JetBlue Airways at a crossroads after Spirit rejects its takeover offer

JetBlue Airways is at a quarter-century crossroads.

The airline’s first flight took off from New York City for Fort Lauderdale in February 2000. Twenty-two years later, JetBlue executives again set their sights on South Florida with a surprise bid for Spirit Airlines. That first flight was a success, the bid was not.

Spirit on Monday rejected JetBlue’s $3.6 billion all-cash offer and said it was sticking with a deal to merge with fellow ultra-low-cost carrier Frontier Airlines, an agreement struck in February valued at $2.9 billion. Spirit’s stock fell more than 9% Monday after it announced it was turning down the JetBlue offer in favor of the Frontier deal, while JetBlue’s rose slightly while JetBlue’s rose more than 2%.

Miramar, Florida-based Spirit cited regulatory concerns in turning down the offer, saying it doubted a JetBlue acquisition would get approved, in part because of JetBlue’s Northeast partnership with American Airlines, which the Justice Department sued to block last year. The DOJ argued in its suit that it would drive up fares and hurt competition, specifically mentioning the importance of smaller carriers like JetBlue.

JetBlue said it would divest Spirit assets in New York, Boston and some in Florida under a revised offer. The discount carrier still said no. Spirit CEO Ted Christie said during the airline’s first-quarter call Thursday that he has “wondered whether blocking our deal with Frontier is, in fact, their goal.”

Spirit’s rejection leaves JetBlue Airways at a turning point. Nearly 24 years after it was incorporated, JetBlue has grown from a quirky leisure airline based in New York City with one class of service into the sixth largest airline in the U.S. with more than 100 destinations from Los Angeles to Lima, Peru.

Throughout its more than two decades of service, JetBlue stood out among its peers, advertising low fares and passenger amenities like seatback screens, satellite television and later, free Wi-Fi. It even has more legroom than competitors. Its latest venture – service to London – aims to capture rivals’ high-paying passengers with its Mint business-class suites.

JetBlue shares are down more than 43% over the last 12 months, as of Thursday’s close, underperforming a 29% drop in the NYSE Arca Airline Index, which tracks 18 mostly U.S.-based carriers. Over the same period, the S&P 500 is off 1.3%.

That, combined with the rejection from Spirit’s board, is adding pressure on Robin Hayes, JetBlue’s third-ever CEO, and his management team to simultaneously grow the airline and ensure reliability in the process.

JetBlue in February ranked last among U.S. carriers for punctuality, with a nearly 62% on-time arrivals rate compared with a 17-airline average of almost 77%, according to the Department of Transportation.

In April, it faced a host of other operational trouble as thunderstorms swept through Florida, impacting operations of Spirit, Southwest Airlines, American Airlines and others.

“I think they can fix themselves. They need leadership who is really able to manage a much bigger and much more complex airline,” said Mark Ahasic, an aviation consultant who worked at JetBlue from 2000 to 2006, including as director of operational planning and manager of corporate planning. “It’s not the entrepreneurial startup JetBlue anymore. It’s an evolved carrier.”

JetBlue executives argued the Spirit acquisition would have helped speed up its growth, giving it access to Spirit’s fleet of more than 170 Airbus planes as well as more than 2,000 pilots at a time when pilot shortages and attrition are hindering expansion.

JetBlue has a host of internal issues to resolve, such as improving reliability and its relationship with crews, who have complained about grueling schedules coming out of the pandemic, something staff at other carriers like Southwest and American have also reported. JetBlue has already taken steps to reduce its schedule by about 10% this summer so it has more wiggle room for disruptions.

Wiggle room it hasn’t always offered its top boss.

A meltdown in February 2007 stranded thousands of customers and cost JetBlue’s founder David Neeleman his position as CEO then. (Neeleman now runs upstart carrier Breeze Airways.) JPMorgan airline analyst Jamie Baker noted the precedent in light of JetBlue’s operational problems during an April 26 earnings call, the week before Spirit rejected JetBlue’s offer.

“The constitution of JetBlue’s Board is different today, but it’s worth noting there’s precedent for senior leaders being let go when operations have suffered,” Baker said.

JetBlue and other airlines have had to navigate bad weather in travel hotspot Florida. The Federal Aviation Administration said Wednesday it will “immediately” add staff to a main air traffic control center for the state after a meeting with airlines, during which carriers said they would continue to fly service to Florida above 2019 levels.

“We can’t control the weather, but we can try and control everything enough, and that’s what we’re laying out to do,” Hayes said on the April earnings call. “But the No. 1 priority from that for me, for the leadership team, for the Board right now is restoring our operational performance because that is the path to margin recovery.”

JetBlue says it will continue to work on its operation and toward regaining profitability. For now, it says it still wants to acquire Spirit.

“While we would unquestionably prefer to negotiate a transaction with you, if you continue to refuse to constructively engage with us so that we can deliver this value to your stockholders, we are actively considering all other options available to us,” Hayes wrote to Spirit Chairman H. McIntyre Gardner and CEO Ted Christie in an April 29 letter.

A JetBlue spokesman declined to elaborate, but a tussle for Spirit Airlines through a proxy battle or tender offer could be costly.

JetBlue’s bid for Spirit isn’t its first attempt at an acquisition. It lost out to Alaska Airlines in 2016 when that airline, another mid-size carrier like JetBlue, acquired Virgin America.

JetBlue hasn’t indicated that it is open to acquiring or combining with a different carrier than Spirit. Alaska’s CEO Ben Minicucci told CNBC in March that he wants his airline to grow organically and that a combination isn’t on the table currently. An Alaska spokeswoman told CNBC Tuesday that Minicucci’s strategy stands.

“A lot of times companies will do acquisitions to avoid having to fix their own house,” said Emilie Feldman, a management professor at the University of Pennsylvania’s Wharton School. “Sometimes it’s better to let the acquisition go and fix your own business.

Ahasic added JetBlue has “more fundamental fish to fry.”