On October 19, 2022, Spirit Airlines’ shareholders approved a merger with JetBlue Airways Corporation. This approval, which represents a significant step towards the finalization of the deal,[1] follows the July 28^th agreement for JetBlue to acquire Spirit for $3.8 billion.[2] The merger aims to generate low-fare challenges to major carriers,[3] including approximately 1700 flights, and produce net annual synergies of $600-700 million for JetBlue and Spirit.[4] If finalized, the combined entity would become the fifth-largest U.S. airline,[5] with a market share of 9%.

Using the JetBlue-Spirit merger as a case study to consider broader economic and political trends, this paper will analyze theories of anticompetitive harm, such as elimination of a maverick and increased market concentration. Additionally, the paper will consider the potential impacts of the JetBlue-Spirit merger on the airline industry and the economy more broadly, discussing feedback from various stakeholders about the merger, the Department of Justice’s (DOJ) position against the merger, potential outcomes of their lawsuit, and JetBlue’s proposed divestiture.

Concentration in the Airline Industry

There is evidence that in the United States, markets have become more concentrated and often less competitive in a wide array of industries, including aviation.[6] The airline industry has consolidated through both mergers and bankruptcies.[7] The big four airlines[8] i.e. American, Delta, United and Southwest, comprise 60% of the domestic market, with market shares of 19.5%, 16.3%, 12.9% and 17.4%, respectively.[9] JetBlue and Spirit comprise 5.3% and 4.9% of the market.

In addition to the percent of overall market share, airlines may also experience regional dominance such as a large share of the flights from a particular airport or geographic region. For example, JetBlue has a partnership with American Airlines, which includes an agreement to share passengers, jets and revenue in certain routes between New York and Boston. This partnership covers more than half the market share for those routes.[10] High barriers to entry including high startup costs, competition for airport gates, and large economies of scale,[11] make the entry of new airlines difficult to enter the market and may also hinder smaller airlines that are attempting to expand.

The merger would enable JetBlue to increase it’s market share from 5.3% to 10.2%, making it the fifth largest airline in the United States.[12] The merger would reduce the overall number of airlines competing for business, further concentrating an already concentrated industry and would eliminate a maverick and one of the few remaining budget airlines in the U.S.

Responses to the Merger News:

Unions & Employee Reaction

JetBlue and Spirit unions are divided on the merger, with opposing views from each side.[13]  The Transport Workers Union (TWU), representing 6,800 JetBlue flight attendants, opposes the merger due to concerns that JetBlue may not honor the worker contracts post-acquisition. JetBlue has a history of disregarding important provisions of the collective bargaining agreement with the union.[14] As a result, the TWU will only support the merger after ensuring improvements and protections from management.[15] On the other hand, the Association of Flight Attendants – C.W.A., representing 5,600 flight attendants at Spirit, has approved a tentative agreement with Spirit that includes higher wages and improved working conditions for the flight attendants.[16]

Florida’s Economic Outlook

Florida is the only state that has supported the merger,[17] as Spirit and JetBlue have benefitted Florida’s tourism economy by increasing competition and reducing fares.[18] With flight costs jumping more than 40% in Florida since January, 2022,[19] Florida is in need of more fare reductions and is looking at the merger as a means to achieve this goal.[20] Florida believes that the merger will reduce prices by increasing competitive pressures on the big four airlines.[21]

Federal Response

In the past, the Obama-era Justice Department drew heavy criticism for allowing the merger between American Airlines and U.S. Airways, one of the last of the major airline deals that led to the U.S. having just four big carriers.[22] The Biden administration has taken a tougher stance on antitrust policy, as evidenced by the DOJ’s lawsuit against Google’s advertising business, the FTC’s attempt to block Facebook’s parent company from purchasing a fitness app,[23] and the DOJ’s antitrust challenge to stop the alliance between American and JetBlue.[24]

On March 07, 2023, the DOJ, together with Attorney General of the Commonwealth of Massachusetts, the State of New York, and the District of Columbia, filed a civil lawsuit to block the acquisition of Spirit.[25] If the suit is successful, JetBlue will pay a termination fee to Spirit and its shareholders of $70 million and $400 million, respectively.[26]

The lawsuit argues that the merger would increase concentration on over 40 direct routes where the companies already have a high market share.[27] Domestic air travel is presently dominated by four airlines,[28] which collectively control 60% of the market. JetBlue’s ongoing partnership with American Airlines (called the North Eastern Alliance or NEA), the largest airline in the world has made this argument even more compelling.[29] The lawsuit also argues that the acquisition hinders Spirit’s expansion, encourages coordination between the airlines, and eliminates a maverick. [30] The lawsuit is based on concerns that by increasing concentration, the merger would reduce competition and innovation and would harm consumers by contributing to rising prices and limited capacity.[31]

On the Lawsuit

Impact of the Lawsuit

The shortage of pilots and aircrafts in the U.S. has made it difficult for domestic carriers to increase capacity and coupled with the rising fuel costs and labor expenses,[32] companies are struggling with growth and cost management.[33] Spirit in particular has faced additional challenges due to a delay in delivery of planes from Airbus, which has impacted their capacity constraints.[34] Spirit and JetBlue are relying on the proposed merger to boost their financial performance and market share relative to the industry’s largest airlines.[35] Mergers and acquisitions, like the JetBlue-Spirit deal have traditionally been a means for companies to reduce costs, and increase revenue and profits.[36]

If the lawsuit against the JetBlue-Spirit merger succeeds, it may act as a deterrent for future airline deals, creating business challenges for other airlines who have traditionally turned to mergers and acquisitions as the quickest solution to increase capacity.[37] In addition to a potential chilling effect on future deals, the JetBlue-Spirit merger may represent a larger trend in antitrust enforcement arising out of growing concerns about market concentration and competition as well as increasing political interest in antitrust policy.

Potential Lawsuit Outcomes

The question of the potential merger’s consequences remains uncertain. In addition to increasing concentration within an already concentrated industry, it may lead to the double elimination of a maverick, or as argued by JetBlue and Spirit, the merger could result in increased efficiency and enable lower prices and other benefits for consumers.

Past testimony from Spirit’s Vice President of Network Planning, John Kirby, may be brought into the JetBlue-Spirit case. During the trial contesting a merger between JetBlue and American Airlines, Kirby testified against the merger claiming that it would harm competition, consolidate limited resources particularly in the New York area, and involve antitrust collusion with backroom deals for gate slots.[38] This statement could prove to be prejudicial in the present lawsuit.

Both JetBlue and Spirit are mavericks in the airline industry. According to the DOJ, merging the two companies would eliminate the “Spirit Effect”, where Spirit’s competitive presence prompts other airlines, including JetBlue, to reduce their prices.[39] Interestingly, in the complaint against the JetBlue-American partnership, the DOJ also recognized JetBlue as a maverick.[40] Since the DOJ acknowledges JetBlue’s positive impact on the industry,[41] they argue that the JetBlue-American partnership and the Spirit acquisition, combined with the NEA, could jeopardize competition by neutralizing the disruptiveness of Spirit and JetBlue and aligning their interests with those of the largest airlines in the world.[42]

JetBlue has offered to divest Spirit assets in New York, Boston, and Florida, but the DOJ’s antitrust head prefers to litigate problematic deals instead of settling.[43] The DOJ has expressed skepticism about the practice of business divestiture as a remedy in merger cases.[44] In part, this skepticism derives from the concern that the divestiture buyer may not be a successful competitor to the divesting business.[45]

In past government-initiated litigation where the loss of a maverick was identified as a theory of harm, the majority of the litigations have resulted in abandoned deals.[46] However, in precedent antitrust cases, such as the Philadelphia National Bank case,[47] market concentration arguments have required the combined firm to have at least 30% of the market share. JetBlue and Spirit’s combined market share would be 10.2%. Therefore, it remains uncertain whether the JetBlue-Spirit merger will be approved.

Conclusion

The DOJ argues that the JetBlue-Spirit merger will have a detrimental effect on concentration, expansion, coordination and elimination of a maverick. The courts will have an important role to play in balancing the interests of the consumers against that of the economy, and their decision will have far-reaching consequences on the market. With the Biden administration’s tough stance on antitrust and the risk of anticompetitive harm from the loss of a maverick and increased concentration, it remains to be seen whether proposed divestiture, state-level support from Florida, divided support from union groups and the merger efficiencies will be sufficient to counter the DOJ’s strong arguments of the impact of the merger. Businesses and consumers will both be watching the court’s decision on the JetBlue-Spirit merger closely.

 

[1] Spirit Airlines, “Spirit Announces Stockholder Approval of Merger Agreement with JetBlue”, October 19, 2022, Press Release, Cision PR Newswire, <https://www.prnewswire.com/news-releases/spirit-announces-stockholder-approval-of-merger-agreement-with-jetblue-301653632.html>, Last accessed [March 20, 2023].

[2] Niraj Chokshi, “JetBlue and Spirit announce plan to merge, creating fifth-largest U.S. airline”, July 28, 2022, The New York Times, < https://www.nytimes.com/2022/07/28/business/jetblue-spirit-merger.html>, Last accessed [March 20, 2023].

[3] Supra at Footnote 1.

[4] Richard Summerfield, “JetBlue’s $3.8bn Spirit deal”, October 2022, Finance Worldwide Magazine, https://www.financierworldwide.com/jetblues-38bn-spirit-deal#.ZBhSiS-B2pY, Last accessed [March 20, 2023].

[5] Supra at Footnote 4.

[6] Heather Boushey and Helen Knudsen, “The Importance of Competition for the American Economy”, July 09, 2021, The White House, < https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-of-competition-for-the-american-economy/>, Last accessed [April 06, 2023].

[7] Douglas Moser, “DOJ antitrust challenge to airline alliance concludes in federal court”, November 18, 2022, The Washington Post, <https://www.washingtonpost.com/transportation/2022/11/18/jetblue-american-airlines-alliance-antitrust/>, Last accessed [April 06, 2023].

[8] Bill Parry, “JetBlue flight attendants picket outside Long Island City headquarters demanding job protections amid proposed Spirit acquisition”, licpost, < https://licpost.com/jetblue-flight-attendants-picket-outside-long-island-city-headquarters-demanding-job-protections-amid-proposed-spirit-acquisition>, Last accessed [March 22, 2023].

[9] Statistica Research Department, Domestic market share of leading U.S. airlines from January to December 21, February 03, 2023, < https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/>, Last accessed [March 29, 2023].

[10] Douglas Moser, “DOJ antitrust challenge to airline alliance concludes in federal court”, November 18, 2022, The Washington Post, <https://www.washingtonpost.com/transportation/2022/11/18/jetblue-american-airlines-alliance-antitrust/>, Last accessed [April 06, 2023].

[11] Scott A. Wolla and Carolyn Backus, “The Economies of Flying: How Competitive Are the Friendly Skies”?, November 2018, Economic Research, Federal Bank of St. Louis.

[12] Supra at footnote 4.

[13] Supra at footnote 2.

[14] Bill Parry, “JetBlue flight attendants picket outside Long Island City headquarters demanding job protections amid proposed Spirit acquisition”, licpost, < https://licpost.com/jetblue-flight-attendants-picket-outside-long-island-city-headquarters-demanding-job-protections-amid-proposed-spirit-acquisition>, Last accessed [March 22, 2023].

[15] Supra at footnote 2.

[16] Supra at footnote 2.

[17] J. Robert McClure, “Why DOJ’s blow to Spirit-JetBlue merger stands against Florida’s tourism economy”, Tallahassee Democrat, https://eu.tallahassee.com/story/opinion/2023/03/14/why-dojs-blow-to-spirit-jetblue-merger-stands-against-floridas-tourism-economy/69995619007/, Last accessed [March 20, 2023].

[18] Id.

[19] Olivia Harden, “Flight Prices are up 40 Percent Since January. Here’s How much Higher It’ll Get This Summer.”, March 29, 2022, Matador network, https://matadornetwork.com/read/flight-price-prediction-summer-2022/, Last accessed [April 06, 2023].

[20] Id.

[21] Supra at Footnote 18.

[22] Josh Cisco, “Biden administration moving toward blocking JetBlue-Spirit merger”, October 02, 2023, Politico, https://www.politico.com/news/2023/02/10/blocked-jetblue-spirit-merger-00082327, Last accessed [March 20, 2023].

[23] Id.

[24] Douglas Moser, “DOJ antitrust challenge to airline alliance concludes in federal court”, November 18, 2022, The Washington Post, <https://www.washingtonpost.com/transportation/2022/11/18/jetblue-american-airlines-alliance-antitrust/>, Last accessed [April 06, 2023].

[25] “Justice Department Sues to Block JetBlue’s Proposed Acquisition of Spirit”, March 07, 2023, Department of Justice, Office of Public Affairs, < https://www.justice.gov/opa/pr/justice-department-sues-block-jetblue-s-proposed-acquisition-spirit>, Last accessed [March 20, 2023].

[26] Supra at footnote 4.

[27] Supra at footnote 29.

[28] Heather Boushey and Helen Knudsen, “The Importance of Competition for the American Economy”, July 09, 2021, The White House,https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-of-competition-for-the-american-economy/>, Last accessed [March 22, 2023].

[29] Supra at footnote 29.

[30] Id.

[31] Id.

[32] Rajesh Kumar Singh, “Analysis: US lawsuit to block JetBlue-Spirit merger casts chill over future airline deals”, March 07, 2023, Reuters, < https://www.reuters.com/business/aerospace-defense/us-lawsuit-block-jetblue-spirit-merger-casts-chill-over-future-airline-deals-2023-03-07/>, Last accessed [March 22, 2023].

[33] Id.

[34] Jay Shabat, “Spirit Airlines Struggles to Control Costs as It Awaits Fate of JetBlue Merger”, February 07, 2023, AW Daily, < https://airlineweekly.com/2023/02/spirit-airlines-struggles-to-control-costs-as-it-awaits-fate-of-jetblue-merger/>, Last accessed [March 22, 2023].

[35]  Supra at Footnote 36.

[36] Supra at Footnote 36.

[37] Supra at Footnote 36.

[38] Supra at footnote 26.

[39] Supra at Footnote 29.

[40]Reuters, “American Airlines, JetBlue ask judge to dismiss Justice Dpt. Antitrust lawsuit”. November 22, 2021, The Washington Post, < https://www.washingtonpost.com/business/economy/american-airlines-jetblue-ask-judge-to-dismiss-justice-dept-antitrust-lawsuit/2021/11/22/732da1d4-4b8c-11ec-b0b0-766bbbe79347_story.html>, Last accessed [March 29, 2023].

[41] J. Robert McClure, “Why DOJ’s blow to Spirit-JetBlue merger stands against Florida’s tourism economy”, Tallahassee Democrat, https://eu.tallahassee.com/story/opinion/2023/03/14/why-dojs-blow-to-spirit-jetblue-merger-stands-against-floridas-tourism-economy/69995619007/, Last accessed [March 22, 2023].

[42] Supra at footnote 38.

[43] Supra at footnote 26.

[44] Fred Ashton, “Despite Success, Merger Remedies Face Increased Skepticism at Antitrust Agencies”, February 14, 2023, Insight, American Action Forum, < https://www.americanactionforum.org/insight/despite-success-merger-remedies-face-increased-skepticism-at-antitrust-agencies/>, Last accessed [March 22, 2023].

[45] Andrew L. Bab & Ted Hassi, “Navigating the Dynamic World of Antitrust Divestitures”, May 2022, May 2022, Debevoise & Plimpton, <https://www.debevoise.com/insights/publications/2022/05/navigating-the-dynamic-world-of>, Last accessed [April 06, 2023].