Shares of the budget-friendly airline Spirit Airlines witnessed a significant 10% drop in premarket trading on Wednesday. This downward trend comes in the wake of a U.S. judge’s decision to halt the airline’s ambitious merger with JetBlue Airways, valued at $3.8 billion.
The ruling on Tuesday dealt a heavy blow to Spirit’s market value, causing it to plummet nearly by half. This decision aligns with the concerns raised by the U.S. Department of Justice about the potential negative impacts of the merger on consumers, particularly in terms of ticket prices.
JetBlue’s Slight Dip Amidst the Market Turbulence
Contrasting with Spirit’s steep decline, JetBlue experienced a 5% increase in its shares on Tuesday. However, the airline wasn’t immune to the effects of the recent legal decision, with a slight 1.3% decrease in its shares observed before the market opened. This shift in JetBlue’s stock performance reflects the overall trend in the airline sector.
Helane Becker, an analyst from TD Cowen, expressed optimism for JetBlue, noting a downturn in Spirit’s operations since the merger announcement. Becker speculated that Spirit might be heading towards a Chapter 11 filing, potentially leading to a complete liquidation under Chapter 7.
The Challenges Ahead for Spirit Airlines
Spirit Airlines faces a rocky path ahead, struggling with profitability issues exacerbated by rising operational costs and persistent supply chain disruptions. These challenges have raised alarms regarding the airline’s ability to manage its debt due for repayment next year. Stephen Trent, a Citi analyst, highlighted the pressing strategic and financial decisions awaiting both airlines, maintaining a “neutral” stance on their stocks.
The merger with JetBlue, had it proceeded, would have positioned the combined entity as the fifth-largest carrier in the United States. This move was viewed as a crucial lifeline for Spirit. However, J.P. Morgan equity analyst Jamie Baker pointed out the diminished valuation prospects for Spirit in the absence of this merger.
Comparing the enterprise value to sales ratios of both airlines for the upcoming 12 months, Spirit stands at 1.3, while JetBlue is at 0.6, based on LSEG data. The lower ratio suggests a more appealing investment opportunity. As the situation unfolds, both airlines can challenge the court’s ruling. In a joint statement, representatives from JetBlue and Spirit indicated their intention to explore “next steps as part of the legal process.”
Source: Yahoo Finance
