlue costs and not in Spirit’s,” Lorenzo said.
The key barrier to a merger, Lorenzo said, is the Biden administration’s apparent opposition to mergers. The stock market apparently shares his opinion, given the spread between JetBlue’s offer price and where Spirit is trading.
JetBlue disputes Lorenzo’s points. The airline has said that a merged airline will spread costs across an expanded single fleet type A320 carrier. In an interview, Glenn Pomerantz, a partner in the Los Angeles office of Munger, Tolles & Olson and a veteran antitrust attorney, said “A JetBlue acquisition of Spirit delivers a unique pro-competitive benefit” because JetBlue entry into a market leads to lower fares.
Pan Am’s 1980 acquisition of National is generally thought to have been unsuccessful not only because it raised costs for the combined carrier but also because it did not sufficiently address Pan Am’s lack of domestic capacity and because cultures clashed.
Lorenzo, who had bid for National, ran Continental from 1981 to 1990, after its merger with his Texas International Airlines. Under his leadership, Continental built the Houston and Newark hubs that now are key parts of United’s route system. But he also won enmity from airline labor unions as he sought to reduce costs after the industry’s 1978 deregulation enabled new lower cost airlines. Now 82, Lorenzo leads Savoy Capital, an investment firm. It does not own shares in JetBlue, Frontier or Spirit
In February, Spirit and Frontier announced their plans to merge. That deal valued Spirit shares at $25.83. In April, JetBlue sought to bid for Spirit, offering $3.6 billion or $33 a share. Last week, JetBlue made a hostile tender offer 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 this is two low-cost carriers strengthening themselves by merger is an open question — I have a feeling that in the end, they will.”
Pomerantz said, “I think the current administration has made clear that any airline merger may face challenges. (Be it) JetBlue/Spirit (or) Frontier/Spirit, no one can predict with any certainty the outcome of that challenge.” He said the “JetBlue effect,” recognized by the Department of Justice in its Northeast Alliance complaint, forces competing carriers to reduce fares in a JetBlue market.
“JetBlue has a strong argument,” Pomerantz said. “JetBlue’s acquisition of Spirit (would) deliver a unique pro-competitive benefit, an expansion of the JetBlue effect. That means more passengers and routes would have lower fares.’
As for the cost impact of a JetBlue/Spirit merger, JetBlue CEO Robin Hayes addressed them on the April 6th call with analysts and reporters.
Primarily, Hayes said, “We have a really compelling order book of very high-performing, flexible, fuel-efficient airplanes. And definitely, there is a significant amount of benefits we've come to (in) scaling around a single fleet type.” Similarly, he said, a combined carrier would benefit from the supply of pilots and other employees in a tight labor market.
For Lorenzo, JetBlue’s tender offer brought back memories. In 1981, Texas Air made a tender offer for 50% of the outstanding shares of Continental. At the time, Continental was trying to merge with its neighbor Western Airlines and was awaiting shareholder approval.
Lorenzo and his team saw Continental as a good fit with Texas International. At the same time, Wall Street had taken a dim view of the Continental/Western second try at a merger, which was reflected in the lowered price of Continental’s stock and shareholders’ decision to accept the Texas offer.
It is possible to view Texas Air in 1981 as a predecessor to JetBlue today, making a tender offer that upsets an ongoing merger effort between two amenable parties, Spirit and Frontier. A difference is that Texas Air was the smallest of the original Civilian Aeronautics Board-certificated carriers, one third the size of Continental, and the CAB rapidly approved the deal.
“Continental and Western had previously applied to merge the two airlines in 1979, but the CAB (Civil Aeronautics Board) turned it down as anti-competitive,” Lorenzo said. “The street hated the deal. Western and Continental had been two high-cost unprofitable carriers located near each other (in Los Angeles) and the deal didn’t really offer anything. We tendered with the expectation that it would get turned down by shareholders, which it was.
“We tendered to break up a pending merger, just as JetBlue has done,” Lorenzo said. Until the JetBlue tender offer for Spirit, it was apparently the only formal cash tender offer in the history of the major airlines.