Thread by @David_Slotnick

Hello from federal District Court in Boston, where it's Day 5 of the JetBlue-Spirit antitrust trial. The defense questioning of JetBlue CEO Robin Hayes has started.

A 2021 assessment found a Spirit-Frontier merger would put greater margin pressures on JetBlue.

The decision to bid for Spirit was made by JetBlue's board after the Frontier bid.

JetBlue will take $3.5b in debt for the purchase.

Not total cost synergies; negative cost dissynergies to $440m/year. Costs will increase, although Hayes thinks the cost vs. synergies number is lower now than when the deal was first inked.

JetBlue assessed the new debt as impacting "flexibility to respond to changing business and economic conditions...reduce funds to engage in investments, capital expenditures, could create some competitive disadvantages."

We're establishing that JetBlue will have a ton of debt after the deal, basically.

JetBlue will continue to discipline its capital expenditures aside from aircraft if the merger goes through.

Note that Hayes suggested it's not fair "as a blanket statement" to suggest that JetBlue would have to further limit its CapEx. In other words, it would continue with current cost discipline.

Hayes testifies that 2029-2030 is the soonest that an airline could reasonably expect delivery on a brand-new order placed with Airbus.

It's possible one could get an aircraft by a lessor in 2027 but Hayes is not familiar with the latest leasing options.

JetBlue's load factor for the year up to Sept. 30 has been 83.4%

Establishing that all Spirit aircraft would be converted to JetBlue aircraft "eventually," a 10-15% reduction in seats on Spirit aircraft.

JetBlue is uniquely able to compete for high-margin leisure and business travelers, lawyer asks. "We compete for everybody," Hayes says.

Talking about last week's earnings' call. Excess capacity has been driving fares down in the second half, JetBlue reduced capacity, largely connected to FAA slot waiver, Hayes said.

JetBlue expects 4Q performance to improve, but expects ATC shortage to remain for "a number of years"

JetBlue noting fares were too low due to too much capacity.

Note that those last few questions were from DOJ, now the defense is going.

JetBlue's founding mission was to "bring humanity back to air travel." Hayes says airlines have been making the travel experience "harder" since 1978.

Showing a venn diagram of airlines "competitive prices vs. customer-centric. JetBlue saw itself as being the first to be both.

15-20% of JetBlue pax are business travelers.

JetBlue's largest corporate contract is the US Govt.

"This merger is about the leisure customer," Hayes says.

JetBlue effect = legacies lowering prices to compete when JetBlue comes into a market, Hayes says.

JetBlue experience focuses on three pillars, Hayes says: Comfort, entertainment, service.

JetBlue expects to maintain or improve cost advantage relative to legacies even after merger, Hayes says.

Previously mentioned cost dissynergies would come from higher pay rates for Spirit employees, bringing them to JetBlue rates. Spirit also outsources a lot, and combined airline would not, Hayes testifies.

October 2016, JetBlue added flights between BOS and LGA. Average fare for BOS-LGA fell 36% from October 2015, while traffic grew 41%.

Lowering prices stimulated demand by making it affordable for people, Hayes said.

After JetBlue left JFK-PIT in Jan 2013, fares went up 67% by January 2014, while traffic fell 28% because fares were up, Hayes says.

JFK-LAX, lowest public fare for business class was $2,919, Hayes says. When JetBlue rolled out Mint at $599 in 2014, competitors lowered fares and added more flatbeds, Hayes adds.

Competition has added free and cheaper Wi-Fi, more IFE, etc.

This is all coming from orientation materials that JetBlue gives to new employees.

Slide noting that in 1980, the biggest 4 airlines in the U.S. held 61% market share. 59% in 1990, 55% in 2000, 74% by 2020.

Hayes outlines employee benefits, says they've never furloughed an employee, never sent out WARN notices. I'm fact-checking that. They managed to avert them in 2020, if memory serves.

JetBlue wants to build larger presence in focus cities (JFK, BOS, FLL, MCO, LAX, SJU) to achieve more relevance, but notes it will never grow to legacy levels, Hayes says. For instance, AA has >80% at DFW. JetBlue's largest has been 40% at JFK.

With increased market share in focus cities, JetBlue can support things like loyalty program growth, Hayes says. They can generate more revenue from co-brand card. Notes legacy airlines can basically subsidize their operations with loyalty revenue.

Free drinks and snacks "sound like a small thing, but are really important to people," Hayes says

Looking at a "triple," a block of three seats. Collins Meridian seat, for newer. A sister seat for the Collins Pinacle seat which is installed on older aircraft.

These are on display in a WeWork across the street, like the Spirit seats (look back to Spirit CEO Ted Christie's testimony for that)

Now discussing seat dimensions. They have 32" of pitch as average Core on most JetBlue planes, 1-4" than most competitors. Compares to 28" on Spirit.

18" seat depth, 18" seat width

We've now established that JetBlue seats have more space than Spirit ones. Moving on to seatback entertainment.

Screens, TV, charging, etc. Also talking "brand-name" snacks and drinks, Wi-Fi, etc. On each, comparing to others. The big 4 "do offer free snacks and drinks, but I think our snacks are better," Hayes jokes.

Now in court, we're looking at 2020 Lender Presentation, from when JetBlue was trying to raise cash during the pandemic. Various awards and accolades listed (including @thepointsguy's 2019 award for Best Domestic Economy Class and Best Domestic Business Class).

Discussing relative fleet size, end of 2022:

AA: 1,461 planes
UA: 1,338
DL: 1,254
SW: 770
Jetblue: 290
Spirit: 194

JetBlue first considered trying to buy Spirit in 2017. Hayes cites 2015ish effort to acquire Virgin America (which went to Alaska instead). Wanted to use combination to build more of a national presence.

Project "Henri" was project to buy a competitor in 2017. Looked at Spirit and another airline, redacted. In an executive summary, JetBlue noted "each option provides a unique strategic opportunity for JetBlue and builds a stronger platform to compete against the Big 4."

Rationale, in summary, listed as "increased presence, scale and customer base."

JetBlue did not pursue Spirit transaction: Reasons were affordability, and fact that Alaska paid a massive premium for Virgin America to beat JetBlue, which JetBlue expected the market would want again.

Quick recess now. Back at 11:20.

We're back.

Now looking at Project Exchange, a 2019 assessment of a potential merger with Spirit.

Focused on Spirit instead of the other redacted airline it looked at in 2017. Common fleet type, same engines. Buying same A320neos, Pratt and Whitney GTF engines, etc.

Strategic rational listed in a 2019 presentation to the board as: "Unleash a Sustainable Challenger Brand to Legacy Airlines"

"Network relevance: Combined network will turbocharge JetBlue Focus City strategy." Immediate benefit in FLL, MCO, LAX; secures valuable airport access for next growth waves (LAS, ORD, ATL), increase in multiple other cities.

"Growth engine: combined fleet/order book provides sustainable growth." Enables investments without cost/margin sacrifice, mitigates aircraft shortage and provides Airbus leverage, protects fleet commonality.

"JetBlue Effect: Aligned product offering will bring the JetBlue Effect to new heights."

Notable that aircraft shortage was cited as a reason even before the pandemic wrecked supply chains. It's easy to forget that the aircraft constraints predated COVID.

That presentation was at the Dec 2019 board meeting. The next was in February 2020. Board authorized Hayes to reach out to Spirit and see if there was interest in a merger. The pandemic took hold before he could connect with Spirit CEO Ted Christie.

The board met again in March, 2022, to discuss "Project Exchange." Hayes still had interest in pursuing the transaction, and then Frontier-Spirit agreement was announced, putting pressure on JetBlue to decide either way, Hayes says.

In that presentation, strategic rational was listed as the same in 2019. The slide is "a near copy" from the 2019 version, Hayes says.

Hayes testifies that eliminating Spirit as a competitor was never discussed as a strategic rationale for the merger.

Moving on to discuss divestitures. "Historically used in our industry in relation to mergers that have gone on in the past."

Hayes notes JetBlue picked up slot pairs at DCA during American/US Air merger. It gave JetBlue the ability to scale up at DCA and add new routes or markets, like BOS. No requirements to fly specific routes or anything as part of the acquisition of those slot pairs.

Delta and US Air previously did a divestiture during a slot swap between LGA/DCA. As part of that, JetBlue gained slots at LGA.

A combined JetBlue-Spirit would make divestitures, to appease expected regulatory requirements, Hayes says.

In a letter to Spirit board, JetBlue noted a "proactive offer to DOJ of a remedy package" that offers divestiture of all Spirit assets in New York and Boston, so JetBlue would not increase its presence at NEA airports. Also gates and related assets in FLL.

Judge asks Hayes if he's ever heard of a judicial decision that says "this doesn't pass muster, but if you did the following, maybe it would." Judge stresses multiple times "don't read anything into this."

The context is JetBlue making the proactive divestitures.

Moving on. Divestitures typically go to new entrants, often ULCCs, Hayes said. Felt that looking at ULCCs would directly address potential DOJ concerns.

Divestiture plan:
BOS: 2 gates and associated ground facilities to Allegiant
LGA: 22 slots, 6 gates to Frontier
EWR: 43 runway authorizations, 2 gates to Allegiant
FLL: 5 gates to Allegiant.

Notes ULCC concentration at LGA would be the same after the transaction as before, given slot handoff.

Discussing NEA now

During NEA trial, DOJ made comments on JetBlue product, concern that it would change its product if NEA continued.

Wow, reading specific statements that DOJ made during the NEA trial:

"JetBlue is unique among LCCs,"
"JetBlue differentiated itself from other LCCs by offering not just low fares, but high quality service." (1/2)

"High quality of service allowed it to compete effectively against legacy airlines in ways other LCCs/ULCCs could not."
"For more than 2 decades, JetBlue served as legacy airlines' foil in the northeastern US." (2/3)

"In total, competition between JetBlue and the legacy airlines has saved travelers billions of dollars."

All DOJ statements from last year's Northeast Alliance trial. (3/3)

Defense questioning of Hayes is over, DOJ is asking a few follow-up questions.

Discussing relevance, what that means. Many passengers will value ability to fly on one airline to a number of destinations, DOJ asks and Hayes answers affirmatively.

Some people will pick lowest fares, others value relevance more.

DOJ asks if people who can only afford to travel once or twice a year are the ones who care least about relevance. Hayes disagrees.

DOJ asks if airline having larger relevance means allows charging higher fares. Hayes says yes, with huge relevance, like legacies at hubs.

JetBlue would announce a new focus city, one no legacy uses as a hub. The city is currently confidential. Without that legacy competition, JetBlue could raise prices at this airport, DOJ suggests.

Implication seems to be that even if combined Spirit-JetBlue competed against legacies generally, it could gain more pricing power and raise prices in certain markets.

"Spirit is the next natural step in our longer-term goal to pursue Alaska," JetBlue noted in a board presentation. Hayes notes there have been no discussions of acquiring Alaska in recent years, and he expects no further mergers could happen post-Spirit.

So to underscore, before the pandemic, JetBlue was interested in eventually acquiring Alaska Airlines.

Discussing organic growth, Hayes cites JPM analyst Jamie Baker by name and his use of the term "LMAs," low-margin airlines.

"What good are divestitures in a period where it's impossible to get new airplanes until sometime in the far future," Judge Young asks Hayes.

"With a limited fleet, they'll have to take planes from somewhere they fly now in order to fly from these more attractive gates. Thus impacting some consumers that fly the ULCCs."

Hayes says it's a good question, and notes divestitures offer a generational opportunity, not a short-term thing. Also, Allegiant and Frontier already have large order books, so they have airplanes coming sooner.

Moving from Spirit configuration to JetBlue will take "a number of years" so it'll take a while and give Allegiant/Frontier time to get those planes. Judge is happy with the answer, and JetBlue CEO Robin Hayes is finished.

We're now hearing from Hartwell Gardner, chair of Spirit's board.

(He goes by H. McIntyre Gardner on Spirit's website)

He would have no position at the combined airline, and does not have a retention agreement.

Some questions about whether the benefit of expanding at legacy hubs outweighs risk of response by the legacies.

At June 27 testimony, he thought Spirit had a healthy financial plan, and expected Spirit to be profitable over the next 5 years. Says that 2023 has not turned out as he thought.

It was his view that Spirit was "not a troubled company" at that June 27 deposition.

Irrespective of the defense argument that Spirit seems to be in trouble, it's remarkable how much things have changed for the airline industry since the start of summer.

"It wasn't too far after my deposition that the outlook for our business changed pretty dramatically."

Pointing to a slide in which Spirit expected to be a "relative winner in a higher fuel environment" due to "ultra-low-cost structure and fuel-efficient fleet." Gardner says that was true this summer.

"It became clear as the summer played out that we were not a winner."

Answering a question from the judge on aircraft delivery: "I'm not sure if you've heard about the geared turbofan engine issue yet?"

Judge: "I'm learning."

We're talking more about the P&W GTF engine issues.

And that's it for the day. Court will resume tomorrow.