Antitrust Enforcers Block the JetBlue-Spirit Merger
For the first time, the Antitrust Division stopped an airline merger, despite wailing from executives about industry woes. That's a historic win. It's also the end of the beginning for our movement.
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“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” - Winston Churchill
“The airline industry,” wrote Boston-based Judge William Young yesterday in an opinion blocking JetBlue’s attempted acquisition of Spirit Airlines, “is an oligopoly that has become more concentrated due to a series of mergers in the first decades of the twenty-first century, with a small group of firms in control of the vast majority of the market.”
Ten years ago, only a very aggressive liberal judge with deep historical knowledge would have the confidence to write something like this. Today, recognizing America is in a monopoly crisis has become conventional wisdom, so much so that this judge, an 82 year-old Ronald Reagan appointee, openly talked about the effects of this concentration problem in a merger opinion blocking a deal between two relatively small airlines. And no one batted an eye. That is a stunning intellectual turnaround from an era where consolidation was considered a way to foster efficiency and better corporate behavior.
As airline expert William McGee noted, it’s often overheated to assert that something is unprecedented, but in the case of this decision, it’s true. The judge’s order represent the first time the Antitrust Division and Department of Transportation have stopped an airline combination since deregulation in 1978. On a practical level, this challenge is also one of several moves that are leading to lower airfares, first over the holiday season as BIG covered, and now potentially for this upcoming year.
So why were JetBlue-Spirit trying to merge? Why did the government try to stop it? And why did this conservative judge block the merger?
Let’s start with the merger. Since Covid, what happened in the airline industry is known as the ‘bullwhip’ effect, where industries overcorrect several times in response to a shock. In 2020, there was no demand for air travel because of the pandemic. Leaders of the highly concentrated airlines industry, despite getting bailout money to maintain airline infrastructure, believed the situation was permanent, and so sought to do voluntary buy-outs of pilots and other staff, getting around the legislative efforts to maintain the air system. As a result, when demand snapped back, airlines, while they faced huge logistical challenges, also had a lot of pricing power, and became immensely profitable. But because they had to cancel a lot of flights, airlines sought to increase capacity by bringing on new pilots and trying to buy new planes as quickly as possible. As that capacity came online, they began to compete once again for customers, and that is finally causing airfares to drop.
Airline CEOs don’t like it when fares drop due to competition. The typical industry practice when prices begin coming down is to merge and collectively cut capacity. For instance, over the last couple of decades, Delta bought Northwest, United bought Continental, American bought TWA, America West, and U.S. Air, Southwest bought AirTran, and Alaska bought Virgin America. This constant state of consolidation has led to a tight oligopoly, with just four trunk airlines running 80% of flights nationwide.
The goal of JetBlue in buying Spirit was, as per industry practice, to eliminate industry capacity, allowing the whole industry to maintain higher prices. The problem is that merging with a competitor so as to increase prices is flat-out illegal. And you don’t need to take my word for it, the board of Spirit Airlines had publicly encouraged shareholders to reject the deal because they thought, correctly, it wouldn’t pass muster with enforcers. Here’s a slide they used, in public, airing their concerns.
But the CEO of JetBlue, Robin Hayes, just could not believe that the Department of Justice would actually challenge a merger. After all, the government, prior to this administration, had always settled with merging airlines, and this lax government attitude led directly to the rise of the big four. So why would the DOJ turn around now and go after the sixth and seventh largest firms when they combined? The answer to this question, as BIG readers know, is that policymakers now realize there’s a monopoly crisis, and believe that allowing consolidation in the first place was a mistake. But Wall Street and corporate America, and men like Hayes, just couldn’t bring themselves to believe the environment has changed.
This suit is the second antitrust loss that JetBlue has incurred of late. The first was last year, when the Department of Justice forced the end of the Northeast Alliance joint venture with American Airlines. In that case, a different Boston judge, Leo Sorkin, argued in his order nullifying their combination that JetBlue and American Airlines had removed competition from the market by combining forces through a joint operating agreement. (American Airlines is appealing.) Sorkin had aggressive words for expert consultants, and like Young, discussed the broad concentration crisis in the airlines. The net effect of these losses inside the airlines is fascinating, with Spirit looking for a new strategy now that their attempt to combine with a larger firm has failed, and Hayes simply stepping down from his role as CEO of JetBlue.
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So why did the judge strike down the JetBlue-Spirit merger? The gist is that Young believed that the merger would cause consumer prices to go up, cut consumer choice, and remove an innovative airline from the market. The combination, Young argued, “would further consolidate an oligopoly by immediately doubling JetBlue’s stakeholder size in the industry. Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier.” Such a deal “does violence to the core principle of antitrust law,” which is to protect “markets –- and its market participants -- from anticompetitive harm.”
Every antitrust decision has a discussion of how antitrust law works. In this one, Judge Young used a burden-shifting framework in which the government had to prove the merger reduced competition, then the airlines could prove that the merger was jusififed, and the government could then offer additional evidence for its case. Young in his order said the government met the first part, proving the merger would consolidate the industry. He then said the airlines met their rebuttal burden, successfully arguing that such consolidation could improve the consumer flying experience, aka a claim that the merger was ‘pro-competitive,’ and that other airlines would eventually take Spirit’s routes, that there was ‘potential competition’ that could discipline JetBlue.
But the judge ultimately came down on the government’s side, because he just didn’t think that other airlines would foster that competition for at least five years after the merger closed. “Even if other ULCCs entered former Spirit routes at an unprecedented rate of growth (which, given the current restraints on airline growth, is unlikely),” he wrote, “their entry is unlikely to be sufficient to protect every consumer, in every relevant market from harm.” Boeing and its recent safety problems shows up in this order; part of his reasoning to block the deal was that Boeing and Airbus are both having problems delivering new jets.
The opinion is fun, poetic even, citing Yogi Berra and Niels Bohr. The judge even attacked junk fees on airlines by quoting the song "Master of the House" from Les Miserables in a footnote.
That said, the opinion itself is a bit strange, an almost stream-of-consciousness discussion of an airline merger from a judge uncomfortable with blocking something he knew was against the law. (John Newman goes over more of the legal details and some of the confusing logic in this thread)
One interesting nugget is that both Spirit and JetBlue are losing money, and in the wake of this deal collapse, commentators like Bloomberg’s Brooke Sutherland are saying that the government should have allowed the merger, because without it, Spirit may go bankrupt. The problem with this argument is that Spirit executives didn’t agree. If the firm were going to collapsing, its executives could have claimed that as justification for the merger. There is actually something in antitrust law called a ‘failing firm’ defense, in which a company that would otherwise liquidate can sell itself even if that fosters monopoly power. Judge Young went over the caselaw, and found that Spirit didn’t meet that burden, since its executives did think the firm would return to profitability. Will it? I don’t know. But projections for lower ticket prices in 2024 may not pan out this year, as the Boeing 737 Max flight groundings constrain capacity across the industry.
Nonetheless, while I do appreciate the end of consolidation in airlines, air travel is not a standard business. In high capital cost transportation industries like shipping, air travel, rail, and trucking, firms with a lot of sunk investment have an incentive to price their product below cost in hopes of being the last man standing, which is something known as ‘ruinous competition.’ Such boom and bust cycles do actually drive bankruptcy and then consolidation, until there is private price-setting above the cost of capital via monopolization. Of course, in such a system, you don’t have a universal service, and since deregulation, regional air service has been gutted, as one would expect.
The ultimate solution here is to have the government regulate routes and pricing, as I wrote in August of 2022. You can’t just hope competition will win out in an unregulated industry, the result will be mal-investment, bankruptcies, consolidation, and then mass bailouts. Nevertheless, this merger was obviously illegal, and it’s good that airlines are going to have a much tougher time consolidating going forward. Now comes the national discussion to actually build a healthy air grid, and turn away from the deregulation that has brought us so much trouble.
As Newman notes in the Sling, agencies have won four merger challenges in the last month. Now we are going to have to find ways of dealing with problems in industry aside from hoping that consolidation fixes it. The anti-monopoly movement hasn’t won the war over monopoly, and we aren’t close to the end of it. But to paraphrase Churchill, we are at the end of the beginning.
Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.