Smaller airlines operating in the shadows of the country’s four dominant carriers are feeling increasing pressure to merge with others to gain access to more planes and airport gates.
That dynamic was on display in a federal courtroom in Boston on Tuesday, where JetBlue Airways tried to persuade a judge to allow it to buy Spirit Airlines for $3.8 billion. It was also in play last weekend when Alaska Airlines proposed acquiring Hawaiian Airlines for $1.9 billion.
The outcome of these agreements could be fundamental for the companies and the American airline industry, in which four companies control more than two-thirds of the national market and exert dominance over large airports in places such as 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 ended when American Airlines merged with US Airways in 2013. In addition to American, the industry is now dominated by Delta Air Lines, United Airlines, and Southwest Airlines. Each of those companies controls so many gates and takeoff and landing slots at their hub airports that they are unlikely to ever lose more than a small percentage of travelers flying to and from those cities. Larger airlines also generally pay less for planes and other equipment because their size allows them to negotiate better deals.
“The power of size in this industry is tremendous,” said Christopher Raite, senior analyst at Third Bridge, a research firm. “Size offers these inherent advantages.”
The dominant position of the Big Four airlines figured prominently in JetBlue’s defense arguments in a federal antitrust case brought by the Justice Department against its acquisition of Spirit. In his closing arguments Tuesday, JetBlue attorney Ryan Shores said smaller airlines “need network breadth to be able to compete with larger airlines.”
Justice Department lawyer Edward Duffy responded that the sale would eliminate a small but important source of competition. Spirit typically sells tickets for less than JetBlue and other airlines. And he argued that more than 135 million airline passengers a year would suffer if Spirit no longer helped reduce fares on the routes those travelers fly. By acquiring it, Duffy said, JetBlue would become the kind of giant that dominates the market it says it wants to compete against.
If it completes the Spirit acquisition, JetBlue would have a market share of more than 10 percent, compared to the 16 percent controlled by United, the smallest of the Big Four airlines. Alaska and Hawaii would have a combined 8 percent share.
In the lawsuit, which was filed before Judge William G. Young of the United States District Court for the District of Massachusetts, the government argued that the acquisition would reduce competition, especially on the 262 routes on which, Duffy said, 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 of that new dominance would occur on routes to and from Florida, where Spirit is based, although the impact may lessen because the airlines plan to give up some access to the airport if the deal is approved.
The Justice Department also argued that Spirit is unusually disruptive, accounting for about half of all service offered by the country’s lowest-cost airlines.
In his closing argument, Duffy argued that the idea that other airlines would fill the void left by Spirit required a “simply astonishing” level of faith that those companies would “grow faster than ever before and then some, than taking on legacy airlines like never before.” “They had done it before, that they would fly in ways and places fundamentally at odds with their established business strategies.”
A larger JetBlue is more likely to copy the big four airlines by charging relatively high fares, the government said. Additionally, JetBlue plans to reduce the number of seats on Spirit planes to match its own more spacious configuration, which the government says would further increase ticket prices. The Justice Department estimated the deal would ultimately cost consumers $1 billion to $2 billion a year in higher fees.
In defending the merger, JetBlue has pointed to its history of disrupting the industry, a fact acknowledged by the Justice Department last year when it successfully sued to overturn an alliance between JetBlue and American in Boston and New York. With more planes and routes, JetBlue said it would have the ability to attract more passengers from big airlines, forcing them to reduce fares or work harder to gain or retain customers.
Combining JetBlue and Spirit “would provide the scale to become a viable and disruptive fifth domestic competitor to the industry’s dominant airlines in the coming years,” said Shores, a partner at law firm Cleary Gottlieb Steen & Hamilton.
JetBlue has also said it would give up access to some takeoff and landing slots at airports in New York, Boston and Florida, where it and Spirit would have substantially high market share. The airline accused the government of being too short-sighted by focusing on a small number of routes, rather than the domestic benefits of the deal. Airlines can and do change routes and planes opportunistically, and some will undoubtedly compete with the larger JetBlue while capturing 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 focused. Previous administrations allowed major mergers that led to the dominance of the big four airlines.
Under President Biden, the Justice Department is seeking to aggressively enforce antitrust laws, primarily preventing further consolidation.
Of course, that strategy is unlikely to make the industry more competitive than it is now, especially at airports where the four largest companies are already dominant. Over the past year, for example, more than half of flights to or from Dallas-Fort Worth International Airport were operated by American, according to Cirium. United controls a similar proportion of flights at Newark Liberty International Airport. And about two of every three flights that left 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 said. Corporate executives can more easily monitor changes in their competitors’ rates and schedules and adjust their own tactics accordingly when there are only a few large companies. Companies are also less likely to engage in bitter tariff wars because there is little to gain when each company has its own hub airports from which most of its planes fly.
“Smaller competitors are usually the ones that break 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 buys something for $100 and you are a small competitor and can price it at $70 or $80, you can win a lot of stock and business against the major sellers.”
JetBlue was founded in 1999 and quickly found its footing, becoming one of the few airlines that remained profitable after the 9/11 terrorist attacks. The company earned a reputation as a fighting force. In a 2013 white paper, researchers at the Massachusetts Institute of Technology found that when the airline operated in a market, fares went down, calling it the “JetBlue Effect.”
But some airline analysts say JetBlue had lost its maverick character in recent years as it chased premium travelers and profits.
If the deal is allowed to go through, JetBlue would expand its fleet and workforce by more than 50 percent, operating more than 450 aircraft and employing about 34,000 people. JetBlue primarily operates 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 trial judge did not say when he expected to issue a final decision. JetBlue has said it plans to finish integrating Spirit operations no later than the first half of 2024.