© Reuters. FILE PHOTO: Airplane model is placed on displayed Spirit Airlines and jetBlue Airways logos in this illustration taken, June 21, 2022. REUTERS/Dado Ruvic/Illustrations/File Photo
By Shivansh Tiwary and Rajesh Kumar Singh
(Reuters) -Shares of JetBlue Airways (NASDAQ:) surged on Tuesday after activist investor Carl Icahn said he took a stake of nearly 10% in the low-cost carrier.
JetBlue’s shares were up 14.7% in late morning after Icahn said his company had been in discussion with the airline about possible board representation.
Icahn, in a filing, called shares of JetBlue undervalued, saying the airline represented an attractive investment opportunity. He has made a career out of buying companies he sees as undervalued. The JetBlue purchase is one of his first big moves in 2024.
“We are always open to constructive dialogue with our investors,” JetBlue said on Tuesday.
Analysts at Deutsche Bank said Icahn’s investment in the U.S. airline industry reinforces their view that the sector will likely undergo more restructuring beyond previously announced mergers.
JetBlue’s earnings have been under pressure due to higher operating costs and uneven travel demand. Its new CEO, Joanna Geraghty, has vowed “aggressive action” to return the airline to profitability.
As part of the plan, JetBlue has deferred about $2.5 billion in planned aircraft capital expenditure and is also planning to cut costs through buyouts to employees in corporate, airports, and customer support functions.
It is also trying to drive its ancillary revenue in a bid to generate an extra $300 million in revenue this year.
The company’s $3.8 billion deal to acquire Spirit Airlines (NYSE:), however, has been a bigger concern for some analysts.
The deal was blocked by a U.S. judge last month, but both airlines have asked for an expedited appeal. A U.S. appeals court will hear arguments in June.
When Spirit originally accepted JetBlue’s acquisition offer, the market value of its equity was $3.8 billion. Its enterprise value, inclusive of its outstanding debt at the time, was $7.6 billion. Since then, the company’s market capitalization has fallen to about $735 million.
If JetBlue is able to complete the deal with new debt to fund the original transaction, its debt-to-EBITDA ratio will increase to 12 times or more at the end this year, up from 9 times at the end of 2023, according to Moody’s (NYSE:) investor service.
JetBlue’s annual interest burden will also increase to about $620 million from about $375 million in 2023, Moody’s said.
In a regulatory filing on Monday, JetBlue acknowledged that its indebtedness following the merger will be substantially higher and could increase borrowing costs. Yet the company last month said the merger agreement remained in effect.
JetBlue’s stock has gained 36% since the merger ruling.
Icahn has built his reputation over the years as a corporate raider and activist shareholder, pressuring companies make changes to their business strategies and boost their stocks.