Dive Brief:
- In a move that’s been expected for months, the Department of Justice on Tuesday filed a lawsuit to block the merger of JetBlue with Spirit Airlines, saying it would eliminate choice for cost-conscious consumers and potentially raise fares by an average 17% in the markets where the two airlines compete.
- In a separate action, the Department of Transportation is also looking at blocking the transfer of Spirit’s airline operating certificate. That’s another way of preventing the merger, on the grounds that it’s not in the public interest. That would be the first time such a move has been applied to a major airline since deregulation of the industry in 1978.
- But JetBlue has a compelling argument in its favor, says Robin Hayes, the airline’s CEO. “We agree with a lot of the concerns of the DOJ about airline competition,” Hayes told Bloomberg. “I've actually been making comments on this for years and years. We just believe the best thing that we can do to make a more competitive industry is to enable a bigger JetBlue.”
Dive Insight:
JetBlue has said it wants the merger, valued at $3.8 billion, for a number of reasons. Among them is the fast and efficient growth it can gain by virtue of the two airlines flying the same type of airplane and using the same type of engines in them. In that way, the airline can immediately boost its fleet and roster of pilots at a time when there’s scarcity in the industry for both.
“So there are huge benefits operationally with a single fleet type,” Hayes told Bloomberg.
Spirit, which came out of the pandemic looking to recover financially, has leveraged its ultra-discount business model to become one of the fastest-growing airlines in recent years.
Should the merger go through, the combined airline would become the fifth largest in the country, behind American, United, Delta and Southwest.
By airline industry standards, merging the two for a combined market share of about 11% is relatively small. But in announcing the lawsuit, Attorney General Merrick Garland said it’s in the public interest to keep the airlines separate, because Spirit’s business model of offering deep fare discounts gives consumers in many markets a chance to fly that they otherwise wouldn’t have.
DOJ estimates ticket prices tend to drop by about 17% in any market in which Spirit competes because of its effect on other carriers, and by JetBlue’s own estimate, prices could rise as much as 30% if Spirit is eliminated.
“As our complaint alleges, the merger of JetBlue and Spirit would result in higher fares and fewer choices for tens of millions of travelers, with the greatest impact felt by those who rely on what are known as ultra-low-cost carriers in order to fly,” said Garland.
Hayes says JetBlue has already gone further than other airlines in past proposed mergers by offering up to DOJ a divestiture package to help maintain competition in markets that could be affected by the deal. Among other things, it has proposed selling Spirit assets in Boston, New York and Fort Lauderdale, among other Florida markets.
“We came up straight away with the most significant divestiture offer of any merger in the U.S.,” Hayes told Bloomberg. “Bear in mind, when these large airlines merged before, they had to do nothing or very little, so we’ve offered that. We think that’s going to enable new entrants coming to the market in a way they would not be able to do today.”
On its own, Hayes has said, JetBlue has helped bring fares down, particularly in the heavily congested Northeast corridor, where it mainly competes, by pressuring full-service carriers to match its business model of tying lower fares to higher-end amenities like free wi-fi and seat-back TVs.
An alliance JetBlue entered into with American Airlines in 2020, which is subject to its own antitrust suit, is a case in point. Although the alliance isn’t a merger, it effectively combines the two airlines in a way that prevents them from competing in Boston and New York. JetBlue has argued to DOJ that the alliance helps keep prices down by providing increased competition to full-service carriers that American primarily competes with.
With the Spirit deal, though, JetBlue is effectively turning that argument on its head by putting upward pressure on prices by turning Spirit planes into JetBlue planes, removing a portion of the seats and adding amenities.
“JetBlue has an interesting storyline here,” Bill Baer, a former DOJ assistant attorney general for antitrust and a Brookings Institution analyst, told CNBC. “Last year they were in court in Boston defending their alliance with American Airlines that significantly reduced competition in the Northeast corridor. Today they’re saying you need to let this deal go through because we want to compete more with American, United, Delta and Southwest. So, they’re caught … making an argument of convenience up in Massachusetts to defend a deal that reduces competition.”
In other words, because its prices sit between a low-end carrier like Spirit and a high-end carrier like American, it can help bring down prices in markets dominated by the big carriers. But with its latest move, it will be putting upward pressure on the lower end of the market, hurting the most cost-sensitive consumers.
“The inconsistency is pretty transparent,” Baer said.
In its separate fight with DOT, which could deny the transfer of Spirit’s airline operating certificate, JetBlue has said it will try to defend against that action by showing the agency in the past hasn’t denied the transfer of the certificate on mergers.
The airline, JetBlue said, would “vigorously pursue” a legal challenge to any deviation in how the DOT has treated takeovers and certificate transfer applications over the past 30 years, Bloomberg reported.
Hayes said his airline has been prepared for the opposition to the merger but he’s still disappointed.
"We said when we got the offer approved by the Spirit shareholders last year that we didn't think we would close until the first half of 2024” because of the pushback, he said in widely reported comments on CBS Mornings.
