Smaller airlines that operate in the shadows of the country’s four dominant carriers are feeling increasing pressure to merge with others to gain access to more planes and airport gates.
That dynamic was highlighted in federal court in Boston on Tuesday as JetBlue Airways tried to convince a judge to let it buy Spirit Airlines for $3.8 billion. This was also the case last weekend when Alaska Airlines proposed acquiring Hawaiian Airlines for $1.9 billion.
The outcome of those deals could be crucial for the companies and the U.S. airline industry, where four companies control more than two-thirds of the national market and exert dominance over major airports in places like Atlanta, Dallas-Fort Worth and Newark. If one or both mergers are approved, the deals would be the largest in years.
The last major wave of airline mergers ended with American Airlines merging with US Airways in 2013. In addition to American, the industry is now dominated by Delta Air Lines, United Airlines and Southwest Airlines. Each of these companies controls so many gates and takeoff and landing sites at their hub airports that they are unlikely to ever lose more than a small percentage of travelers flying to and from these cities. Larger airlines also generally pay less for aircraft and other equipment because their size allows them to negotiate better deals.
“The power of size in this industry is enormous,” said Christopher Raite, senior analyst at Third Bridge, a research firm. “There are just these inherent advantages that size gives you.”
The dominance of the four major airlines figured prominently in JetBlue’s defense arguments in a Justice Department federal antitrust case against its acquisition of Spirit. In his closing argument Tuesday, JetBlue attorney Ryan Shores said smaller airlines “need the network breadth to compete with the larger airlines.”
Justice Department lawyer Edward Duffy countered that the sale would eliminate a small but important source of competition. Spirit typically sells tickets for less than JetBlue and other airlines. And he claimed that more than 135 million airline passengers per year would suffer if Spirit no longer helped drive down prices on the routes those travelers fly. The acquisition, Duffy said, would transform JetBlue into a market-dominating giant with which it ostensibly wants to compete.
If the Spirit acquisition goes through, JetBlue would have a market share of more than 10 percent, compared with the 16 percent controlled by United, the smallest of the big four airlines. Alaska and Hawaiian together would have a share of 8 percent.
In the lawsuit, heard before Judge William G. Young of the U.S. District Court for the District of Massachusetts, the government argued that the takeover would reduce competition, particularly on the 262 routes on which the airlines compete, according to Duffy. The merger would increase JetBlue’s market share to more than 50 percent on more than a dozen routes, according to data analysis by Cirium, an aviation data provider. All of the newfound dominance would extend to routes to and from Florida, where Spirit is based, although the impact may be smaller as airlines plan to give up some airport access if the deal is approved.
The Justice Department also argued that Spirit was unusually disruptive, accounting for about half of all services offered by the country’s low-cost airlines.
In his closing argument, Mr. Duffy argued that the idea that other airlines would fill the void left by Spirit required a “simply breathtaking” level of confidence that these companies would “grow faster than ever before and even more so that they will.” “Take on the legacy airlines in ways they have never done before, flying in ways and in places that are fundamentally at odds with their established business strategies.”
A larger JetBlue would be more likely to copy the big four airlines by charging relatively high fares, the government said. In addition, JetBlue plans to reduce the number of seats on Spirit jets to match its own, more spacious configuration, which the government says would further drive up ticket prices. The Justice Department estimated the deal would ultimately cost consumers $1 billion to $2 billion annually in higher rates.
In defending the merger, JetBlue pointed to its history of disrupting the industry, a fact the Justice Department acknowledged last year when it successfully sued in Boston and New York to break up an alliance between JetBlue and American. JetBlue said with more planes and routes, it would be able to poach more passengers from the major airlines, forcing them to cut prices or work harder to attract or retain customers.
The combination of JetBlue and Spirit would provide “the scale to become a viable, disruptive fifth national challenger to the industry’s dominant airlines in the coming years,” said Mr. Shores, a partner at law firm Cleary Gottlieb Steen & Hamilton.
JetBlue also announced it would give up access to some takeoff and landing slots at airports in New York, Boston and Florida, where JetBlue and Spirit had significantly high market share. The airline accused the government of being too short-sighted in focusing on a small number of routes rather than the national benefits of the agreement. Airlines can and do shift routes and aircraft opportunistically, and some will undoubtedly compete with the larger JetBlue while taking some of Spirit’s business, the airline argued.
JetBlue, the Justice Department and many experts agree that the industry is overly concentrated. Previous governments allowed large mergers that led to the dominance of the big four airlines.
Under President Biden, the Justice Department is trying to aggressively enforce antitrust laws, primarily by preventing further consolidation.
Of course, this strategy is unlikely to make the industry more competitive than it is now, especially at airports where the four largest companies already dominate. For example, more than half of flights to or from Dallas-Fort Worth International Airport were operated by American last year, according to Cirium. United controls a similar share of flights at Newark Liberty International Airport. And about two out of every three flights that departed or arrived in Atlanta last year were operated by Delta.
Fewer competitors also increase the likelihood that companies will at least tacitly coordinate with each other, say antitrust experts. Company executives can more easily monitor changes to their competitors’ fares and schedules and adjust their own tactics accordingly when there are only a few large companies. Companies are also less likely to engage in brutal price wars because there is little point in each company having its own hub airport from which it flies most of its planes.
“Usually smaller competitors are the ones that break ranks,” said John Kwoka, an economics professor at Northeastern University and an antitrust expert who has advised states and the Justice Department on airline mergers. “If everyone else is buying something for $100 and you are a small competitor and can set the price at $70 or $80, you can gain a lot of market share and business over the big sellers.”
Founded in 1999, JetBlue quickly found its footing and became one of the few airlines to remain profitable after the Sept. 11 terrorist attacks. The company gained a reputation as a fighting force. In a 2013 white paper, researchers at the Massachusetts Institute of Technology found that airfares fell when the airline operated in a market, calling it the “JetBlue effect.”
But some airline analysts say JetBlue has lost its distinctiveness in recent years as it chases premium travelers and profits.
If the deal goes through, JetBlue would expand its fleet and workforce by more than 50 percent, operating more than 450 aircraft and employing about 34,000 people. JetBlue operates primarily in Boston, New York, Los Angeles and several destinations in Florida. Spirit’s network is more diffuse, but is particularly dense in Florida and the East.
The judge in the trial did not say when he expected to make a final decision. JetBlue has announced that it will complete the integration of Spirit operations no later than the first half of 2024.