It is official. The US government does not like the JetBlue/Spirit merger one bit. The Department of Justice (DOJ) has filed a lawsuit to stop the plan, and the Department of Transportation (DOT) is standing behind DOJ, cheering it on. There aren’t any particular surprises in the lawsuit itself, but some of it is rather confusing if you try to use rational thought to get through it. Let’s break it down.
But first… I shouldn’t have to say this, but I am not a lawyer. If you’re looking at me to judge whether there’s a true case here for DOJ or not, well, I would suggest you look toward antitrust lawyers who would have a far better grasp on that than I. All I can do is base my view off industry knowledge and whether I think it makes sense or not. Just because something may not make sense, however, doesn’t mean it’s illegal, and vice versa.
What is DOJ saying? I’d sum it up this way. DOJ absolutely has it out for the big four airlines. Yes, that includes Southwest which used to be the golden child. Now, they’re too big and this DOJ doesn’t like what past DOJs have done to allow those airlines to get as big as they are. What does this have to do with the JetBlue/Spirit merger? Well, DOJ now views JetBlue as evil, under the thumb of American thanks to the Northeast Alliance (NEA) between the two airlines, and if JetBlue takes over Spirit, then Spirit will turn evil as well. Or in Scooby Doo terms….
Put another way, using DOJ’s complaint:
Approximately 75 percent of JetBlue’s total capacity is tied up in the Northeast Alliance. That means JetBlue today coordinates its capacity decisions and shares its revenues with American Airlines on the vast majority of its flights. In other words, JetBlue no longer competes with American Airlines on
those flights—and if this acquisition happens, Spirit won’t either.
DOJ gives plenty of examples of how JetBlue has become a mini-legacy, including the accusation that JetBlue now prices like a legacy and matches fare increases, playing the unspoken game of airline pricing strategery. Spirit does not do that. It is a price leader and does what it wants. DOJ likes that a lot. Good Spirit. Bad JetBlue.
Of course, DOJ can’t just say that and walk away. It has to prove itself in a court of law. That’s where the details become important. You can follow along by reading the 39-page complaint yourself. Here is my interpretation of what points DOJ will rely on.
DOJ Sees Spirit as the Savior of the Airline Industry
It is a weird, mixed message that DOJ is putting out there, but despite what you might think, it thinks very highly of Spirit as an innovator and bringer of low fares. The complaint cites how “Spirit has touted that its total prices, including charges for all unbundled services, are 30% less than those of other airlines in the United States.”
It’s these low fares under the ULCC model that make Spirit hugely important to the DOJ’s case that there will be harm. Let’s just forget that the feds have lambasted airlines for charging “hidden” fees (even though they aren’t hidden, but I digress). Now DOJ says it loves fees. “Spirit was among the first domestic airlines to unbundle these features and empower its cost-conscious travelers to prioritize the aspects of the flying experience they valued the most.”
I like the a la carte model, but I don’t believe the feds when they say they feel the same way. This is just a construct for them to prove their point that eliminating Spirit will be very bad for the country. It then goes into reasons why.
Move Over JetBlue Effect, Now There’s Something Meatier
We get it, Spirit has lower fares. JetBlue hasn’t talked about those, but rather it zeroes in on how it provides lower fares than the big guys, and it makes the big guys lower theirs to compete. This is the so-called “JetBlue Effect” which JetBlue talks about more than a Jehovah’s Witness talks about God at your doorstep.
DOJ is all for any effect which brings down fares. It says the JetBlue Effect is all well and good, but hey… have you heard of the Spirit Effect? It REALLY likes that. DOJ cites Spirit as saying that fares drop 17 percent when the airline enters a market. And it cites JetBlue saying fares rise by 30 percent when Spirit leaves.
The assumption by DOJ here is that if JetBlue takes over Spirit, then the Spirit Effect goes away and fares under JetBlue will rise. That is a safe bet. With higher costs at JetBlue, fares will have to rise.
Density, Going Down
The issue of rising fares isn’t just one of strategy. It’s also simple supply and demand. Spirit has more seats on its airplanes than JetBlue, and JetBlue has said it will convert the Spirit product into the JetBlue product. What does that mean? On an A321, for example, JetBlue has 200 seats on its non-Mint airplanes (fewer on the Mint ones) and Spirit has 228 seats. That means every flight added on an A321 operated by JetBlue has 12 percent fewer seats than if delivered to Spirit. That means there will be a lot fewer seats in the market even with the same number of airplanes, and that makes DOJ mad.
JetBlue has countered this by saying that it will make up for the lower density seating arrangement by increasing utilization. I find that hard to believe.
Oh Yes, the Traditional Arguments
The traditional arguments were rolled out here as well. The merger will reduce competition on overlap routes, primarily between the Northeast and Florida. DOJ says that there are 40 routes that are problematic, up to 150 if you include markets where the airlines have connections. Just on market share, this seems like a tougher sell considering all the precedent out there for much larger mergers. But it piles on top of the rest of the arguments. And some of those arguments… are just made up.
Speculation Rules the Day, But Only When Convenient
It’s pointed out in the complaint that Spirit has big growth plans, and in the “next five years Spirit plans to add nonstop service to several routes JetBlue flies today.” Somebody called Tom Cruise, because apparently precrime is a thing now. The merger is being dinged for future growth that may or may not actually happen.
Sure, airplanes are coming fast to Spirit, but JetBlue isn’t canceling those orders in a merger. It can’t compete with itself, of course, but it will still add competition to other airlines somewhere. More importantly, there is no way for the feds to know where those airplanes will go assuming Spirit takes delivery of them.
On the flip side of this, DOJ says that if JetBlue buys Spirit, half the ULCC capacity in the US will disappear and nobody will replace it. It notes how Spirit is 3x more likely than Frontier and 7x more likely than Allegiant to have at least daily service in a market; they just use different models. That sounds right for Allegiant, but let’s be clear on Frontier.
That airline is salivating as it waits for Spirit to exit the ULCC space. If DOJ is going to speculate on where future aircraft at Spirit will fly, then it should also be willing to speculate on what Frontier would do to replace Spirit in a vacuum. I have a hard time believing Frontier won’t quickly move to fill in the gaps on Spirit’s routes. It won’t fill them completely, but it has a ton of airplanes on order and clearly is interested in stepping in when JetBlue takes over.
DOJ Was Not Short on Fodder
Remember that JetBlue’s bid for Spirit was a hostile one. Spirit management spent a long time trying to convince its shareholders that the Frontier deal was better. At the same time, Spirit has been leading the charge opposing the NEA. Now DOJ has been able to throw a lot of those arguments back in the face of the airlines.
I think my favorite part was when DOJ included a slide from a Spirit presentation that was meant to help sway people to prefer the Frontier merger instead of JetBlue acquistion.
Seems pretty devastating coming from the airline now trying to get the merger approved. It’s as if DOJ didn’t really want to put much rigor into this, or maybe it just felt it didn’t have to. Instead it could just let Spirit do the talking.
Unlike previous cases, including in JetBlue’s Northeast Alliance fight, I don’t see a simple path to victory for the airlines here. From a non-legal standpoint, this does seem to reduce competition, eliminating a large low-fare player. I do, however, think that the government’s argument is poor with conflicting stances and problematic decisions on what to believe and what not to believe. What will the courts say? Beats me.