Recent multi-billion dollar mergers and upbeat earnings reports in the airline industry have revived optimism in the sector and airline stocks as investors turn bullish on the sector’s potential after being paralyzed by the COVID-19 pandemic in the past two years.
Several airline companies declared bankruptcy during the pandemic, while some were forced to scale down or completely cease operations as countries implemented border closures. While some have emerged from bankruptcy and resumed operations, several carriers still face a heightened risk of bankruptcy.
Merging To Strengthen Competition
Others, in a bid to strengthen their operations, have opted to merge with other carriers to take advantage of each of their strengths. Spirit Airlines (NYSE:SAVE) and JetBlue Airways (NASDAQ:JBLU) last week announced a merger that would value Florida-headquartered Spirit at $3.8 billion and create the fifth-largest airline in the US.
The deal was announced just a day after Spirit abandoned its planned merger with Frontier Airlines after Spirit failed to secure backing from its shareholders. The deal with Frontier fell short of the JetBlue offer by about $1 billion.
Frontier CEO Barry Biffle, in a call with analysts on Thursday, said they were “disappointed” with the outcome but stressed that Frontier’s board “took a disciplined approach throughout our negotiations rather than overpay for Spirit.”
In the first quarter of 2022, Spirit’s net losses ballooned to $194.7 million from $112.3 million in the year-ago period, even as revenue jumped 13% year over year to $967.3 million.
In announcing the merger with JetBlue, Spirit CEO Ted Christie said,
"The two companies will create the most compelling national low-fare challenger to the dominant US carriers.”
Spirit’s shares rose 5.6% on Thursday following the announcement, while JetBlue’s shares inched down 0.4%. The investor reaction came as JetBlue said it would preemptively stop operating in certain airports where it and Spirit have a big presence.
Risks Remain
Some experts are skeptical of the merger, with William J. McGee, a senior fellow for aviation and travel at the American Economic Liberties Project, telling The New York Times,
“We have yet to see an airline merger in the United States in the last 30 years that has been good for consumers, good for labor, and good even for the cities and regions in which they operate.”
Meanwhile, Erik Gordon, a business professor at the University of Michigan, said,
"The merger will be a case study of the winner’s curse… JetBlue will face years of nightmares trying to integrate aircraft, systems, and cultures from different planets.”
However, Helane Becker, a managing director and senior analyst at investment bank Cowen said the merger between Spirit and JetBlue could encourage other carriers to merge to stay competitive.
“If this transaction were to get done, it might encourage smaller airlines, especially regional airlines, to consider merging.”