A federal judge’s decision to block JetBlue Airways Corp.’s proposed $3.8 billion acquisition of Spirit Airlines Inc. is a good outcome for JetBlue, according to J.P. Morgan.
“In our minds, this represents the cleanest possible outcome for equity holders; it frees JetBlue from a costly merger we believe management and the Board were no longer wed to (unless at a markedly reduced price, a complex scenario not easily achieved, in our view),” J.P. Morgan analyst Jamie Baker, wrote in a note released Tuesday. “Our base case remains that JetBlue equity could potentially take up near-term residence in the higher single digit range; its losses are less acute than Spirit and Frontier’s, its balance sheet affords it greater flexibility, and it leans into both international and premium markets, though not as aggressively as the Big 3.”
The Big 3 are U.S. giants American Airlines Group Inc.
AAL,
Delta Air Lines Inc.
DAL,
and United Airlines Holdings Inc.
UAL,
Related: Federal judge blocks $3.8 billion JetBlue-Spirit deal, sending Spirit shares plummeting 47%
JetBlue
JBLU,
shares rose following the judge’s ruling, and ended Tuesday’s session up 4.9%, while Spirit’s
SAVE,
stock plunged 47.1%. Shares of Spirit continued their slide in premarket trades Wednesday, falling 16.5%. JetBlue’s stock is down 0.2% in premarket trades.
J.P. Morgan has an underweight rating for JetBlue. Of 14 analysts surveyed by FactSet, one has a buy rating, eight have a hold rating, and five have an underweight or sell rating for JetBlue.
The federal judge’s decision also prevents Frontier Group Holdings Inc.
ULCC,
from “inheriting the keys to the low-cost-carrier kingdom, at least for now,” according to Baker. “And it frees Spirit to focus on identifying a path back to profitability (difficult for us to envision),” he added.
Related: Airline stocks have had a great run. Here’s what analysts expect from here.
Frontier shares ended Tuesday’s session down 2.8% and are down 0.9% in premarket trades Wednesday.
Tuesday’s decision has also thrust Spirit’s near-term health into the spotlight. “The focus is likely to be on Spirit liquidity,” wrote J.P. Morgan’s Baker. “We see little valuation support for Spirit in the absence of a merger, and for some time have envisioned shares taking up residence in the vicinity occupied by Frontier.”
Baker added that Frontier is not in a position right now to take on a Spirit acquisition and would be better served to re-engage with Spirit through a bankruptcy process if one materializes.
Related: Airline stocks slide after Delta lowers 2024 earnings guidance
“The path forward for Spirit turns to survivability,” Melius Research analyst Conor Cunningham, wrote in a note released Tuesday. “Spirit’s financial results have been outright bad and are not expected to materially improve in the near term.”
“We see ongoing cash burn over the next several years at Spirit, and a company that needs to continue to raise capital to survive,” Cunningham added. “The real issue here is that if Spirit does go bankrupt, it seems more likely to be a Chapter 7 filing than a Chapter 11 one. Chapter 7 would result in the permanent reduction of supply as lessors would look to reallocate aircraft out of the US.”
