DOT Telegraphs Feelings on JetBlue With Spirit Award in Newark

JetBlue, Spirit

Spirit picked up 16 slots at Newark this week. Is that a big deal? It’s notable, yes, but more interesting to me was what this says about the Frontier/JetBlue/Spirit love triangle that at last check was still going to be voted on tomorrow. It doesn’t look like DOT has as much love for JetBlue as it used to, and that could be cause for concern for those who back a JetBlue acquisition of Spirit.

Before we get into that, let’s talk about this slot award. When United and Continental merged, the combined airline was forced by the feds to divest some slots to new entrants to lessen the negative competitive impact. Southwest picked those up, but then in 2019 it decided it didn’t like Newark anymore, so it pulled out.

By then, Newark had been downgraded to a so-called Level 2 airport which doesn’t have strict slot requirements. In a Level 2 environment, each airline submits what it wants to fly every season, and the FAA works with the airlines to get to something that’s flyable. Southwest had 16 slots during the peak hours of 2pm to 10pm when the airport was at capacity. The FAA decided to retire those slots (which had effectively become runway timings), effectively reducing allowed capacity during the peak afternoon.

Spirit was angry about this and said it defeated the whole purpose of the divestiture. It went to the courts, there was much arguing, and it was decided that those 16 slots would be reallocated. In the meantime, Newark has lurched toward gridlock as United, JetBlue, and Spirit all fight each other for precious afternoon departure times. It has become so bad and unreliable that the FAA let United cancel 50 daily flights this summer without letting others backfill, because the airport has simply been unable to function.

Now, there are these 16 slots (8 slot pairs) which are being reactivated. And while the airlines have been able to grow their schedules during COVID using ad hoc timings, these slots mark a permanent right to operate during the peak, so they were coveted, at least by three airlines: Alaska, JetBlue, and Spirit. (They would have been coveted by United too, but that obviously wasn’t going to happen.)

In the end, DOT gave the slots to Spirit with two caveats. First, Spirit must fly them all. If they decide to give some back, the DOT can take them all and reallocate. Second, Spirit has to report on customer service metrics every quarter if it wants these slots. This seems to stem from the DOT Secretary’s pet project of trying to improve airline performance. I don’t imagine Spirit is overly concerned about this, because it doesn’t seem to require any thresholds be met. Spirit just has to report the details.

In the decision-making process, Alaska was immediately thrown out, because it only wanted 4 slots, and the DOT wanted to give all 16 to a single airline if one was interested. That left JetBlue and Spirit to duke it out. As we all know, JetBlue has been trying to ruin Spirit’s merger plan with Frontier. With ever-escalating offers, JetBlue has caused Spirit shareholders to pause long enough on the Frontier deal to delay the shareholder vote approving the latter deal twice.

As of now, tomorrow is d-day on whether the Frontier/Spirit merger gets approved or not, but I’m no Charlie Brown. You take the football away from me twice, and I won’t believe you’ll let me kick it next time. We’ll see if the vote happens this time.

Spirit’s board has unequivocally backed the Frontier deal, saying that the merger of two ultra low cost carriers (ULCCs) will only help competition and keep fares low. JetBlue taking Spirit out of the ULCC space entirely — Spirit says — will hurt fares, and the feds aren’t likely to approve that. But is it true?

The feds tend to keep things close to their vest, but in this decision awarding slots to Spirit over JetBlue, it may have tipped its hand just a bit.

In the filing, DOT laid out its rationale in great detail. You can read it if you’d like, but I’ll just pull out the points that may have a deeper meaning for the future.

First, it has to be pointed out that DOT would not consider JetBlue’s application in a vacuum. Not only did it take American’s Newark presence into account thanks to the Northeast Alliance (NEA) between the two airlines, but it also looked at all New York airports. As DOT put it,

JetBlue, together with its joint venture partner American under the NEA, is the largest operator in the New York area, which includes EWR; the NEA operates 32 percent of service in this area, followed by United and Delta each at 23 percent.

As far as DOT is concerned, there is no daylight between the two carriers in the northeast, and there’s no reason to think it won’t feel similarly in a merger analysis.

Now, going back to this decision process, DOT put forth this as its first criteria to evaluate the applications:

Business model and product offering that allow the carrier to effectively compete, including the extent to which offering low fares to large numbers of travelers is core to its business proposition across markets

Low fares are important. And in that regard, DOT goes on further to note this.

Spirit maintains a 32 percent cost advantage over JetBlue, and a 46 percent advantage over United. This will effectively allow Spirit to offer lower fares to more customers while maintaining the profitability necessary to remain an effective competitor at EWR.

This is an important point. JetBlue has relied upon its assertion that while Spirit may have lower fares, JetBlue fares combined with its product offering make it more able to lower legacy airline fares since they feel more compelled to match JetBlue than Spirit with its a la carte model.

DOT doesn’t seem fazed by this argument. It wants lower fares, and Spirit delivers.

As discussed previously, Spirit has the clear advantage in offering lower fares, allowing it to attract a much broader set of passengers, including discretionary travelers whose decision to travel is stimulated by Spirit’s low base fares.

DOT went on to say that operational performance is also important. It flagged Spirit for having a higher level of cancels last year and a really high number of complaints while JetBlue was nailed for more recent cancellation numbers, poor on-time performance, and a bad mishandled bag rate. Though its analysis didn’t come to a clear conclusion on which airline is better, the department was able to impose those extra customer service reporting requirements on Spirit. Spirit’s operation has at least generally trended in the right direction while JetBlue’s poor performance has been the standard for many years.

After looking at all the criteria, the decision was made in favor of Spirit and the rationale was clear.

The Department finds that Spirit’s application will produce greater consumer benefits for a larger
pool of passengers at EWR. Spirit has demonstrated its ability to maintain a significantly lower
cost structure, allowing it to offer lower fares to more passengers, and has a demonstrated history
of entering and stimulating markets (including those dominated by United or other legacy
carriers). The Department concludes that the maximum competitive benefits will be realized by
the award of these timings to Spirit as the carrier best able to achieve the proceeding’s aims of
restoring the competition lost when Southwest relinquished the timings.

Does this mean a JetBlue/Spirit merger can’t happen? Of course not. But DOT seems to rely heavily on fare levels as an indicator of competitive benefit in this decision. A JetBlue acquisition of Spirit would unquestionably raise Spirit fares, eliminating a ULCC from the market. That’s not something the feds appear willing to overlook, and it could cause some concern for those who were hoping for a JetBlue acquisition and easy sailing through the regulatory process.

18 comments on “DOT Telegraphs Feelings on JetBlue With Spirit Award in Newark

  1. American Airlines will eventually acquire B6 and agree to sell off the B6 FLL hub to DL or UA. NK and F9 will merge. DL/AS and UA/WN combos are also very possible. The industry is a mess and business travel demand, as it existed pre-pandemic will never come back.

    1. Your scenarios get less likely with each sentence you’ve written there. Could B6 and AA merge? Quite possible. And this part I think is plausible. If that were to happen, the combined operation would have to divest itself of that FLL hub and you’re likely right about who would happily pick up that piece; UA (who could really use a hub in the southeast) or DL. You go off the rails in your last bit though. Could DL and AS merge? I guess, but it doesn’t seem imminent. How about UA and WN? Never in a million years. Totally different business models.

    2. Unfortunately, none of the above mentioned possible mergers would benefit consumers at all, as you take competition out of the market. Given the current Presidential administration, none are likely to happen. You would need a Republican / pro-business President in office for any to even be considered by the DOJ / DOT.

      Also, WN not likely to every merge with anyone… they have a unique business model, and certainly much different from UAs.

  2. Let’s remember old Billy Boy at Frontier HATES Newark and it’s High airport cost. They like TTN,SWF and PHL for that side of the Hudson coverage. I’d be quiet surprised if a Merged NK/F9 kept any of the EWR operations in the ULCC giant marriage aftermath. Once you add in ACY and ISP in post Merger operations. The heart of their NYC operations will be at its private Maine Terminal in LGA with SWF coverage to the north, ISP to the north east,TTN to the western edges, PHL to the Southside and ACY to the south East. EWR becomes a redundant expensive operation with a Huge Delay problem to gum up its aircraft flows .
    In addition EWR gate rental fees are set to double with the new Terminal 1.

    1. I wouldn’t presume that just because F9 couldn’t make it work, if NK makes it work they’re going to get rid of it completely when the merger happens.

      Bill Franke, et al aren’t that stupid, and FWIW they might be more wanting lots of Spirit’s management to handle the Frontier assets than the other way around.

      1. It all depends on Who’s team ends up running the combined airline. Bills team already ditched EWR once because of high cost and moved operations what they deemed “Alternate” EWR catchment areas. AND Yes I’ve been to NY/NJ several times are the airports I’ve listed above great Alternatives? Well that all depends on how badly you want cheaper airfares.
        Same situation going to play out in LA and Chicago where Bills team is ditching the more expensive prime airport for the “Alternative gateway”. But they delayed the Merger Vote again so????

    2. Have you ever been to NYC? TTN and PHL are certainly not coverage for “that side of the Hudson.” ISP is certainly not an alternative to EWR, and SWF is its own market 70+ miles outside of NYC. There’s a market that you just can’t capture if you’re not serving JFK, LGA or EWR. If NYC is important to their strategy, they would not have the mindset that you shared.

      1. > There’s a market that you just can’t capture if you’re not serving JFK, LGA or EWR. If NYC is important to their strategy,

        Agreed. I’d argue that there are a lot of people on the west bank of the Hudson who would be very reluctant to consider flying from JFK (as opposed to EWR or LGA), and similar reluctance for people living in Brooklyn/Queens/Long Island to consider flying from EWR (as opposed to JFK or LGA).

        Especially for leisure domestic trips, unless there are very favorable fares/schedules/nonstops not available elsewhere, there’s not much reason for those East/West of Manhattan to go out of their way to make the slog past Manhattan and go any farther than LGA.

  3. It’s being said Both B6 and F9 mergers are dead in the water as they stand now.
    NK/F9 will instead announce a systemwide codeshare and passenger connections at several different Hubs . In addition NK/F9 will sale the planned surviving Brand Key operations throughout 2023/2024/2025.
    Eventually still achieving one Giant ULCC and keeping JetBlue at bay.
    Is it legal? WN successfully threw money at ATA took what it wanted to kill off AirTrans merger hopes.

  4. There are lots of themes here:

    The DOT still wants to play the role of competition authority even though EWR is no longer slot-controlled. The DOT clearly does know what the DOJ is thinking and is using commentary on the EWR “slot” deal to talk to potential mergers/acquisitions.

    The DOT is trying to save face over the Northeast Alliance (NEA) between AA and B6; mergers are the responsibility of the DOJ which argues that the NEA has components that are only permitted by domestic airlines if they merge. By commenting on DOJ issues, DOT is trying to highlight the validity of its position on the NEA.

    The DOT said that JBLU’s argument that it stimulates traffic better than ultra low cost carriers is patently false which is central to its acquisition claims.
    DOT permanently shot down JBLU’s idea that it can keep the NEA and still go after SAVE

    Divesting SAVE assets in NYC is not a consideration to make JBLU/SAVE work; SAVE is the best antidote to the big 4 plus JBLU. Scattering assets between multiple carriers or selecting the weakest remaining carrier is not the same as having a potent single competitor.

    There will be no later mergers involving the big 5 – AAL DAL LUV UAL plus whoever combines among JBLU, SAVE, ULCC
    JBLU’s years long operational track record is a massive liability

    The NEA is still vulnerable but the DOJ is more likely to allow it to continue with restrictions than a merger/acquisition of SAVE.

    1. The DOT and DOJ look at issues differently based on the administration that’s in power, No one is trying to “save face.”

      1. Unless you are expecting a change in administration in the next 30 months, the administration’s approach under the DOT and DOJ won’t change any time in which SAVE’s future will have to be determined… unless you think that SAVE can keep postponing that long.

  5. The DOT doesn’t have the authority to stop a merger. Only the DOJ can try to do that – and it has to file a lawsuit to get it done. And nobody knows how a judge will rule.

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