JetBlue/Spirit merger blocked on competition, innovation concerns | PaxEx.Aero

The US Department of Justice prevailed in its lawsuit against JetBlue and Spirit Airlines, successfully (at least for now) blocking their planned merger. The ruling, handed down on Tuesday, found that “Even if other ULCCs entered former Spirit routes at an unprecedented rate of growth (which, given the current restraints on airline growth, is unlikely), their entry is unlikely to be sufficient to protect every consumer, in every relevant market from harm.” With the elimination of Spirit, it would fall to other ULCCs not only to backfill Spirit routes, but also both to continue their own growth and to succeed in disciplining other, larger airlines as to both price and innovation — a tough row to hoe. – Court ruling Protection of the consumer, in this case, comes in two parts. The judge ultimately found that passengers would suffer from the elimination of a competitor in the oligarchical world that is the US airline market. This is not too surprising, especially given the prior ruling on the JetBlue/American Airlines alliance. More surprising, however, was the significant credibility given to innovation Spirit forced on/brought to the industry. Competition and capacity cannot be easily replaced The airlines did not argue (too hard) that their merger would reduce competition. Instead, the pair focused on the benefits their combined strength would bring to the market in trying to counter the domination of the Big Four (American, Delta, United, Southwest). And the judge allowed that might actually be the case, noting “A post-merger, combined firm of JetBlue and Spirit would likely place stronger competitive pressure on the larger airlines in the country.” But that was not enough. The judge further noted that “consumers that rely on Spirit’s unique, low-price model would likely be harmed.” The airlines suggested that others would fill the gaps, between divestitures and generally adding capacity where the merger left a void. But they also argued they could not expand without merging because they lacked access to facilities, new aircraft, and staff to operate them. The judge recognized these shortcomings as an industry-wide problem, “Spirit’s unique position in the domestic scheduled passenger airline industry would be exceedingly difficult for another airline, or a combination of other airlines, to replicate, even with low barriers to entry and the dynamic nature of the industry inasmuch as they face the same, industrywide aircraft sourcing issues.” The backlog of aircraft delivery – P&W gets called out for the engine issues – and staffing challenges – pilots and ATC both earn a mention – proves a large part of the ruling. If there are no new planes entering the market then there cannot be new competition to replace the lost airline. And the law requires any backfill to occur independent of other planned growth. Frontier suggested in testimony it would take 5-8 years to fully cover the markets vacated. And that’s without any of its previously planned growth. Given those challenges, the ruling holds that the market would remain distressed by the merger. Innovation is critical Beyond the basic competition discussion, the judge also delved into the nuance of unbundled fares, on-board product, and other areas of competitive innovation. There, too, it was found that eliminating Spirit Airlines came with outsized risks. Spirit is described in the ruling as “an innovator in the airline industry.” It is credited with launching the unbundled fare model in the United States, as well as various product innovations. The judge cites self-checked baggage and handicap-accessible lavatories as two examples. JetBlue is also described as an innovator of sorts. The court recognizes its “maverick” position and the “JetBlue effect” where fares drop when it enters a market. But the similar impact of Spirit appears to merit greater consideration. The ruling recognizes Spirit as “a uniquely disruptive competitor that consistently puts pressure on other airlines, both to lower their prices and to innovate.” It might be reasonable to argue that other U/LCCs can force similar innovation, but there isn’t much more to unbundle. And there’s also still the bit about getting enough planes to hit a critical mass to impact the market. What next? While it seems likely JetBlue will appeal the decision – the carrier is on the hook for a $470 million breakup fee, so a few million more on lawyers seems a smart choice – the ultimate outcome remains in flux. And that decision must be made by Joanna Geraghty, the new CEO who supported the merger plans but was not the architect of them. Should the deal remain blocked, the future of both carriers will look very, very different. Given the reasoning of the ruling it seems unlikely that a Spirit/Frontier merger would be successful. After all, that would also eliminate a competitor, though not a product class. Given Spirit’s significant losses since 2019 and the past year mostly idling while trying to figure out the future, there is a very real chance it could disappear. TD Cowen’s Helane Becker suggested Tuesday that while another buyer may step forward, “a more likely scenario is a Chapter 11 filing, followed by a liquidation.” It is not clear why the deal would require the two-step bankruptcy process – Chapter 11 is typically used to reorganize, often with funding at the ready rather than to prepare for liquidation – but the end game remains the same. And should that happen there would be significant new and used aircraft, pilots, and airport resources suddenly available. Indeed, how it is better for consumers to have Spirit disappear “naturally” and be absorbed in chunks by competitors rather than rolled into JetBlue is unclear. But the judge was clear the $1.5bn+ in recent losses is insufficient to overcome the other anti-merger elements. The ruling also raises questions for Alaska Airlines‘ proposed purchase of Hawaiian Airlines. In that case there is also significant overlap between the mainland and Hawaii. And, just as in this case it is unclear how competition would backfill against that loss given market constraints. But the deal would not eliminate a unique innovator nor a major player in keeping fares lower, so maybe the DOJ lets it slide. Or JetBlue could make a counter-offer for Hawaiian given zero overlap and see how far that goes. Though losing three times on mergers (plus the AA JV) would be pretty brutal. More on the now dead merger: JetBlue will not appeal NEA ruling, refocuses on Spirit merger JetBlue promises massive Orlando growth if Spirit merger approved JetBlue teases new routes, international connections with Spirit merger A JetBlue-Spirit merger almost certainly means higher fares JetBlue hit with DOJ, DOT objections to Spirit buyout JetBlue, Spirit agree to $3.8 billion deal A favor to ask while you’re here… Did you enjoy the content? Or learn something useful? Or generally just think this is the type of story you’d like to see more of? Consider supporting the site through a donation (any amount helps) . It helps keep me independent and avoiding the credit card schlock.