Smaller airlines are pursuing mergers to compete with industry giants
Smaller airlines operating in the shadows of the country’s four dominant carriers are feeling increasing pressure to merge with each other to gain access to more aircraft and airport gates.
This dynamic was on display Tuesday in a federal courtroom in Boston, where JetBlue Airways tried to convince a judge to let it buy Spirit Airlines for $3.8 billion. It also came into play last weekend when Alaska Airlines proposed acquiring Hawaiian Airlines for $1.9 billion.
The outcome of these acquisitions could be critical for the companies and the U.S. airline industry, where four companies control more than two-thirds of the national market and exert dominance over major airports in places like Atlanta, Dallas-Fort Worth and Newark. If one or both mergers are approved, the deals would be the largest in years.
The last major wave of airline mergers came to an end when American Airlines merged with US Airways in 2013. In addition to American, the sector is now dominated by Delta Air Lines, United Airlines and Southwest Airlines. Each of these companies controls so many gates and take-off and landing slots at their hub airports that it is unlikely they will ever lose more than a small percentage of the travelers flying to and from those cities. Larger airlines also generally pay less for aircraft and other equipment because their size allows them to get better deals.
“The power of size in this sector is enormous,” said Christopher Raite, senior analyst at research firm Third Bridge. “There are just these inherent advantages that size gives you.”
The dominant position of the four major airlines featured prominently in arguments put forward by JetBlue in rebuttal to a federal lawsuit brought by the Justice Department against Spirit’s acquisition. In his closing arguments in the case on Tuesday, Ryan Shores, an attorney for JetBlue, said smaller airlines “need the network breadth to compete with the larger airlines.”
Justice Department attorney Edward Duffy countered that the sale would eliminate a small but important source of competition. Spirit typically sells tickets for less than JetBlue and other airlines. And more than 135 million airline passengers a year would suffer if Spirit no longer helped lower fares on the routes these travelers fly. By acquiring it, JetBlue would grow into the kind of market-dominating giant it says it wants to compete against.
After the Spirit acquisition, JetBlue would have a market share of more than 10 percent, putting it behind the 16 percent controlled by United, the smallest of the four major airlines. Alaska and Hawaiian together would have a market share of 8 percent.
In the lawsuit, heard before Judge William G. Young of the U.S. District Court for the District of Massachusetts, the government argued that the takeover would reduce competition, especially on the 262 routes where Mr. Duffy said the airlines compete. The merger would increase JetBlue’s market share on more than a dozen routes to more than 50 percent, according to an analysis of data from Cirium, an aviation data provider. All that newfound dominance would come on routes to and from Florida, where Spirit is based, although the impact could diminish as the airlines plan to give up some airport access if the deal is approved.
The Justice Department also argued that Spirit is unusually disruptive, accounting for about half of all services offered by the nation’s cheapest airlines.
In his closing argument, Mr Duffy argued that the very idea that other airlines would fill the void left by Spirit required a “simply mind-boggling” level of confidence that those companies would “grow faster than ever before, and then they would also could one day grow’. are taking on legacy airlines in a way they have never done before, that they would fly in ways and places that are fundamentally at odds with their established business strategies.”
A larger JetBlue will likely copy the big four airlines by charging relatively high fares, the government said. Additionally, JetBlue plans to reduce the number of seats on its Jets jets to match its own more spacious configuration, which would further drive up ticket prices. The Justice Department estimated the deal would ultimately cost consumers $1 billion to $2 billion annually in higher rates.
In defending the merger, JetBlue has pointed to its history of industry disruption, a fact recognized by the Justice Department last year when it successfully sued to overturn an alliance between JetBlue and American in Boston and New York. York to end. With more planes and routes, JetBlue says it would be able to lure more passengers away from the major airlines, forcing them to lower fares or work harder to win or retain customers.
“This merger will provide the scale to become a viable, disruptive fifth national challenger to the industry’s dominant airlines in the coming years,” said Mr. Shores, a partner at the law firm Cleary Gottlieb Steen & Hamilton.
JetBlue has also said it would give up access to some take-off and landing slots at airports in New York, Boston and Florida, where it and Spirit would have significantly large market shares. The airline accused the government of being too short-sighted in focusing on a small number of routes, rather than the national benefits of the deal. Airlines can and do opportunistically switch routes and aircraft, and some will undoubtedly compete with the larger JetBlue as they take over some of Spirit’s business, the airline argued.
One thing JetBlue, the Justice Department and many experts agree on is that the industry has become too concentrated. Previous governments allowed major mergers that ushered in the dominance of the big four airlines.
Under President Biden, the Justice Department is trying to aggressively enforce antitrust laws, mainly by preventing further consolidation.
Of course, this strategy is unlikely to make the sector more competitive than it is today, especially at airports where the four largest companies are already dominant. For example, according to Cirium, more than half of flights to or from Dallas Fort Worth International Airport last year were operated by American. United controls a similar share of flights at Newark Liberty International Airport. And about two out of every three flights that departed or arrived in Atlanta last year were operated by Delta.
Having fewer competitors also increases the likelihood that companies will at least tacitly coordinate with each other, antitrust experts say. Business leaders can more easily track changes in their competitors’ fares and schedules and adjust their own tactics accordingly when there are only a few large companies. Companies are also less likely to get involved in a bruising tariff war, as there is little gain to be made if each company has its own hub airports from which they fly most of their planes.
“Smaller competitors tend to be the ones breaking ranks,” said John Kwoka, an economics professor at Northeastern University and an antitrust expert who has advised states and the Justice Department on airline mergers. “If everyone else is buying something for $100 and you are a small competitor and can price it at $70 or $80, you can gain a lot of market share and sales versus the big sellers.”
Founded in 1999, JetBlue quickly found its footing, becoming one of the few airlines to remain profitable after the September 11 terrorist attacks. The company gained a reputation as a dirty, disruptive force. In a 2013 white paper, researchers at the Massachusetts Institute of Technology found that when the airline operated in a market, fares fell, calling it the “JetBlue effect.”
But some airline analysts say JetBlue has lost its outrageous ways in recent years as it chases premium travelers and profits.
If the deal goes through, JetBlue would expand its fleet and workforce by more than 50 percent, operate more than 450 aircraft and employ about 34,000 people. JetBlue operates primarily in Boston, New York, Los Angeles and several destinations in Florida. Spirit’s network is more diffuse, but particularly dense in Florida and the East.
The judge in the trial did not say when he expected to make a final decision. JetBlue has said it plans to complete the integration of Spirit’s operations by the first half of 2024.