Carl Icahn has set his sights on JetBlue with his recent $200 million purchase of the airline’s shares this past…
Judge Blocks JetBlue, Spirit Merger
This ruling is the latest in the drawn-out JetBlue-Spirit saga.
In a big win for President Joe Biden’s Justice Department, a federal judge has blocked the merger between JetBlue Airways and Spirit Airlines. The Justice Department sued to block the merger soon after it was announced, arguing that it was anticompetitive and would drive up prices.
The $3.8 billion merger would have resulted in the country’s fifth-largest airline. JetBlue would have entirely absorbed Spirit, rebranding its airplanes and using its slots across the country for rapid expansion.
Judge’s Findings and the Clayton Act
“In light of the foregoing Findings of Fact and Conclusions of Law, it is hereby ordered that the Defendant Airlines, their agents, servants, employees, and all persons acting in concert with either of them, are permanently enjoined from executing the proposed merger as agreed on July 28, 2022,” wrote Judge William Young on Tuesday.
Judge Young found this merger would violate the Clayton Antitrust Act of 1914, which prohibits price discrimination and focuses greatly on mergers and acquisitions. Specifically, Judge Young mentions in his 113-page decision a section that prohibits mergers and acquisitions “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition” in an effort to prevent a trend towards monopoly “before the customer’s alternatives disappear.”
“The parties need not be each other’s closest competitors to raise a threat to competition; being close competitors is enough for an acquisition to result in upward pricing pressure,” Young wrote in his decision. “The loss of Spirit’s influence on JetBlue as a head-to-head competitor would likely result in less competition to both discipline the prices and spur the innovation of JetBlue as a smaller, maverick -– more competitive — market participant. “
The Importance of Independent Brands
For its own part, Spirit has been flying for decades. Despite having a somewhat volatile reputation with the American public, Spirit has profited greatly by selling rock-bottom base fares and charging extra for bags, drinks, snacks, and even, in some cases, checking in with an agent at the airport. Spirit competes with Frontier Airlines, the other major ultra-low-cost carrier in the United States.
“The loss of Spirit’s innovation, in particular, would be a loss for all consumers in the national scheduled airline passenger market. A reduction in product innovation resulting from an acquisition is a cognizable harm to competition,” Judge Young wrote in his decision.
“In eliminating Spirit from the marketplace, the proposed transaction would, by definition, dampen Spirit’s disruptive force,” Young continued.
It seemed for a moment that there would have been a way for JetBlue to make some concessions – namely giving up lucrative slots on the East Coast – to make the deal happen; those slots would have most likely gone to Frontier. In December, Judge Young said that he would entertain a deal that saw JetBlue making concessions to allow the merger but that he was at the time unsure how much of its current operation JetBlue would need to sacrifice for the merger.
Still, it seems that the major sticking point for Judge Young was the reduction of choice in the American aviation landscape. Young wrote that the elimination of product options that consumers value “is a cognizable harm to competition.”
Ultimately, Young decided, “The Government has demonstrated that consumers value Spirit flights as a unique, economical product option. The removal of Spirit as an option for consumers, therefore, would constitute a cognizable harm.”
While Young says that JetBlue can innovate better because of Spirit’s competition, JetBlue says that this deal is necessary for it to have the aircraft and slots to challenge the established big four carriers – American, Delta, United, and Southwest – which collectively control 80% of the US airline market. Without this merger, per JetBlue, customers suffer from a lack of choice more than they would from price increases if the deal goes through.
JetBlue also argued that, though losing Spirit would cause price increases for a time, inevitably another new carrier would replace it and bring costs back to where they once were. JetBlue further argued that the potential entry of new competitors into the market may be considered when a judge determines whether a merger will substantially lessen competition, adding that they need not prove that a competitor will enter the same markets Spirit would leave or when for their argument to be considered.
There is a question, though, whether such an entry would be “timely” enough to offset the impacts of Spirit’s disappearance from the market. It often takes years for new airlines to start up from nothing to a full airline, and most airline startups do not succeed long-term in the U.S.
That does not mean that such is impossible. Avelo Airlines and Breeze Airways, two low-cost airlines that focus on serving underrepresented cities with nonstop routes to popular destinations, launched during the COVID-19 pandemic and are on the verge of turning their first profits.
Still, though, both carriers fill a niche market with no previous competition that allows them an advantage. Any replacement for Spirit would need to compete directly with Frontier, Allegiant, Sun Country, and others before it comes close to being the same size and having the same loyalty that Spirit does, making its path to growth difficult.
Perhaps Spirit’s disappearance would allow innovation from other airlines already in business. Allegiant’s business model and route structure, though close, does not directly match Spirit’s.
JetBlue’s Recent Snubs
This is not the first time that JetBlue has lost out on a potentially lucrative merger. Alaska beat it to buying Virgin America, another carrier that would have solved JetBlue’s inability to get a foothold on the West Coast. Though JetBlue has a handful of routes to the U.S. West Coast and Europe, a large majority of its flights are concentrated on the East Coast, and all outside of that region connect to the East Coast, meaning the airline cannot compete meaningfully with any other company apart from eastern routes.
This is also not the first time in recent months that the Justice Department has come for JetBlue. The carrier’s codeshare with American Airlines, dubbed the Northeast Alliance, was struck down in late 2023 because, once again, the Biden administration claimed it was anticompetitive. JetBlue decided not to appeal the decision to focus on its deal with Spirit, meaning the airline is now out of two lucrative deals within months.
The Merger’s Legal Future
At the time of writing, neither JetBlue nor Spirit has commented on Tuesday’s decision. What impact the loss of both of these deals will have on JetBlue’s future is unclear.
JetBlue does have an additional incentive to appeal: it will owe Spirit $400 million if the deal cannot clear regulatory hurdles. Such a payment would constitute a big break for the ultra-low-cost carrier, which in recent months has been hit hard by economic slowdown.
The Justice Department has focused greatly on antitrust cases under President Joe Biden, taking aim at other companies such as Amazon and Google. This prioritization of taking down big brands is likely the fundamental reason why the Justice Department wanted this case to go to trial instead of settling out of court, which both JetBlue and Spirit were ready to do.
“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 alleged in its lawsuit last March.
Past and Future Airline Mergers
The Justice Department does not have much precedent in the 21st century for taking airline merger cases to trial; in fact the federal government has not rejected an airline merger in 20 years. The merger between American Airlines and US Airways in 2013 narrowly avoided trial. Southwest and AirTran also merged in 2013 without one, as did United and Continental in 2010 and Delta and Northwest in 2008.
This decision calls into question whether the original merger Spirit had with Frontier would have gone through either. In both cases, there would have only been one major ultra-low-cost airline remaining in the U.S. market. Spirit would have disappeared from some key destinations, and its competition would have disappeared in other markets where it was the only challenger to mainline companies, thus increasing prices.
Equally in question now is the future of a proposed merger between Alaska Airlines and Hawaiian Airlines. The Justice Department would most likely argue for price increases caused by that deal, but the fact that the two brands would remain separate – and that their route networks are largely complimentary of each other – means that the number of airlines in the U.S. would not change, at least publicly.
That allows Alaska to make a stronger case against any anticompetitive argument that the Justice Department could make based on brand loyalty, which Judge Young specifically mentioned in the JetBlue/Spirit case. With independent brands still in operation, Alaska would allow passengers to continue having at least the illusion of choice, not to mention many in the traveling public might not notice any difference once Hawaiian was purchased and would continue flying as normal.
A stronger example is the international market – Hawaiian would continue competing with international and domestic brands alike, and it would maintain brand loyalty from both Hawaiian natives who have known the brand for decades as well as international vacationers who are either already familiar or who will make the correlation between the name of the state and the airline.
Hawaiian said immediately after its proposed deal with Alaska that it is open to other offers. JetBlue has yet to make any statement about Hawaiian, and it is unlikely that it will. A merger with Spirit makes sense for JetBlue because the two airlines have nearly identical fleet commonality. Spirit also has the exact slots that would allow JetBlue to expand in a way that makes sense.
However, adding widebody Airbus A330s, aging Boeing 717s, and a trans-Pacific route network does not match the way that JetBlue has been expanding in recent years. Hawaiian also does not have the number of airport slots on the West Coast that would be beneficial to JetBlue.
- The Large Air Carrier That Few Know Exists - February 19, 2024
- Bolts Missing from Alaska 737 MAX 9’s Door Plug: NTSB - February 6, 2024
- Boeing Continues To Face Mounting Pressure From Airlines - February 5, 2024
Subscribe to AirlineGeeks' Daily Check-In
Receive a daily dose of the airline industry's top stories along with market insights right in your inbox.
The aviation industry encountered unprecedented challenges during the global pandemic, yet African airlines have showcased resilience. According to a report…
Emirates has become the second major airline customer to put pressure on Boeing after last month’s 737 MAX 9 door…