Bloomberg News

JetBlue Takeover Appeal Grows Amid AMR Limbo: Real M&A

August 27, 2013

JetBlue Takeover Appeal Grows With AMR Merger in Limbo

A ground crew member prepares a JetBlue Airways Corp. plane for takeoff at Long Beach Airport in Long Beach, California. Photographer: Patrick T. Fallon/Bloomberg

JetBlue Airways Corp. (JBLU:US) may become a takeover target for AMR Corp. (AAMRQ:US)’s American Airlines or US Airways Group Inc. if federal regulators succeed in derailing their merger.

The U.S. Department of Justice sued two weeks ago to block the creation of the world’s biggest carrier, saying it would reduce competition and boost fares. Without the $12.1 billion deal, both airlines could turn their sights to JetBlue, whose smaller size makes it less likely to raise antitrust issues while also offering a base in New York, the busiest air-travel market, said JetBlue shareholder (JBLU:US) Eagle Asset Management Inc.

While buying JetBlue would do less to close the gap with larger rivals, shareholder Disciplined Growth Investors Fund said the airline remains one of the more attractive candidates left in an industry shrunk by mergers and beset by bankruptcies. With a market value of $1.8 billion, the company may be vulnerable as its shares trail (JBLU:US) an index of the largest U.S. airlines by the most since 2006, according to data compiled by Bloomberg.

JetBlue “would be a pretty appealing strategic asset for both of those companies in the event that the merger does fall apart,” Eric Mintz, a fund manager at St. Petersburg, Florida-based Eagle Asset, which oversees about $10 billion, said in a phone interview. “You get a much bigger East Coast presence.”

Size, Success

JetBlue “doesn’t think size determines success,” Jenny Dervin, a spokeswoman for the New York-based company, said when asked about the possibility of teaming up with American or US Airways. (LCC:US) “By virtue of JetBlue’s position in the industry, we believe we can continue to grow profitably and sustainably, through organic growth and strategic partnerships.”

JetBlue may be more vulnerable to takeover interest with its shares (JBLU:US) lagging behind peers. The stock trailed the Bloomberg U.S. Airlines Index by 30 percentage points in 2013 through yesterday, the worst year-to-date underperformance through Aug. 26 in seven years, data compiled by Bloomberg show.

Today, JetBlue shares fell 2.2 percent to $6.23, the second-best performance among the 10 stocks in the Bloomberg U.S. Airlines Index. US Airways declined 4.6 percent to $15.47.

Deutsche Lufthansa AG agreed to buy a stake in JetBlue in 2007 and became its biggest shareholder, then said in November 2011 that it no longer considered the holding a strategic asset.

“It is mere speculation, and we don’t comment on any speculation,” Nils Haupt, a Lufthansa spokesman in New York, said about JetBlue as a potential acquisition target. The Cologne, Germany-based airline holds about a 17 percent stake in JetBlue.

International Hub

JetBlue, the sixth-largest U.S. carrier in terms of miles flown by paying passengers, says it has 850 daily flights, about 19 percent of which originate at New York’s John F. Kennedy International Airport. That New York gateway may appeal to larger companies, said Fred Martin, the Minneapolis-based president and chief investment officer of Disciplined Growth.

American could use JetBlue to ferry passengers from across the U.S. to the AMR unit’s international hub at JFK. American routes most of its New York domestic traffic through LaGuardia Airport.

If its merger with US Airways is blocked, a deal with JetBlue could help American bolster a network that lags behind those of larger competitors United Continental Holdings Inc. (UAL:US) and Delta Air Lines Inc. (DAL:US), Savanthi Syth and fellow Raymond James Financial Inc. analyst Jim Parker said in an Aug. 16 note to clients. The analysts placed about a 20 percent probability that the American-US Airways deal is blocked and American buys JetBlue.

Less Attractive

“It’s not as good as what US Airways would bring, but it is a potential candidate and will at least be talked up,” Syth said of JetBlue in a phone interview from St. Petersburg, Florida.

American would remain the third-largest U.S. carrier even with a JetBlue acquisition. The two carriers already have a marketing agreement for flights to 41 U.S. and international destinations.

“American Airlines has a strong, unwavering belief in the benefits our merger with US Airways will bring,” Michael Trevino, an American spokesman, said in an interview, while declining to comment on JetBlue. “We are focused on achieving antitrust clearance so we can build the new American.”

JetBlue’s New York routes also would appeal to US Airways, which could seek a takeover to prevent JetBlue from tightening its relationship with American, according to Mintz of Eagle Asset. It’s plausible both carriers could bid against each other for JetBlue, he said.

Fifth Place

Buying JetBlue wouldn’t do as much to bolster US Airways as a deal with American, failing to move it out of the No. 5 spot behind United, Delta, American and Southwest Airlines Co.

US Airways has also shown a curbed appetite for New York markets, winning U.S. regulators’ approval in 2011 to scale back its then-unprofitable LaGuardia domestic operations and electing to bypass JFK for international flights in favor of Philadelphia and Charlotte, North Carolina.

“We are proposing a merger with American Airlines,” said Ed Stewart, a spokesman for Tempe, Arizona-based US Airways. “Speculation about JetBlue is not on our radar at all.”

If it fails to merge with American, though, “US Airways will have to seek other acquisitions to scale up,” Vicki Bryan, an analyst at New York-based debt research firm Gimme Credit LLC, said in phone interview. “US Airways is trying to compete in the same market as United and Delta -- in the larger international market. They will have to find other logical partners, and what’s left is much smaller scale.”

JFK Focus

JetBlue wouldn’t make business sense for either American or US Airways, said Jeff Straebler, managing director for aerospace in the bonds and corporate finance group of John Hancock in Boston. While the smaller combination with US Airways might win regulatory approval, a tie-up with American probably would have too large a concentration at JFK, he said.

“The whole reason to buy JetBlue, those JFK slots, is the same reason DOJ would have a problem with it,” he said.

George Ferguson, a senior aerospace analyst for Bloomberg Industries in Skillman, New Jersey, disagrees, citing the extensive New York operations of legacy carriers like United, Delta and American.

“I don’t think it would be a problem” to get regulatory approval for an American-JetBlue deal, he said. “You have all three legacies pretty deep in the New York region, and it’s a pretty competitive market.”

Hubs, Unions

Both US Airways and American might have difficulty combining JetBlue’s operations with their systems that feed passengers to hub airports, and with meshing their organized labor groups with JetBlue’s non-union workforce, according to Greg Roeder, a fund manager at Guilderland, New York-based Adirondack Research & Management Inc.

The larger carriers would also have to decide whether to operate JetBlue as a wholly owned unit, retaining its low-cost culture, or absorb it into their brand. Delta and United both failed at operating a low-cost subsidiary.

“Culturally, I just don’t see a fit,” Roeder, whose firm oversees about $170 million including JetBlue shares, said in a phone interview. JetBlue “has put itself in a unique spot, and it doesn’t really fit into the mold of the legacy carriers.”

There’s still more than a 50 percent chance that American and US Airways complete their union, according to the Raymond James analysts. A judge overseeing the government’s challenge has scheduled an Aug. 30 hearing to establish a trial date.

Martin of Disciplined Growth Investors said JetBlue could be a takeover target if the merger falls through, even though he prefers to hold onto the shares.

“If you have a wonderful carrier that is basically self-supporting, is not a troubled carrier and you could buy that carrier for a nice price, that strikes me as what you’d want to do,” Martin said in a phone interview. For an airline searching for deals in a shrinking industry, JetBlue “would be an ideal one.”

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • JBLU
    (JetBlue Airways Corp)
    • $8.62 USD
    • -0.18
    • -2.09%
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