Justice Department sues to block JetBlue’s acquisition of Spirit Airlines
A JetBlue Airways Airbus A320, left, passes a Spirit Airlines Airbus A320 as it taxis on the runway, Thursday, July 7, 2022, at the Fort Lauderdale-Hollywood International Airport in Fort Lauderdale, Fla.
Wilfredo Lee | AP
The Justice Department on Tuesday sued to block JetBlue Airways‘ $3.8 billion proposed takeover of budget carrier Spirit Airlines, the Biden administration’s latest attempt to prevent industry consolidation.
Spirit Airlines agreed to sell itself to JetBlue last summer after a long battle for the carrier between JetBlue and Frontier Airlines. New York-based JetBlue’s acquisition of Spirit faced a high hurdle with regulators from the start, and the airline on Monday said it expected DOJ action this week.
JetBlue’s takeover of Spirit would create the fifth-largest airline in the country and also eliminate Florida-based Spirit, with its business model of rock-bottom fares and fees for everything from carry-on baggage to seat assignments.
“JetBlue’s plan would eliminate the unique competition that Spirit provides—and about half of all ultra-low-cost airline seats in the industry—and leave tens of millions of travelers to face higher fares and fewer options,” the Justice Department said in its complaint, filed in a Massachusetts court on Tuesday. “Spirit itself put it simply: ‘A JetBlue acquisition of Spirit will have lasting negative impacts on consumers.'”
At a Tuesday press conference, Attorney General Merrick Garland underscored that the merger would be particularly harmful for “working and middle class Americans who travel for personal rather than business reasons and must pay their own way.”
The DOJ cited Spirit’s own internal documents that show that when the airline starts flying a route, average fares fall by 17%.
JetBlue has argued the combination would allow it to better compete with large airlines that dominate the U.S. market. The deal would also give JetBlue access to more Airbus jetliners and pilots, which are both in short supply as travel demand remains strong.
JetBlue plans to remodel Spirit’s bright-yellow planes with packed-in seats to JetBlue’s, which include seatback screens and more legroom.
“JetBlue competes hard against Spirit, and views it as a serious competitive threat. But instead of continuing that competition, JetBlue now proposes an acquisition that Spirit describes as ‘a high-cost, high-fare airline buying a low-cost, low-fare airline,” the DOJ said.
New York, Massachusetts and Washington, D.C., also joined the suit.
Merrick Garland, US attorney general, speaks during a news conference at the Department of Justice in Washington, DC, US, on Tuesday, March 7, 2023. The US Justice Department challenged JetBlue Airways Corp.’s $3.8 billion acquisition of Spirit Airlines Inc., filing an antitrust lawsuit seeking to block the deal.
Ting Shen | Bloomberg | Getty Images
JetBlue and Spirit said in a joint statement Tuesday that they will “continue to advance our plan to create a compelling national challenger to the Big Four airlines.”
“We believe the DOJ has got it wrong on the law here and misses the point that this merger will create a national low-fare, high-quality competitor to the Big Four carriers which – thanks to their own DOJ-approved mergers – control about 80% of the U.S. market,” JetBlue CEO Robin Hayes said in a statement.
Spirit CEO Ted Christie said his airline will “vigorously defend” the merger against the DOJ’s suit.
“Together, we intend to democratize flying for travelers across the country – a goal we believe is worthy of the government’s support,” he said in a statement.
A JetBlue-Spirit combination would be the first major U.S. airline merger since Alaska Airlines’ takeover of Virgin America in 2016. The Justice Department at the time required Alaska to scale back its code share with American Airlines to clear the deal.
The Justice Department also sued to block American Airlines’ 2013 merger with US Airways but settled, forcing American to sell dozens of gates and slots at congested airports like Washington Reagan National Airport.
The Biden administration has vowed a hard line against deals it considers to be anti-competitive and has sued to block other mergers, such as Penguin Random House’s failed attempt to buy rival publisher Simon & Schuster. Yet the administration has failed to stop several deals, such as one last year in the sugar industry and UnitedHealth’s merger with Change Healthcare.
The administration has also taken aim at the airline industry after a host of travel disruptions over the past two years, even after carriers received $54 billion in payroll aid to weather the Covid pandemic.
Separately, JetBlue is awaiting a ruling on its Northeast partnership with American Airlines, which the Justice Department sued to undo in 2021.
—CNBC’s Rebecca Picciotto contributed to this report.
Secondhand resale is getting cutthroat as platforms such as Depop and Poshmark boom
The Depop application on a smartphone arranged on Wednesday, June 2, 2021.
Gabby Jones | Bloomberg | Getty Images
Six months after launching his secondhand clothing shop on digital marketplace Depop in 2020, Blake Robertson, a 15-year-old high schooler at the time, received a death threat from a customer.
It came via Instagram, from someone who had not received her purchase in time for Christmas.
“Nothing happened, but I don’t know, it just opened my eyes to the fact that some people, they just really want their items,” said Robertson.
Demand for secondhand resale online has been booming since the early days of the pandemic, generating a culture shift within the indie marketplaces where it began. Customers, many of whom have been feeling the squeeze of inflation, are fiending for lower prices, leading to more heated negotiations and occasionally ruthless bidding wars.
Meanwhile, independent resellers are turning their onetime hobby into a job, sometimes even upselling items to take advantage of demand spikes. Users on platforms such as Depop and Poshmark set up online shops to list vintage, secondhand or unique items for sale and generate notable followings of loyal shoppers.
Robertson is now 17 and says the growth of resale has allowed him to turn his Depop shop, which now has more than 19,000 followers, into a part-time gig. He told CNBC he juggles the hustle of reselling with his high school studies.
Blake Robertson, 17, poses with his closet, some of which is up for resale on his Depop shop.
Courtesy: Blake Robertson
He’s become accustomed to the occasional hate message or dayslong negotiations over a single item. More than anything, he has been pleasantly surprised by the growing reach of his shop, which used to just serve his friends as patrons.
“I get these messages from total and complete strangers, which just makes me think how much this app genuinely has grown,” Robertson said.
To be sure, death threats against resellers are not the norm. Beaux Abington, 49, says that overall, she’s had “really fantastic, phenomenal customers.”
But she’s also noticed more buyers hunting deals and has felt insulted by recent offers for her products that are sometimes less than half her asking price.
“There’s definitely a price-consciousness that wasn’t always there,” said Abington.
About 53% of people polled in an October 2022 Depop survey of more than 2,000 U.K. consumers said that they have been turning to secondhand shopping more in order to save money as living costs rise. The result, sellers say, is more frequent negotiations and intensified bidding wars.
“There’s a lot more negotiation happening. Even in the last year, I’d say it’s kind of skyrocketed for me,” said Josefina Munroe, 27, a Depop seller with more than 30,000 followers. She started her shop five years ago and decided to make it a full-time job after she graduated college in 2020 and demand for online resale expanded.
Then there are the de facto bidding wars. Munroe recalls purchasing an item on Depop only to have the seller cancel her order after realizing that another customer was willing to pay more. Other Depop shoppers say that is not an uncommon experience.
“It’s completely separate from real-world shopping because that would never happen in a store,” said Munroe. “I think people have gotten very comfortable with the whole back-and-forth.”
Beaux Abington, 49, models some of her own Depop items.
Courtesy: Beaux Abington
Platforms such as Depop and Poshmark are leaning into the competitive consumer zeitgeist.
Last January, Depop launched a new “Make Offer” option — a feature that has streamlined the negotiation process, which used to take place informally via direct messages. Resellers say that the new button has made customers more comfortable haggling.
“The offer feature on Depop has definitely created a new dynamic in terms of being hounded with low-ballers and also being expected to sell things cheaply,” said Pascale Davies, 28, who runs a Depop shop with 59,000 followers.
But Depop has yet to institute a formal function for bidding battles — like the original online reseller, eBay, offers. Depop also shut down comment sections on product pages where customers used to ask questions and sometimes get in arguments, according to users.
“We found that comments on an item did not directly help buyers with their decision-making,” a Depop spokesperson told CNBC when asked about the change.
In September, Poshmark launched “Posh Shows,” which allows sellers to hold livestreamed auctions to sell and promote their inventory.
Stephanie Dionne, 44, who has been selling on Poshmark for about two years, said the live shows are “all kinds of crazy and chaotic,” generating a fast-paced, ruthless selling environment.
“When it comes to the live shows, people will kind of steal it out from under you at the last second,” she said.
Since she launched her secondhand market with her two sisters, Dionne’s business keeps getting bigger and bigger — so much so that one of her sisters reduced her full-time day job to part-time in order to focus on the Poshmark shop.
Last year, the Dionnes made between $4,000 and $5,000 in profit. Just a couple months into this year, they have already surpassed that.
But now, sellers such as the Dionnes are not only competing with Poshmark and Depop peers but also major retailers such as Target and H&M that are trying to cash in on the resale boom.
Last week, H&M announced its most recent collaboration with the online thrift store ThredUp, which will now cross-list about 30,000 pieces of secondhand clothing on H&M’s website. Target has launched several ThredUp partnerships of its own, and Etsy bought Depop in 2021. In January, Poshmark was acquired by South Korean web giant Naver.
But some independent resellers doubt that the unique, curated experience of indie resale can be scaled.
“Although bigger companies are trying to occupy this space, I think they miss the mark when it comes to the personal element of vintage,” Finn Thomas, a London-based Depop seller, told CNBC.
“Part of the charm of buying vintage is the one-on-one interaction between the buyer and seller, the unique story behind each piece and the general curation behind a store, something I can’t see the larger companies like H&M achieving,” Thomas added.
How Ford plans to turn a profit on EVs in under four years
John Lawler, Chief Financial Officer of Ford, rings the opening bell at the New York Stock Exchange (NYSE), March 23, 2023.
Brendan McDermid | Reuters
Ford Motor disclosed Thursday that its electric vehicle unit, called Ford Model e, lost $2.1 billion in 2022 — and could lose as much as $3 billion in 2023.
But the company also forecast a drastic turnaround, reiterating that it expects its EV business to be solidly profitable by the end of 2026. So how will it pull that off?
The automaker’s answer started with a single slide it presented during a “teach-in” for analysts and investors in New York on Thursday.
On an earnings before interest and tax, or EBIT, basis, Ford Model e had a profit margin of roughly negative 40% in 2022, it said. Ford is targeting a positive EBIT margin of 8% for the unit by the end of 2026.
“We’re already seeing green shoots of the improvements in the profitability of Model e,” Ford CFO John Lawler said Thursday during the investor event. “From a contribution margin perspective, we expect Model e to approach breakeven at the end of this year, and, in 2024, we believe our first generation products can be EBIT margin positive.”
But Model e as a whole won’t be profitable for a while yet, Lawler said, because of the heavy investments Ford will be making to scale up production and roll out more new EV models. Here, step by step, is how Lawler said Ford expects Model e to get to a positive 8% EBIT profit margin in under four years:
- Scale. Simply put, building more EVs and allowing the supply chain to mature will yield greater economies of scale. Ford expects to have the capacity to build EVs at a rate of 2 million per year by the end of 2026. That alone will provide roughly 20 points of margin improvement, according to Ford’s projections.
- Design and Engineering. Lawler said Ford is “obsessing over energy efficient designs because they will allow us to significantly reduce the battery size and cost.” He said such designs will lead to “ultra-high simplicity of manufacturing and platforms that maximize commonality and reuse,” which will yield another 15 points of margin improvement.
- Battery. While costs have come down, batteries are still the most expensive part of an EV, especially if the automaker is buying them from third-party manufacturers, as Ford has been. To make matters worse, or at least more costly, Ford’s EVs have so far used relatively expensive lithium-ion cells, rather than the cheaper lithium iron phosphate, or LFP, cells used by Tesla in its less expensive models. Ford’s plan to bring those costs down further centers on bringing battery-cell manufacturing in house, either directly or via joint ventures with battery makers. In addition, it will soon begin offering LFP as a lower-cost option on some of its EVs — starting later this year with cells bought from Chinese battery giant CATL, and from a new Michigan factory that will come online in 2026. As those efforts scale up, Ford expects to gain another 10 points of margin improvement.
- Other. Ford also expects to find incremental gains by selling software and services, such as driver-assistance system BlueCruise, to EV owners, via benefits in the Inflation Reduction Act, via improvements in raw materials costs, and with other tweaks here and there. But pricing — specifically, the need to stay competitive with a fast-growing number of EV rivals — may offset all of that to some extent. Ford thinks the upshot will be about 3 points of margin gain, just enough to bring it to that targeted positive 8% by the end of 2026 — if all goes according to plan.
Not all of those margin gains will take years to materialize. Lawler said that Ford thinks it can still reduce the costs of making its current first-generation EVs — the Mustang Mach-E crossover, F-150 Lightning pickup and E-Transit van — by incorporating lessons it’s learning as it engineers its second-generation models, which are due to launch over the next few years.
Despite the considerable detail that Ford provided Thursday, some Wall Street analysts are still skeptical that Ford can achieve an 8% EBIT margin on EVs by 2026.
“We believe investors are likely to remain skeptical on the path to appropriate margins, especially amid inflationary headwinds and price declines,” Barclays’ Dan Levy said in a note following the event.
Wells Fargo analyst Colin Langan shared similar thoughts in an investor note Thursday morning: “It’s unclear how Ford expects to get to its 8% 2026 target margin for Model e” as long as sales expectations remain the same.
Part of that near-term help may come from the Inflation Reduction Act, which provides company-level credits for making batteries and vehicles in North America, as Ford plans to do with the EVs it sells here. But as Deutsche Bank analyst Emmanuel Rosner pointed out Thursday, Ford’s 8% margin goal was announced “well before IRA.” That means any benefit realized from the legislation should be in addition to that goal, he said in an investor note during Ford’s presentation.
Rosner, prior to Thursday’s event, called the 8% margin target “especially optimistic” when compared with crosstown rival General Motors, which is only targeting low- to mid-single digit margins on its EV business by 2026, excluding any IRA benefits.
Lawler said the company will provide more details on Model e’s path to profitability during Ford’s annual capital markets day on May 22.
“We are laser-focused on building an industry leading portfolio of highly differentiated EVs that inspire our customers and play to Ford’s strengths in pickup trucks, vans and SUVs,” Lawler said.
Ford is about to break out big EV losses for the first time
Incoming Ford CEO Jim Farley (left) and Ford Executive Chairman Bill Ford Jr. pose with a 2021 F-150 during an event Sept. 17, 2020 at the company’s Michigan plant that produces the pickup.
Michael Wayland | CNBC
DETROIT – Ford Motor is about to tell investors what they’ve long wondered: How much is the transition to electric vehicles costing?
The automaker on Thursday plans to begin reporting its financial results by business unit, instead of by region, ushering in the new reporting structure with a “teach-in” for analysts and media — on the theme of “Ford Refounded” — and releasing revised versions of its financial results that will reveal how the new business units would have performed in 2021 and 2022.
Those new business units include “Ford Blue,” Ford’s traditional internal combustion engine business; its “Model e” electric vehicle unit; the “Ford Pro” commercial and government fleet business; “Ford Next,” which includes nonautomotive mobility solutions and other future tech; and its existing Ford Credit financial services subsidiary.
The changes amount to the most detailed look yet by any legacy automaker into the finances behind the EV business.
The carmaker is expected to release profits and losses, revenue, margins and earnings before interest and taxes, or EBIT, for each of the units – giving investors and analysts a baseline for comparisons as the company’s transformation unfolds.
As part of a sweeping rethink of its business under CEO Jim Farley, Ford decided last year to separate its primary profit engines – internal combustion vehicles and its commercial fleet business – from the company’s emerging all-electric vehicles, which are not expected to be profitable for at least a few years.
Farley and other executives have emphasized that the reporting changes aren’t just about disclosure: The new format reflects the way Ford’s executive team thinks about and runs the business.
“The changes are significant. It’s not the first time Ford Motor Co. has had to reimagine its future or form its own path that’s different from other companies,” Farley said when announcing the new business units on March 2, 2022. “Is this about winning? 100%.”
Wall Street is taking a wait-and-see approach to the changes. Analysts on average maintain a hold rating on the stock with a $13.50 price target, according to ratings compiled by FactSet. The shares traded Wednesday for about $11.70 per share.
Shares of Ford jumped by 8.4% the day executives announced the new businesses, but the stock is down 35% since then, dragged lower by changing market conditions, supply chain issues and underwhelming quarterly earnings.
The company will report its first-quarter results under the new format on May 2 and will host a capital markets day on May 22.
Farley argued last year that Ford’s stand-alone EV business will “produce as much excitement as any pure EV competitor, but with scale and resources that no start-up could ever match.”
Still, he described the legacy business as “a profit and cash engine” for the 120-year-old automaker. As with other automakers and EV startups, investors should expect deep losses when it comes to Ford’s electric vehicle business, according to Wall Street analysts.
Model e is expected to include the company’s EV platforms, electronics, batteries, motors, and embedded software and digital experience.
Morgan Stanley’s Adam Jonas expects Ford Model e to have negative gross margins of between 10% and 20% with adjusted EBIT margins of between negative 20% and negative 30%. Both would imply significant losses.
Ford has said it expects 8% margins on its EVs — along with 2 million units in annual production of the vehicles — by 2026, helping to boost its overall adjusted profit margins to 10%. The company’s adjusted profit margin last year was 6.6%.
Deutsche Bank analyst Emmanuel Rosner believes Ford could be incurring gross losses of about $9,000 per EV sold. The analyst expects Ford to reveal Thursday Model e operating losses of $6 billion for 2022. That’s after accounting for significant research and development investments — roughly 65% of the company’s total R&D — into the EV unit.
“The EV business could report much deeper losses than investors expect, which could make Ford’s target for 8% EV EBIT margin by 2026 particularly difficult to achieve,” Rosner said Monday in an investor note.
Aside from EV leader Tesla, no major automakers are expected to generate meaningful profits from electric vehicles for at least several years, as the industry works to increase EV output and manufacturing scale. That’s particularly true of EVs like Ford’s, as mass-market vehicles typically generate lower profits than luxury models.
Ford’s current bread and butter is vehicles with internal combustion engines, specifically its F-Series pickups, which have topped U.S. sales charts for more than 40 years.
The large pickups fuel the company’s operations and are expected to for “years to come,” Farley said when announcing the split last year.
Deutsche Bank estimates the Ford Blue traditional business could show an EBIT margin of 7.3% for 2022, more than offsetting last year’s EV losses.
Morgan Stanley’s Jonas said Ford’s new reporting structure should “confirm our view that the ICE business (Ford Blue) is highly cash flow generative and currently funding the capital consuming EV business.”
However, “Investors may question how long this can continue,” he said.
2023 Ford Super Duty F-350 Limited
Ford’s plan is to cut at least $3 billion in structural costs largely out of the traditional business by mid-decade to boost margins. Kumar Galhotra, head of Ford Blue, said the company expects to do this by reducing complexity, quality and structural costs over the next two to three years, he said in March 2022.
“Nothing is going to be off the table,” Galhotra said last March. “Our complexity needs to be radically simplified; our warranty costs need to be substantially lower. Our advertising cost needs to be what we do when we invest in our products. Those investments need to be made at world-class efficiency.”
Ford Pro surprise?
The pleasant surprise on Thursday may be the profitability of Ford Pro, the company’s fleet unit. Deutsche Bank estimates that Ford Pro would have been the company’s most profitable automotive unit in 2022, with an EBIT margin of 23.5%.
Ford has long been a significant player in the commercial fleet markets in North America and Europe with its deep expertise in pickups and its huge-selling line of Transit vans. More recently, it has looked to increase the profitability of its fleet operations with software and services that draw on its decades of experience serving fleet operators – and that take advantage of the connectivity and new technologies built into its latest vehicles.
Thanks in part to those new technology-enabled offerings, Ford Pro’s recent profit margins will almost certainly impress. But will they be sustainable? Deutsche Bank’s Rosner, who has a sell rating on Ford’s stock, wrote that he wonders if Ford Pro’s profitability “could come under pressure as the segment ramps up vehicles with expensive electric powertrains.”
Sales of EVs are expected to be a significant part of Ford Pro’s business in the coming years as the company introduces additional electric models tailored for its fleet customers. That will almost certainly hurt Ford Pro’s margins as Ford’s EV production ramps up. (In 2022, the numbers were still small: Only 6,500 of the roughly 105,000 Transit vans that Ford sold in the U.S. last year were EVs.)
Still, Ford Pro CEO Ted Cannis says fleet electrification offers new opportunities for Ford Pro.
“Our commercial customers are confused [about EVs], and they want a lot of help,” Cannis said at an Evercore utilities conference in January. “The key part for us to accelerate the move to electrification is to make it easier.”
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