JetBlue Airways’ [NASDAQ:BLU] USD 7.8bn acquisition of Spirit Airlines [NYSE:SAVE], agreed on 28 July after a months-long bidding war with Frontier Group [NASDAQ:ULCC], was the North American airline industry’s biggest transaction in nearly a decade.

The deal puts 2022 on track to be the strongest year since 2013, when a bankrupt American Airlines [NASDAQ:AAL] and its creditors agreed a USD 7.26bn merger with US Airways to create what was then the world’s largest air carrier.

In search of scale

In the decade or so after 9/11, several mergers created a trio of national carriers in the US: Delta’s [NYSE:DAL] USD 5.57bn deal for Northwest in 2008, United’s [NASDAQ:UAL] USD 6.5bn acquisition of Continental in 2010, and the American/US merger.

Since then, regional and low-cost carriers have sought to consolidate in a bid for scale. Spirit gives JetBlue roughly 2,700 pilots, 180 planes and an order book of 113 Airbuses to better compete with Southwest Airlines [NYSE:LUV] – the US’s No. 4 biggest operator. That is especially important with pilots quitting in thousands during the pandemic and supply chain glitches causing jet delivery delays.

Turbulence ahead

The risk exists that a Biden administration more intent on cracking down on mergers and acquisitions could shoot down the deal. JetBlue’s USD 400m breakup fee signals its confidence it can win anti-trust approval. The carrier has expressed a willingness to divest Spirit assets in New York and Boston, which overlap with its Northeast Alliance (NEA) codeshare agreement with American. Also in its favor: The government has never blocked an airline deal to date, even though the Department of Justice tried with American/US in 2013. If regulators squash the JetBlue deal, Frontier could try to land Spirit again.

Come Fly With Me

Regional carriers, such as Mesa Air Group [NASDAQ:MESA] and SkyWest Airlines [NASDAQ:SKYW], have been losing pilots to the higher-paying major carriers. The result is greater difficulty keeping consistent flight schedules and lower stock prices, factors that could push them to consolidate, says a sector banker.

Since all regional airlines have a shared goal of competing with the majors, no specific tie-up makes greater sense than another. Differing labor union agreements can also add crosswinds to merger talks, the banker notes.

One possibility is Republic Airways – in which American owns 25% and United holds 19% – buying SkyWest, the banker speculated. Another is Southwest buying Hawaiian Airlines [NASDAQ:HA] given Southwest has been expanding its presence significantly in the West-Coast-to-Hawaii market, he adds.

Alaska Airlines [NYSE:ALK], which JetBlue/Spirit now leapfrogs into fifth place, seems an unlikely acquirer for two reasons, notes the banker. First, its share price has more than halved since it paid USD 4bn for Virgin America in December 2016. Second, that transaction prompted Southwest to “double down” on its West Coast routes, giving Alaska a tougher time in its own backyard. If anything, Alaska is a more likely target, perhaps even for JetBlue should it embark on a post-Spirit buying spree akin to the one US Airways did in the 1980s, argues the banker.

Any further tie-ups are likely 18 months or more away, however, he cautions. Most airlines – struggling with low passenger numbers due to lingering COVID-19-related angst and a lingering preference for business over Zoom – want to prioritize a return to pre-pandemic levels of profitability. That means more taxiing on the runway before deals take off.