Hard Landing
US air travel is a marvel of modern regulatory success. Deaths from commercial air travel vanished years ago. In most years, that number is precisely zero. Every few years, it jumps to one or so. The rate of injuries from any sort of air travel snafu has reliably marched downward. It hovers near its all-time low.
Compare that to passenger vehicles. Those kill 50 times as many people as the most unsafe year in the past decade of flying. And the passenger vehicle death rate has been mostly increasing over the last decade.
Most "injuries" from airlines these days come from the discomfort of cramped seats or the anguish of flying a low-cost carrier or investing in one.
Peanuts
Just over a year ago, Lamplighter looked at JetBlue's proposed acquisition of Spirit. It wrote about it here and here. The gist was any potential consumer harm brought by the carrier combination was limited to about half a dozen routes. Consumer harm is what antitrust law tries to prevent. The DOJ argued that the potential for higher prices on this handful of routes was enough to ground the deal.
A slew of larger, more overlapping airlines merged over the past three decades. All did so without getting blocked by the courts despite a few in-court challenges. Surely two mid-table airlines who wanted to compete with the big guys and without much overlap in routes wouldn't cause courts to get in the way? Lamplighter believed the merger likely to go through and the potential payout was large. This take landed like a bag of peanuts.
On January 16, 2024, Judge William Young took the DOJ's side with the cheeky sign off "To those dedicated customers of Spirit, this one's for you." The deal wouldn't go through. JetBlue abandoned the deal shortly after without appeal.
The merger failed as an investment. Lamplighter disembarked the shares, but only after a stinging loss to start the New Year.
Missed Connection
In the background of the case, the airline landscape changed massively. The Justice department's case relied on analyzing the market before COVID-19. The lumbering industry that Spirit disrupted had moved on. Legacy carriers were eating Spirit's lunch. Even JetBlue pivoted to disrupt its up-market carriers rather than flinging mud in the budget tier.
The not-so-secret reason for Spirit selling itself was that its business model wasn't working any more. It needed a new one. Spirit could have tried to do this on its own. Turnarounds take time, though. Spirit is notorious for low prices and low-quality service. It needed to raise both.
JetBlue's acquisition of Spirit was really a backdoor restructuring. This is something that happens pretty often. Most stakeholders — shareholders, bondholders, employees, customers — all end up better off if the company stays out of the court. Through the merger, Spirit would have done that and could just sort-of dissolve into JetBlue.
Even Judge Young admitted in his opinion that the combined JetBlue-Spirit would be better able to compete nationally with larger carriers.
Lost baggage
On November 18, 2024, Spirit filed Chapter 11 bankruptcy. It will continue to run but will start selling off whatever assets it has to repay bondholders. Stockholders get nothing. Some employees will get pink slips. Other carriers will likely get to pick off some of the routes the DOJ was so concerned about keeping just for Spirit.
Spirit will carry on a smaller, diminished version of itself. One with higher prices that the DOJ sought to stop. One less able to compete with the bigger airlines, which antitrust is supposed to promote.
Two lessons for investors jump out: 1) the bar for anti-trust actions can be impossibly low, proceed with caution and 2) don't underestimate regulators' enthusiasm for sabotaging their own goals.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.