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JetBlue Makes $3.6b Bid For Spirit – A 37 Percent Higher Price Tag Than Frontier

By Jacob Wolinsky. Originally published at ValueWalk.

JetBlue Airways

Following is the unofficial transcript of a CNBC interview with JetBlue Airways Corporation (NASDAQ:JBLU) CEO Robin Hayes on CNBC’s “Squawk on the Street” (M-F, 9AM – 11AM ET) today, Wednesday, April 6th. Following is a link to video on CNBC.com:

JetBlue Makes $3.6b Bid For Spirit – A 37 Percent Higher Price Tag Than Frontier

PHIL LEBEAU: Thank you very much, Morgan. Robin, thank you for joining us this morning. Let’s get to the main question that I think a lot of people have. When did you decide, did the JetBlue board decide you know what? We think that, that Spirit is the airline that we should be partnering with, let’s put in a rival bid.


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ROBIN HAYES: Hi Phil. Thanks for the question and good morning, everyone. You know, obviously, the sort of the landscape is something that we think about a lot and we’ve watched a lot of consolidation happen here in the, in the US where you have four large airlines that control about 80% of the market and so for the for the rest of us, you know, I think we’re always thinking about or certainly from a JetBlue perspective, how can we best compete and, you know, when so we’ve been thinking about that and we see the Spirit offer, the Spirit transaction as really a way to turbocharge JetBlue’s organic growth and the ability to do something much more quickly because of the the order book and the presence that Spirit had and really just bring more low fares and the great JetBlue experience to more customers. And so we’ve been thinking about it for some time and then obviously once the Frontier Spirit deal was announced, you know, we had to we had to make a decision and we felt that the benefits were compelling.

LEBEAU: Robin, you know, the big concern that’s out there, regulators and whether or not the DOJ will sign off on this deal. In fact, that’s what Frontier hit at when it responded to your bid yesterday. In fact, they said in it, “Unlike the competing Spirit Frontier combination and acquisition of Spirit by JetBlue, a high-fare carrier would lead to more expensive travel for consumers, in particular, the significant East Coast overlap between JetBlue and Spirit would reduce competition and limit options for consumers.” I mean, they’re saying it right there, they do not consider you guys a low-cost carrier and they do not believe that you will have low costs with Spirit. What do you say to that?

HAYES: No, I mean, first of all, we do expect a lot of regulatory rigor, a review of this transaction just as there would have been with the Frontier Spirit merger. I mean, we’ve, as I said earlier, we’ve had a lot of consolidation and that’s something I know that the regulators are, you know, have expressed some concern about. What I would say is when I think about the benefits of a JetBlue Spirit transaction is that you don’t have to choose between great service and low fares. You can have both. I mean, we have a, a blue basic fare, which is our fare designed to attract the most price sensitive customer, but we also offer other things as well. We can offer buy ups to more bundled fares. We can offer more leg room and let’s remember Phil, even customers buying our blue basic fare, they’re getting on a JetBlue airplane. They’re going to get more legroom. They’re going to get free Wi Fi, they’re going to get free TV, they’re going to get free drinks and snacks and yes, the price is clearly important that we must always remember that. But people want more when they fly and JetBlue can bring you both.

LEBEAU: Robin, if the DOJ comes to you and it says okay, you can buy Spirit, but you’ve got to unwind your northeast alliance with American Airlines. Would you do that, and do you think that that’s a possibility?

HAYES: Well, I think these deals are very complementary. I mean, when we look at the benefits of the Northeast alliance with American, I mean, JetBlue is 50% bigger this summer in New York than we were three years ago enabled by the NEA. Between American and JetBlue, we’ve created a third viable competitor to compete with the other large two legacy airlines. Our TrueBlue members have access to the American network and some of the benefits of now flying on American I mean the benefits the NEA for the consumer are just so pro consumer, I don’t see how you could for a minute say that you should trade that for this. If, if we were to walk away from the NEA, JetBlue would get smaller again in the Northeast. You would have less flights that we’re able to do. I mean for all the destinations we’ve added we just added Milwaukee and Kansas City. One of our legacy competitors reacted to that and added it to in the Northeast. So the NEA is already driving more choice for customers and more competition and so we certainly don’t think about should we trade the NEA for this. These are two very complementary deals, the Spirit transaction will allow us to grow outside of the Northeast and really complement what we’re doing with the NEA.

MORGAN BRENNAN: Robin, its Morgan. If this proposed combination moves forward, I mean, just to dig into it a little more deeply, what is the airline to be? Are we talking about two specific brands? Are we talking about a situation where Spirit is more deeply integrated into JetBlue and if it is integration, what would that involve? Because analysts are already raising questions around things like aircraft, retrofitting and pilot pay.

HAYES: Sure. So, I want to be very clear. I mean, we are welcoming, we really welcoming all the Spirit team members. We think it’s a fantastic team to combine with our own teams so we’re excited about that. The airline will be JetBlue though. There’s certainly things that we can learn from Spirit. I mean, I think they’ve done a really good job on the airport technology side. There’s a number of other things that that I know we can learn from you know their focus on on cost but the brand is going to be JetBlue because we think we are perfectly set up to cater for both value conscious leisure and business flyer and there is a, you know, there is obviously costs that go with this type of acquisition in terms of things like retrofitting, and I’m bringing everyone on to sort of come, that’s perfectly normal in this type of transaction. It’s something that we, you know, we’re ready for. We’ve just retrofit 119 of our own 320s in the new, the new spec so we know, we know how to do it and the accretion for this deal is so significant that even with those costs, you know, they will still be earnings accretive for shareholders in the first year.

DAVID FABER: Robin, it’s David Faber. You know, I don’t know if Spirit is going to say that it might lead to a higher offer for you. I could well see that board deciding that the risks of antitrust scrutiny and or rejection are just too high. It’s an easy defense to hide behind. What will you do to try and convince them? Will you offer a very large verse termination fee, for example, or hell or high water as we call it or a willingness to potentially go to court should the DOJ say we are challenging this.

HAYES: I mean, one step at a time. We’ve made an offer we’re standing by. We’re ready to engage. We’ve obviously done a lot of work on the regulatory side. We understand I believe what the concerns are, you know, we we got a lot of data to support the effect, what they call the JetBlue effect. I mean, interestingly, when JetBlue flies into a market and competes with a legacy airline, the overall fares come down more than when an ultra-low-cost carrier flies against the legacy airlines and they do that because JetBlue is not ignored. The legacy carriers will bring their fares down and so, you know, when you scratch behind the surface and you look at what the regulators are trying to do, which is to make sure as a result of these combinations, fares go down rather than up we actually believe a JetBlue Spirit combination will have a more profound and a more permanent effect nationwide on lower fares than a merger of the ultra-low-cost carriers. So, we have a lot of conviction behind this and we’ll lay the case out to the the Spirit board. Our offer is clearly a superior proposal to the one they’ve got today, and you know, we expect them to engage seriously as they’ve already said that they will.

FABER: Yeah, well what are your shareholders not perhaps understanding about the benefits of this given your stocks down eight and a half percent?

HAYES: Yeah, you know, the markets down today. We’re down a little bit more than that. I mean, I think this was a surprise for for people so, you know, this came out last night. So, we are doing a lot of investor calls. We hosted an analyst call earlier and, you know, get to, get investors to, you know, understand the strategic rationale of this transaction. I mean, it actually if you compare this with the last merger which was the acquisition of Virgin America by Alaska Airlines where, you know, they paid it about $2.7 billion for an airline that’s about a third of the size of a Spirit so really, this offer is $3.6 billion. It’s just under a billion dollars more but it’s the acquisition of airline that’s three times the size and again, will allow us to turbocharge our organic plan, which is the plan our investors are already familiar with. So you know, we’re, we’re gonna be making the case over the next days and weeks.

LEBEAU: Robin, part of making that case and you just talked with the analysts about this is talking about the potential to grow into some of those markets where you really have been constrained in terms of growth potential, talking about Los Angeles, for example, at LAX but you also want to grow into markets, like Las Vegas, secondary markets like Chicago where you don’t have as big a presence as you’d like. How important is that to convincing the Spirit shareholders, look, this is a smart move here and it helps everybody grow here.

HAYES: Yeah, I mean, absolutely Phil. I mean, not only does this allow us to offer our combined customers more flights and more markets like Orlando where we’re both, we both have a presence but yes, I mean, you named it the ability to grow in Los Angeles. We’ve made no secret fact that we’d like to grow there more quickly that, you know, it’s a very constrained airport. And also by having more access into legacy hubs, we can offer more choices to markets that have historically suffered from higher fares. So we think that’s a core part of the argument.

BRENNAN: Robin Hayes, Phil LeBeau. Thank you for joining us today.

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