JetBlue Airways Corp already overcame one adversary in its battle to acquire Spirit Airlines Inc. Now it faces an even bigger fight.

The $3.8bn merger must undergo a rigorous antitrust review that analysts say could lead to significant divestitures or changes to the deal’s structure — if it gets approved at all.

Concern over regulatory pushback was the main reason Spirit’s board resisted JetBlue’s overtures for several months in favour of a lower offer from Frontier Group Holdings Inc.

“This one is going to be put under the microscope,” Bill Baer, former assistant attorney general in charge of the Justice Department’s antitrust division, said of JetBlue’s deal.

The notion that combining a low-cost airline with an ultra-low-cost carrier will enhance competition “will get a lot of scrutiny.”

After prevailing Thursday in the fiercest airline takeover clash in years, JetBlue is poised to gain new planes, routes and pilots, swelling its ranks at a speed it couldn’t otherwise achieve.

While still ranking well behind behemoths like Delta Air Lines Inc

and American Airlines Group Inc, a bulked-up JetBlue would leapfrog Alaska Airlines to become the fifth-largest carrier in the US.

The DoJ is likely to examine a range of factors in JetBlue’s case, including the markets in which the carriers both operate, how any concentration of flights would affect air fares, whether service would be cut and if the combination would reduce chances that the surviving carrier will expand into new cities or regions.

Merger reviews are customary, but President Joe Biden has made intense scrutiny a priority in industries with heavy consolidation, including airlines.

A number of high-profile recent deals have been stymied by antitrust reviews, including Nvidia Corp’s failed attempt to purchase Arm Ltd and Lockheed Martin Corp’s proposed — then abandoned — merger with Aerojet Rocketdyne Holdings Inc.

Asset divestitures can help smooth the way to antitrust approval, and JetBlue has already offered to give up Spirit’s assets in the New York and Boston areas, and potentially in crowded airports in some Florida cities. Robin Hayes, JetBlue’s chief executive officer, said this shows how committed they are to doing what is necessary. “We have a path to close this deal,” he said in an interview. The carriers expect approval no later than mid-2024.

Investors and experts aren’t so sure.

An informal survey of merger arbitrage specialists by Bloomberg found most see a 50% or lower probability of the deal being completed.

JetBlue is already facing a DoJ suit to block an existing partnership in the Northeast US with American Airlines.

Concerns over the so-called Northeast Alliance — and whether JetBlue would be willing to abandon it to close the Spirit deal — led JetBlue to include an unusual $470mn breakup fee for Spirit and its shareholders if the merger is blocked on antitrust grounds.

“When JetBlue made the takeover bid for Spirit, they already knew that the NEA was something that would have to go,” said Florian Ederer, who teaches a class on antitrust and competition policy at the Yale School of Management and has authored papers on the topic.

A requirement to ditch the American partnership likely will not lead JetBlue to walk away from the merger, he said.

Unexpected Help The DoJ’s case against the tie-up may get some unexpected help from Spirit.

Earlier this year, when trying to fend off JetBlue’s unsolicited offer, lawyers hired by Spirit and Frontier offered an analysis of the ways a JetBlue-Spirit combination would be detrimental.

That now gives regulators a clear roadmap for what to look for and areas ripe for challenge, said Jennifer Rie, a Bloomberg Intelligence analyst.

JetBlue’s best argument is that the merger will put competitive pressure on the industry’s largest carriers, including United Airlines Holdings Inc and Delta, to lower prices on routes where a combined JetBlue-Spirit fly, Rie said.

But antitrust prosecutors will need to weigh that against the likelihood of higher prices on individual routes since JetBlue flies planes with fewer seats and higher fares than Spirit, she said.

“In today’s aggressive DoJ, where there have already been many, many complaints and studies of airline consolidation and people already believe the industry is too consolidated in general, they have a tough argument to make,” she said.

Source: Civil Aviation Authority – Qatar