A Look at DOJ’s Problematic But Not Entirely Insane Lawsuit to Stop the JetBlue/Spirit Merger

JetBlue, Mergers/Finance, Spirit

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.

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19 comments on “A Look at DOJ’s Problematic But Not Entirely Insane Lawsuit to Stop the JetBlue/Spirit Merger

  1. A really great summary.

    The B6/NK merger is ludicrous. Ludicrous because of the egregiously high price JetBlue would be paying for Spirit, and the subsequently massive integration costs it will have to assume to harmonize the fleets. The concentration in Florida is part of the problem. The NEA is another. JetBlue essentially wants to have its cake and eat it too. If only JetBlue ran a good, reliable operation, even with the challenges it faces at the airports that serve as its hubs (JFK, BOS), it would be more profitable and more capable of operating as a stand alone carrier without the need to merge and further eat into its razor thin margins and meager profitability.

    The NEA seems a bit more justifiable, in that it is a messy, convoluted solution to American Airlines’ long standing problem in NY of being large enough but too small to compete efficiently (a legacy of its unwillingness to exploit Chapter 11 in the wake of 9/11 and lower its costs, like the rest of the industry did). American probably needs JetBlue more than the other way around, and the synergies, while interesting, face a high hurdle over the advantages Delta and United offer to NY-area flyers.

    Lastly, the industry, and the US4 in particular, sucked up so much taxpayer money in 2020-2021 due to the pandemic and the DoJ is probably weary of a further outlay of federal subsidies in the event of another economic shock like COVID19 or a deep recession, which illustrates why, even as bulked up as the US3 have become (I don’t count WN in there, because WN is an even bigger mess), can’t withstand heavy losses for more than a handful of quarters.

    All that said, further consolidation in the industry is very probable, with AS, B6, NK, F9 all in play and eventually bound to fold into each of the US4.

  2. Excellent run-down.
    IMHO the winner in this mess will be F9 and possibly G4, and the loser will undoubtedly be AA.
    Perhaps someone should open a book…..?

  3. As a consumer I would like to see Spirit and Frontier become the Ryanair and EasyJet of North America by providing service to nearly all airports with a great mix of point-to-point service. Considering the quantity of aircraft on order, I see this coming in the not too distant future.
    When I learned that JetBlue was going after Spirit, I assumed the result would be that JetBlue morphs into a ULCC and would assume Spirit’s business model – similar to Frontiers transition to become a ULCC. Perhaps this would be the case if not for their dominance at JFK.

    Anyways, I agree that Frontier will be the big winners here if the merger goes through. Now who will grow to join them in dominating the ULCC market?

  4. A big difference (at least that I see) between this and most of the past big mergers is that there’s no narrative of “X carrier cannot survive if they do not merge with Y”. JetBlue and Spirit are doing more or less fine on their own, so the merger isn’t going to save either of them from going bankrupt. A big selling point, at least for US/HP, DL/WN, and UA/CO, was that one or both of the premerger carriers either was going to bankrupt soon or recently was, so the alternative to merging was just failing, which is probably worse for competition, not to mention passengers and employees.

    This is more a matter of timing rather than anything else; fares are high, planes are full, and there’s no external circumstances like in 2020 or the early 2000s that depressed demand and caused carriers to suffer or go bankrupt. If JetBlue waited for a recession or some other reason for Spirit to do poorly financially they might be able to make this argument that competition would be reduced anyway if Spirit just failed on its own.

  5. Based on this summary, there are lot of weak spots in the DOJ’s argument. Just to start, on the “75% of JetBlue’s total capacity is tied up in the NEA…” – while this is true on the surface, how many of the B6 routes were actually being flown by AA before the NEA? A lot of B6’s capacity here is flying into JFK, where AA had limited domestic capacity before the NEA. Same for EWR. Boston may be more problematic.

    On Spirit’s fares, DOJ isn’t just going to be able to say “they’re an ULCC, so of course their fares are lower!” They’ll have to prove this with statistics, which will be really interesting to see. My personal experience has been that NK tends to be higher than competitors, especially when they’re the only airline offering nonstops (or at least daily nonstops) compared to connections on other carriers, I’m looking forward to seeing more data in this space.

    On unbundling: a nice basic argument, but they’ll have to prove that Spirit’s base fares are consistently cheaper than the basic fares being offered by other airlines AND that a meaningful number of Spirit’s customers don’t buy baggage services and assigned seats, or compare those fares to comparable fares on the legacy carriers and JetBlue.

    (Again, just a recent personal experience: I priced a May weekend trip to NYC two days ago, and will only have a personal item. For “basic” (no luggage) service, UA, B6, and AA were all cheaper than NK, and I’d get free seat assignments on them too. Looking forward to data that shows whether or not my experiences are typical.)

    I haven’t had a chance to read the full DOJ ruling (pesky job!) but it doesn’t look like the DOJ is considering barriers to entry for new competitors, and whether or not the B6/NK proposals to give up slots or space at impacted airports would allow for new entrants (or more service from existing competitors) to mitigate competition concerns. JetBlue doesn’t have to prove that there will be new entrants, just that it’s possible for new competitors to enter.

    That’s not to say the DOJ may not find a point to prevail on, but they seem to be throwing a lot of tangentially-related arguments at the wall hoping something will stick.

    1. “That’s not to say the DOJ may not find a point to prevail on, but they seem to be throwing a lot of tangentially-related arguments at the wall “hoping something will stick.”

      If that’s what they are banking on, then I’m sorry that will never stand up in court irrespective of the law or past rulings.

      As a conservative friend of mine said to me yesterday, if we really lived under capitalism the government wouldn’t be bailing out the airlines making them to big to fail. And now the DOJ & DOT are stuck fighting from a position of weakness. That said, I’ll leave the law to the lawyers.

  6. If only the DOJ actually looked up a fare, then went through the 5 or 6 step process to get to a final price and then saw that Spirit was not in fact any cheaper than anyone else (insert hidden fee SOTU rant here). Sure, you have the bare bones fare that you can utilize if you only take a day trip, or overnight….but then? As a small business owner flying employees around the country, and mostly long 3-4 hour segments, we’ve had great concern with the prices legacies have skyrocketed towards this year. So we’ve started looking at alternatives. Considering that we have to travel with a lot of luggage/cargo, and I like to take as much stress out of my employees travel by letting them pick seats, or extra legroom seats if they are tall (I’m 6’4”, and my tallest employee is 6’10”) by the time we fully price out a ULCC it’s just the same as a legacy (or worse) where we have status across multiple airlines and get those ancillaries included. Sorry, it might be $30 cheaper, but then I still have to pay for a snack, lol. After going through this process time and again the last few weeks, it’s a joke to think the legacies are even concerned about the fares ULCCs post and could really care less about capturing that segment of the market. Because THEY DON’T NEED TO. I’m not in favor or against the merger in any way, but in my anecdotal opinion it’s clearly disingenuous to say Spirit or any ULCC actually creates price competition for a flyer like me, despite me really wishing it did.

    1. The problem with your comparison is that you’re comparing legacy airlines after they’ve adjusted their fares and product (I.e. the introduction of Basic Economy) to compete with Spirit and the other ULCCs. The government is trying to make the argument that if JetBlue takes over Spirit, fares will go up.

      1. While I appreciate that thought – and can fully admit I could be on the wrong train of said thought – wouldn’t a product that is closer to the legacy’s offering, but cheaper, do exactly what JetBlue is saying it will do? Will it cause the fares to drop because it’s in the same space? Granted, I’m new to booking in the ULCC space, but I don’t see Basic Economy being today what it used to be, the gap has narrowed so much between it and a regular coach fare, that basically Basic Economy is for dupes. If I’m understanding your comment correctly, you are saying it’s specifically because there no discernment between a legacy and a ULCC fare once you’ve checked out, and that will be the reason fares will go up? Wouldn’t this actually help JetBlue’s argument that they are competing on a similar product basis and lower fares?

  7. Yet another great analysis, CF.
    A couple more points
    – You are absolutely correct that the DOJ is undoubtedly recognizing that previous merger decisions may not have been in the best interest of consumers. While many people continue to harp on the legacy carriers and JBLU itself argues that it should be allowed to do what the legacy carriers did via consolidation, the biggest offender of removing a competitor in true overlap markets was Southwest in taking out AirTran in major duplicate markets. Fares did increase, service levels (schedules) are down and Southwest, which positioned itself historically as being a discipline to higher fares from the legacies is not fulfilling that role. Now, all LUV does is have lower fares at the top of the fare structure – which few people buy on the legacy carriers anyway. JBLU is now trying to position itself as taking the role LUV once held despite the overlap and other issues including removing capacity but nobody is convinced.
    – The DOJ also recognizes that having the government try to pick winners doesn’t work to take up the slack left from consolidation which is what JBLU is asking them to do with Frontier and Allegiant, the only two real possibilities to take enough ultra low cost share that is vacated by SAVE. Picking ALK to take AAL’s place at Love Field did not work and ultimately DAL got what it wanted anyway.
    – Whether JBLU wants to try to view the NEA and merger separately, it is clear that they are overlapping strategies that JBLU continues to try to pursue and the NEA esp. decreases the ability of JBLU to serve a “disciplinary” role in pricing and that is true w/ or w/o a merger. I still think that JBLU’s best option is to voluntarily downgrade the NEA to look like the AAL-ALK relationship and the chances of getting the merger approved go up dramatically.
    – SAVE’s slide which you provide is priceless in the DOJ’s case. Let’s not forget that SAVE intended to merge with Frontier but JBLU, fearful of being left out in yet another merger that made sense and probably could have been approved by the DOJ, jumped in and has created a monster that is very hard to defend. The DOJ is not lost on the dynamics that have taken place to get to the point of the lawsuit, and again, they are unparalleled in the history of the US airline industry, including among other legacy carrier mergers.
    There are legally defensible models that apply to merger analysis and some aspects of the JBLU/SAVE merger are problematic using those models which have been used in other airline mergers. Other aspects of the case are interpretation of the law which does change based on context. The fact that two different judges in Boston, one left and one right leaning are deciding JBLU’s two major initiatives will remove the possibility of charges of bias.

  8. Consumers have many complaints about airlines. Price is one of them. Consumers also complain about reliability, ancillary fees, and shrinking seat sizes, among other things.

    Is Spirit cheaper than JetBlue? Yes. Does that provide value for consumers? Maybe/Maybe not. The provided products are not the same. Considering that Spirit is also one of the highest margin airlines, they may be overcharging their customers for what they offer.

    Regarding reliability, Spirit and JetBlue both have had issues, as have many airlines recently.

    Spirit is a leader in charging ancillary fees. These fees are generally disliked among consumers. And I disagree with CF about these fees not being hidden. Spirit’s website does not show what these fees would be when checking airfares until after you select your flights and enter your personal information. Bag fees can be checked, but only with a separate inquiry on a different page. Other airlines (including JetBlue), show these fees up-front as options when clicking on each flight. Spirit’s extra fees are not transparent.

    Seat pitch is night & day between Spirit and JetBlue. According to SeatGuru, seat pitch on Spirit is 28″ vs 32″ on JetBlue. Among other airlines Delta, United, AA are 30-31″, Alaska is 31″, Southwest is 32″, Frontier is mostly 28″, Sun County is 29″, Allegiant is 30″.

    It is disingenuous for DOJ to say Spirit offers better value for consumers just because they have lower prices. There are numerous facets to what American consumers value and price is just one of them.

    1. Time and time again passengers booking flights show that they care about cost above almost everything else. They are happy to complain about any airline when things go wrong, but they still go and book the cheapest option the next time.

  9. This is another case where one administration looks at business differently than another. That’s not bad or good, it just is what it is (to use a tired cliche).

    Without repeating myself too much (which is hard because I tend to raise the same points over and over), I have to wonder (and there’s no way to know) if a Spirit/Frontier merger would have been blocked. CNBC’s Phil LeBeau reported that Frontier and Spirit overlap more than JetBlue and Spirit (which is why I’m raising the question). Either way, mergers eliminate competitors. Fewer companies in a given industry are, by definition, fewer competitors. That’s basic math.

    But … do fewer competitors automatically mean less competition? Put differently, when is the marketplace so fragmented that very few make money, and those who do can’t recoup their cost of capital? That was the airline industry post 9/11 (and throughout much of its history), before the latest round of bankruptcies and consolidation. Do we really want to go back to the time when virtually every major airline, including the world’s only perfect airline – Delta – filed for Chapter 11 protection?

    Rightly or wrongly, I would argue (and that’s all DOJ can do in its lawsuit) that fewer financially stable companies are able to provide more sustained competition than a plethora of weak ones can. No one can “recognize” what can’t be conclusively proven. They can only present opinions and arguments. There’s no concrete evidence I’ve seen that airline consolidation has decreased overall competition – in spite of the recent run-up in fares. Right now, there’s a shortage of qualified pilots, which is resulting in too many passengers chasing too few seats – the polar opposite of the situation post 9/11. The law of supply and demand suggests that reduced supply + increased demand = higher fares. I’ve seen no clear evidence (which is what’s required in a court of law) that the reduced supply of pilots has anything to do with airline consolidation. If someone can show me real evidence that I’m mistaken on any of the above points, then I’ll happily acknowledge my error(s).

    1. The problem post 9/11 was a collapse of revenue and the legacy carriers’ inability to cut costs. Now demand is high as are costs but legacy carriers are posting higher margins because they are better at generating high revenue.

      JBLU has argued that part of the reason for the merger is to gain pilots and planes and yet there are still new airplane orders in the hundreds being made while the legacy carriers are each hiring thousands of pilots per year. The problem for low cost carriers is paying the high bills and competing with the big old carriers.

      Won’t it turn the industry on its head if we see some low cost carriers declare C11 in the coming years?

  10. I love how the DOJ feels compelled to their argument to put the Spirit points they put out during the B6 hostile takeover for their shareholders, but negated the counterpoint that NK shareholders where brining up that the BOD of spirit had conflicted backdeal between Franke and his ex protege Ed Christie. Which was called out by B6 and NK shareholders, ok so there is that big nugget they won’t talk about. So that slide was just a ad piece convincing the NK shareholders to the point later we find to be disingenuous, which is why NK BOD was rejected by the NK shareholders. For the DOJ tp put that slide KNOWING it had inherit bias when Spirit BOD was trying to do well with their ol pal Franke is poor on their end, especially since there is no evidence to back it.
    Then there is the POTUS in the SOTU, the guy with the DOJ face saying how they want to crack down on airline fees, and the DOJ is lapping up the idea that spirit is a darling for brining fares down, again no evidence, and data would suggest otherwise when all regualr fees are involved in most cases, to the airline that is the godfather of a la carte fees in which Spirit had been sued in the past couple years for bad sales practice.
    These points by the DOJ are looking pretty weak. And I haven;t even touched how its for anti-monopoly case when said carrier will be a distant 5 and let the big 4 and the true Big 3 have a triopoly on the full network across the US and beyond.

    1. with all due respect, the allegations of a back door or behind the scenes deal between F9 and NK impacted what SAVE stockholders could get rather than impact the competitive situation for consumers. SAVE stockholders will get paid a whole lot of money regardless of how the merger plays out and could make more the longer it takes for approval.

      Your point about fees is valid; the administration seems to want to keep alive an airline model built on unbundled pricing while attacking larger airlines that do the same thing for a segment of customers. At the legacy airlines, whether your pricing is unbundled or not depends on the type of fare you buy while with the ULCCs including SAVE, nearly everyone is unbundled. And it is not clear for any airline what fees you will run into until you get well into the booking process. Southwest is at one end of the spectrum because they include alot in the basic price that other airlines charge separately for with Spirit on the other end but it is doubtful that the DOJ or DOT will succeed at eliminating fees and unbundling but rather require better disclosure earlier in the shopping process. Short of repealing the Airline Deregulation Act of 1978, all the government can do is complain and force greater disclosure. Various models benefit different groups of customers in different ways.

  11. Given that ULCCs fly the same aircraft and pay the same price for fuel, and with pilot shortages and massive pilot pay increases, there are fewer and fewer ways for ULCCs to have significant cost advantages, other than cramming in more seats. The fee game is basically a game, sell at a lower price but lard on the extra charges. A few customers can win at that game, but many won’t. People with credit cards may do better with one of the legacies if their credit card covers a bag or seat assignments .

    So long as airports are not slot or gate constrained, new ULCCs will emerge or grow to serve the ULCC niche.

    While I agree that JetBlue’s price for Spirit seems insane and will be hard to pencil out, I think the broad base of consumers will be better served by letting JetBlue better compete with the Big 4 than by keeping JetBlue subscale. Of course that is what the Big 4 want and maybe even the pilot and flight attendant unions. But new ULCC competition will grow up to fill whatever niche Spirit leaves unfilled. And a better competitor to the Big4 will serve most consumers better.

    DOJ should go pound sand.

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