Savi Syth, managing director at Raymond James, discusses JetBlue's bid for Spirit Airlines and whether or not it would actually be successful.

Video Transcript

DAVE BRIGGS: Welcome back. Consolidation in the skies appears inevitable after surprising news yesterday that JetBlue had offered $3.6 billion in cash for budget carrier Spirit Airlines. And that news followed reports of a merger between Frontier and Spirit back in February.

What's the impact of all this? And will that deal-- will either deal, quite frankly, be approved? Let's talk about it with Savi Syth, Raymond James managing director. Nice to see you. Let's first get your reaction to that offer by JetBlue, again, $3.6 billion in cash. UBS called it a, quote, "head scratcher." How would you describe it?

SAVI SYTH: It was definitely a surprise. It was highly unexpected. Look, I can see some of the cases for making it. In terms of pricing, they clearly needed to make it something that grabs the board of directors' attention at Spirit and makes it hard to ignore. So I think that was the thinking around the price. But it was not an expected move here by JetBlue.

DAVE BRIGGS: Assuming that it is 33% higher than the other offer out there, is this one-- is this the path that Spirit goes forward with?

SAVI SYTH: I mean, I think-- yes, I think what Spirit will need to do is make a couple of assessments. While you have-- from a financial standpoint, it's clearly a better offer here for shareholders, assuming in terms of risk-reward. Clearly, with Frontier, you do get to participate in the upside if those synergies are realized. And so they're going to have to make that assessment.

And the other assessment they're going to have to make is, do they think that this kind of deal can get through? So I think Frontier is probably going to have to improve the offer for Spirit board of directors to completely ignore Jetblue's offer.

DAVE BRIGGS: You mentioned approval, and that's the big question out there. Do you get a sense this deal would be approved? And I'm talking about the JetBlue acquisition.

SAVI SYTH: I don't think it will be easy. You know, but I do think it can get approved, actually. It is still two smaller airlines getting together and then two airlines that have kind of be noted to bring low fares into the market. So I think it can get done. There will be-- I expect concessions at especially Fort Lauderdale, possibly related to the Northeast Alliance. So there'll be concessions, but I think it is something that can get done.

DAVE BRIGGS: Their prices are much higher than Spirit Airlines, so let's talk about two different avenues. How does that impact the share price at JetBlue? And what's the impact for consumers, for passengers?

SAVI SYTH: And so, you know, what you've seen in the US airline industry over the past several years is segmentation, so, you know, the price you pay for the product that you're getting. So Spirit offers a very different product. And clearly, JetBlue wants to change that Spirit product to be more in line with JetBlue. So kind of the lowest fare product at JetBlue is probably going to be pretty competitive to what a Spirit offers.

But at the end of the day, what this means is because JetBlue is turning Spirit's product into a JetBlue product if this goes through, there is going to be a lot less ultra low cost carrier type offering in the market. And but I think that opens up the window for Frontier to go and address that market that clears up.

DAVE BRIGGS: But overall, you'd expect increased prices.

SAVI SYTH: In average fares, yes. Average fares should go up because you are offering less of the bare-- kind of the lowest kind of type of unbundled product, so to say. So the average kind of industry fares in those markets will probably go up because the product is going to be different. The flip side of that is, you will see some of the premium fares probably coming down as well. So it's not just straightforward, but I suspect that the average fares would go up.

DAVE BRIGGS: Yeah, growth, obviously, the biggest issue they're looking to solve there at JetBlue, but across all airlines, most of them are not making any money. What are the biggest industry headwinds?

SAVI SYTH: Yeah, so, you know, clearly, for 1Q, actually, in the second half of last year, you started to see airlines making money. You saw several airlines report profitability. Not everybody's back there. Part of the issue is some of these airlines have kept growing their fleet and ahead of where demand is. And demand is finally catching up. So starting in March-- and March is usually a strong month anyway-- I expect all the airlines to be profitable in March.

But I think starting in 2Q, this group, even with these higher prices, should be able to eke out profitability for the most part. There might be some that still lag. But I think with COVID and some of the disruptions there starting to fade, it's not gone all the way. And this demand environment is really strong. And so there's some pricing power here to also recuperate the higher fuel price.

But right now, it's less about, I think, COVID demand issues and more about higher fuel prices. But the demand environment is really strong. There are people who worry about inflation and what it's going to do to forward demand, but so far, across industries, restaurants, hotels, you are seeing very strong demand and maybe less price sensitivity or ability to kind of pass through some of these higher costs.

DAVE BRIGGS: Yeah, certainly, a major drag with the jet fuel prices. Lastly, the pilot shortage across several different airlines. Any light at the end of the tunnel there?

SAVI SYTH: Yeah, I think it's going to take a little while. So what happened is during the pandemic, you had five years' worth of retirements pulled forward. And now suddenly, the thinking was that we'd have a lower demand for a while. And demand just came back almost completely, especially on the leisure and visiting friends and relatives side. But even business is starting to pick back up. So we're starting-- we're trying to hire for several years, with a pilot hiring in one year this year. So things will start to get better.

There's a little bit of a tail to that because training takes a little while, and the captains take even longer to train the first officers. So I think this will remain a little choppy for the next 12 to 18 months. And the supply will remain tight, but I think the level of difficulty that we're seeing today should ease as we get 12 to 18 months from now. But that is another thing that's perversely helping the industry.

Right now, the industry would love to be flying more and needs to be flying more to meet the demand even at higher oil prices. But this pilot supply is constraining capacity, which the flip side of that is, you are able to get pricing power because, you know, the demand is outstripping supply right now.

DAVE BRIGGS: All right, well, training shortage a real issue for the industry as well. Savi Syth, Raymond James managing director, appreciate it. Thank you.