Spirit Airlines-JetBlue Airways Agreement: Wait for payment (SAVE)

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While long-term investors should have wanted the Frontier Group Holdings’ (ULCC) purchase of Spirit Airlines (NYSE: REGISTER), these investors must now analyze Jet Blue Airways (JBLU). The agreement when buying, the purchase price provides a substantial upside to the stock, while holding Spirit Airlines provides downside protection should the trade fail. My investment thesis remains ultra bullish on the stock, despite disappointed shareholders not approving the merger with Frontier.

big advantage

JetBlue has agreed to acquire Spirit for $33.50 per share in cash for a value of approximately $3.8 billion, including an advance payment of $2.50 per share in cash payable upon approval of the transaction by Spirit shareholders. Additionally, the deal offers a ticking fee of $0.10 per month from January 2023 until closing,

Spirit is trading at $22.50, now giving shareholders an incredible $10 upside at the close of the trade, a gain of 44%. The big catch is whether the deal actually gets approved by regulators.

JetBlue management is confident the deal will close, but the market is not in favor of the massive discount. The airline suggests the overlap on non-stop routes represent only 11%but JetBlue has an almost 30% overlap with Spirit Airlines on flights and ASM.

Overlap slide

Source: JetBlue regulatory presentation

The airline plans to divest Spirit assets in New York and Boston, as well as growth plans in Fort Lauderdale. JetBlue points out that the combined airline only accounts for 9% of the departure seat market share in 2022 with revenues of $11.9 billion in 2019.

Market share slide

Source: JetBlue merger presentation

The airline is far smaller than traditional airlines’ total revenues of more than $45 billion. American airlines (AAL) is expected to generate $53.7 billion in revenue in 2023, while combined JetBlue is expected to increase revenue to $15.8 billion as Spirit Airways continues to soar beyond 2019 levels.

Either way, the new JetBlue would be a fraction of the market. The airline must convince regulators that removing an independent ULCC will have no impact on the low fares offered to consumers.

Spirit Airlines has been the aggressive leader in capacity growth, while legacy airlines are still mostly operating 10% below 2019 capacity levels. Spirit has increased capacity by 28% since October 2019, followed of Allegiant Travel (ALGT) at 26% and JetBlue down to 1%.

Capital addition slide

Source: Airlines.org

Regulators’ biggest fear is that the combined airline will become more conservative on capacity expansion with a very large revenue base exceeding $15 billion and a fleet of 458 planes. In overlapping markets, a new airline would naturally have to acquire Spirit’s assets and compete aggressively on those routes with the new JetBlue to maintain current fare structures.

Autonomous mind is fine

Upon shareholder approval, Spirit shareholders will receive a one-time cash prepayment of $2.50 per share. The risk for shareholders is that the deal lingers through 2024 and never gains regulatory approval. Some analysts place regulatory approval at below 50%.

Shareholders will begin collecting the listing fee of $0.10 per month once approval is not obtained by January. The problem is that the stock is experiencing regulatory hiccups, although a combined $470 million breakout payment to Spirit and shareholders in a deal stalled due to antitrust groups would be a huge boost for the action and the shareholders.

Shareholders will receive the initial cash payment of $2.50+. Spirit could trade lower with any trade rollbacks, although Frontier could come back in such an event. Shareholders could actually approve the deal without having a cash offer from JetBlue on the table.

Based on United Airlines (UAL) for Q3’22, investors should view analysts’ current EPS targets as very strong, if not weak. Analysts currently have a 2024 EPS target of $2.23.

Such an EPS target equates to 4% pretax margins in 2024. Based on United Airlines’ target for a 9% pretax margin next year, the analyst community seems far off base with BPA targets on Spirit Airlines.

With 111 million diluted shares, the airline would only produce $250 million in net income to meet such an EPS target. Revenue is expected to approach $6.8 billion in 2024, so margins similar to United Airlines would provide $612 million in pretax profit with nearly $490 million in net income based on an effective tax rate of 21% shown for the third quarter of 2022.

The numbers continue to support the upside potential of keeping the stock or merging into a stock deal with Frontier, but the only option on the table now is to approve the JetBlue deal for a 44% upside .

Carry

The main takeaway from investors is that shareholders should hold the stock either for the cash boost resulting from the conclusion of the JetBlue deal, or for the general strength of the stock thanks to the improved operations in the sector. air Transport. Based on recent industry data, shares of airlines like Spirit Airlines are far too cheap.