Spirit shares fell 9.4% to $21.40, suggesting investors agreed the current JetBlue bid would fail.
Frontier and JetBlue have been in a battle for Spirit, arguing that a merger with Spirit would help them better compete with legacy carriers, or the "big four" airlines that control nearly 80% of the U.S. passenger market.
JetBlue on Friday had "enhanced" its offer for Spirit - but not its $33 per share price - and promised a $200 million reverse break-up fee - or $1.80 per Spirit share - if the deal does not go through for antitrust reasons. JetBlue disclosed the new offer on Monday.
JetBlue's offer is significantly higher than the current roughly $21.66 per share value of the cash and stock bid that Frontier made in February. Frontier told employees the Spirit board rejection of JetBlue's offer was "good news – we are moving ahead with our combination with Spirit."
Frontier shares fell 3.8% and JetBlue shares rose 2.6% to $11.30.
H. McIntyre Gardner, chair of the board of Spirit, said in a letter to JetBlue that given "substantial completion risk, we believe JetBlue's economic offer is illusory, and Spirit's board has not found it necessary to consider it."
One of their concerns is that JetBlue is already embroiled in an antitrust lawsuit with the government. The Justice Department sued in September to unwind JetBlue and American Airlines' "Northeast Alliance" partnership, alleging the agreement would lead to higher fares in busy northeastern U.S. airports.
"We believe a combination of JetBlue and Spirit has a low probability of receiving antitrust clearance so long as JetBlue's Northeast Alliance (NEA) with American Airlines remains in existence," Spirit said in the letter to JetBlue Chief Executive Officer Robin Hayes on Monday.
The Justice Department declined to comment.
Spirit also said it believes the Justice Department and a court "will be very concerned that a higher-cost/higher fare airline would be eliminating a lower-cost/lower fare airline in a combination that would remove about half of the ULCC (ultra low cost carrier) capacity in the United States."
Antitrust experts said that they would not be surprised to see the Justice Department, which normally reviews aviation deals, challenge either of the potential mergers involving Spirit.
"This current administration is more hostile to merger activity generally," said Henry Su of the law firm Bradley Arant Boult Cummings LLP.
Andre Barlow of Doyle, Barlow and Mazard PLLC agreed, saying: "This is a budget (aviation) market and the two most significant competitors will be combining if the DOJ does not challenge the transaction."
JetBlue said on Monday that it would offer a remedy package to address regulatory concerns "that includes the divestiture of all Spirit assets in New York and Boston so that JetBlue does not increase its presence in the airports covered by the NEA. The package would also include gates and assets at other airports, including Fort Lauderdale."
Hayes told Reuters in early April he believed the court challenge over the NEA would be resolved before the Justice Department determined the fate of a JetBlue Spirit tie-up.