JetBlue vs. DOJ: Will the Merger Fly?
Spirit Airlines July 2024, calls are trading for $0.9. They could be worth 3X more if the proposed merger between JetBlue and Spirit Airlines closes.
JetBlue and the DOJ are locked in a high-stakes battle over the proposed merger between JetBlue and Spirit Airlines. The outcome of the trial could have a major impact on the US airline industry and consumers alike.
JetBlue argues that the merger is necessary to compete with the dominant legacy airlines, who represent over 80% of the market. The four largest US airlines, United Airlines, American Airlines, Delta Air Lines, and Southwest Airlines, control 80% of the domestic market, compared with JetBlue's roughly 5% market share. JetBlue argues that for Spirit and JetBlue to compete effectively with the larger players, the merger will increase competition and force larger airlines to lower their prices. It is a win-win for airline customers, employees, and shareholders.
The DOJ argues that the merger would cost travellers billions of dollars because of fewer flights and higher fares. It also questions the financial viability of the union due to JetBlue's post-merger leverage, the adequacy of the divestitures, and the impact of the deal on carriers smaller than JetBlue in the US.
There is an opportunity to profit.
Spirit Airlines July 19, 2024, $22.5 strike calls are trading for $0.9. They could be worth $3.6 upon deal completion. If the DOJ loses its JetBlue antitrust lawsuit, Spirit Airlines 19th July 24 calls will be multibaggers. I own them for the asymmetric payout and immediate catalyst. Judge William Young has said he would try to rule by year's end.
Take the $27 offer price in the merger agreement minus the $22.5 strike and minus the $0.9 call premium equals a $3.60 spread. The calls present an asymmetric payoff at today's prices. A potential $3.60 upside for a $0.9 cents downside. As of writing the call options price in less than a 25% chance of the deal closing. However, considering the facts, divestitures, and industry support for the deal, the probability of closure is likely closer to 50%.
If you are interested in the JetBlue-Spirit Airlines merger, carefully consider the risks. The airline industry has real antitrust issues, and both businesses are customer-facing. Additionally, given JetBlue and Spirit Airlines' abysmal Q3 results, JetBlue may look to recut the deal at a lower offer price, meaning the calls could be worth $0 or 3x what they are currently trading for.
Conclusion
BUY Spirit Airlines July 19, 2024, $22.5 strike calls and wait for a court decision by year-end. The trial's outcome is uncertain, but it has the potential to significantly impact the airline industry and shareholder returns.
Outcome
SOLD Spirit Airlines July 24 calls for a +180% return. Probability of closure is now closer to 50% before July 24 relative to 25% at the time of purchase.
Disclaimer:
The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.
SOLD Spirit Airlines July 24 calls for a +180% return. Probability of closure is now closer to 70% before July 24 relative to 25% at the time of purchase.