The US Justice Department has sued to block the proposed merger between Spirit and JetBlue. This is big news, even though it was expected. The US has not interfered with an airline merger in the past 20 years.
“If not blocked, the merger of JetBlue and Spirit would result in higher fares and fewer choices for tens of millions of travelers across the country. The Justice Department is suing to prevent that from happening,” said AG Garland. “Companies in every industry should understand by now that this Justice Department will not hesitate to enforce antitrust laws and protect American consumers.” This is something of a sea change. Concern for consumers and airfares were not a priority for over two decades. This is why the big four airlines control ~80% of the market.
JetBlue CEO Robin Hayes told “CBS Mornings”: “We said when we got the offer approved by the Spirit shareholders last year that we didn’t think we would close until the first half of 2024, expecting a trial.” That said, we should expect to see the airline’s Plan B. Since the pushback was anticipated, there has to be one. Codesharing is undoubtedly one way to go.
The chart below lists the average fares and traffic volume from 2015 through 3Q22. Fares were declining and then dropped precipitously during the pandemic. However, fares rose markedly from the pandemic compared to the traffic recovery. This happened because the supply of seats has been slower to recover than demand. The pilot shortage guided airlines to cut back on flight capacity – even though flying larger aircraft might increase the number of seats in the market.
The following chart lists 2022 average fares for the top 20 destinations in descending order. There is a wide range of fares from #1 to #20. This suggests a relatively efficient market. The market is a rational oligopoly. Mergers are the way this industry has always worked.
The Justice Department’s concern for reduced competition and rising airfares comes too late. Airlines must chase lower costs; merging is a sure way to move down the long-term cost curve. At best, the DOJ can slow down this deal. The pressure to move down the cost curve for an airline is imperative. Economies of scale require it. What does the DOJ do if this deal gets held up and Spirit returns to negotiating Frontier? Does this DOJ lawsuit take Alaska Airlines off the merger target list?
The US airline industry is highly competitive; players match and adjust to each move. That means every US airline has a Plan B they are dusting off as the DOJ makes its call. Not one of these plans will lower fares or increase competition. These are rational players.
Airlines are run for the benefit of shareholders. Consequently, they focus on profit optimization. If that means tighter seats, and higher fares, guess what? The DOJ’s new-found concerns are a bit laughable.
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.