Carl Icahn’s Gaze Turns to JetBlue

Carl Icahn has set his sights on JetBlue with his recent $200 million purchase of the airline’s shares this past week. The purchase makes Icahn the third largest shareholder at JetBlue and that is sending shivers down the spines of many.

Icahn, the original corporate raider, has a history of buying shares in companies and using the subsequent voting rights that the shares entitle him to push through significant changes that he and his investors feel would result in increased value in the company and ultimately a higher stock price. This often comes with much opposition to management, many of whom find themselves out of a job.

These corporate raiders would raise funds to buy enough shares in a company to get themselves onto the board. They then would do whatever they could to unlock value at the company. This involves just about anything from selling valuable assets and reducing payroll to spinning off high-performing divisions.

When the stock price would rise with these actions the raiders sold their positions and pocketed a hefty sum while also leaving the company with back-breaking debt that was used by the raiders to acquire the company in the first place.

Icahn and TWA

Icahn followed a similar approach with the leveraged buyout of TWA in the 1980s. Ichan felt the airline was undervalued at the time and took over the airline in what is called a leveraged buyout. This is when a company starts issuing bonds against the combined assets of the company it wants to take over. This means that the assets of the acquired company are used as collateral against the bonds.

It’s essentially buying a company and sticking the acquired company with the costs of being acquired. The process allows for a company to buy and take private a much larger firm by leveraging only a small amount of its own assets. This unfortunately can leave the acquired firm with so much debt financing that financing payments can often exceed operating cash flows.

Ichan came in with vast amounts of cash and was looking to make big changes at the airline. According to him, TWA was performing poorly due to mismanagement of the airline as evidenced by the company losing money. However, years later it was still doing poorly. Many soon came to think that Icahn was using TWA as simply a way to acquire significant wealth.

Icahn took the company in 1988 netting himself over $400 million in the deal and straddling TWA with over $500 million in debt. Icahn then sold off valuable assets like TWA’s routes to other airlines leaving himself with a tidy sum. Shortly afterward, TWA went bankrupt in 1992 with many believing it was Icahn’s actions that destroyed the company.

Icahn and JetBlue

Given Icahn’s history with TWA, many are watching the JetBlue transaction carefully. It’s gained even more attention now that Icahn is being allotted two board seats at JetBlue. This gives him and Icahn Enterprises greater control over the airline and further spooks many who remember the story of TWA.

This is leading to a lot of speculation around JetBlue. Enilria, a writer of very insightful commercial aviation analysis, shared on their Patreon a very well-thought-out idea of what the airline must do now.

The airline should trade gates at Los Angeles for slots as New York’s LaGuardia then turn Boston into a hub for Canadians traveling to Europe by partnering with Porter for greater reach into Canada to find those passengers. Enilria also suggests expanding at Fort Lauderdale along with Miami. There is significant potential to grow the Latin American market out of South Florida, the writer adds.

There are many different paths for JetBlue moving forward. It will have to tread very carefully as the watchful eyes of Carl Icahn are now focused on it. No one knows for sure what Icahn is going to do in the future with JetBlue but there’s enough history to be concerned that it may not end up well for the airline.

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Hemal Gosai

Hemal took his first flight at four years old and has been an avgeek since then. When he isn't working as an analyst he's frequently found outside watching planes fly overhead or flying in them. His favorite plane is the 747-8i which Lufthansa thankfully flies to EWR allowing for some great spotting. He firmly believes that the best way to fly between JFK and BOS is via DFW and is always willing to go for that extra elite qualifying mile. Hemal's opinions are his own and do not reflect those of his employer.

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