For the first time in decades, the Department of Justice filed suit against an airline merger—and won. William McGee argues that the next fight is correcting false assertions concerning JetBlue and Spirit for the sake of future potential mergers, such as one between Alaskan and Hawaiian Airlines.
In January, Judge William G. Young of the United States District Court in Massachusetts ruled for the U.S. Department of Justice (DOJ) and seven states by permanently enjoining JetBlue Airways and Spirit Airlines from executing their proposed $3.8 billion merger. Young, who was appointed by President Ronald Reagan in 1985, concluded:“To those dedicated customers of Spirit, this one’s for you. Why? Because the Clayton Act, a 109-year-old statute requires this result—a statute that continues to deliver for the American people.”
To call either the ruling or the lawsuit itself unprecedented is an understatement. Together, the DOJ and Young have rightly ushered us into new territory by at long last slamming the brakes on 40 years of runaway airline consolidation, the first meaningful pushback against decades of mergers and acquisitions.
Lies & Statistics
Unfortunately, the decision immediately launched a host of misleading prognostications and even false conclusions by pundits, journalists, and social media influencers. Since Young’s ruling, there’s been a spate of media reports repeating unfounded assertions, quoting data and statistics incorrectly, and drawing wrong conclusions. There are five false assertions that need to be addressed.
MYTH #1: NATIONAL MARKET SHARE (NOT ROUTE-BY-ROUTE) IS WHAT MATTERS.
There’s been a concerted effort to downplay the sizes of JetBlue and Spirit, repeatedly referred to as America’s sixth and seventh largest carriers. Robin Hayes, who recently stepped down as JetBlue’s CEO, asserted: “This is not Pepsi buying Coke. Together we are going to be 8% to 9% of the market.” On that I certainly agree, though not for the same reasons. Because the “Pepsi-Coke” argument is irrelevant to the airline industry and highlights the unique problem of the airline cartel, and that’s why this argument fails on two levels.
First, as Young clearly stated, the U.S. airline industry is an oligopoly comprising the “Big Four” of American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines, and JetBlue has shown that it’s a cooperative player in such an oligopoly, particularly through its Northeast Alliance marketing and codeshare agreement with American Airlines. This isn’t about JetBlue-Spirit commanding 8%-9%. It’s about how the Big Four—which currently control 80% of the domestic market—would become the Big Five controlling some 88% of the U.S. market if the merger was approved. The analogy doesn’t even work on its own terms; soft drink behemoths Pepsi and Coke control a smaller percentage of the U.S. soda market, at 71%, less than the Big Four do of the airline market.
Second, the Pepsi-Coke analogy fails to capture the unique anticompetitive nature of commercial aviation in the U.S. Simply put, even the duopoly of Pepsi and Coke still compete vigorously with each other and in virtually every zip code in America. A shopper in any grocery store from Maine to Hawaii or Florida to Alaska can choose both Pepsi OR Coke. But air travelers in the U.S. are never given the choice to fly on every U.S. carrier, even on the busiest and most congested routes. Therefore the most relevant market share data for airlines is on a route-by-route basis, not on the national level.
Gautam Gosrisankaran, a Columbia University economics professor, summed it up when he testified for the DOJ:
Let’s say we were looking for a market of coffee shops around the courthouse in Boston. And we added in coffee shops that were say, in New York near my office. Then that’s not going to illuminate competitive effects, because if you raise prices for coffee shops here in Boston, nobody’s going to go to New York to get their coffee.
On the route-by-route level and at individual airports, both JetBlue and Spirit have large footprints; what’s more, they compete in 183 markets and head-to-head on more than 51 nonstop routes. For example, the Department of Transportation’s (DOT) Bureau of Transportation Statistics shows that JetBlue commands the largest market share in New York/JFK at 35.83% and in Boston at 29.50%. Similarly, Spirit is the largest presence in Fort Lauderdale, at 26.98%, directly ahead of JetBlue at 19.32%. Spirit also is second to Southwest in Orlando (17.64%) and Las Vegas (16.03%). Air travelers in all these cities do not view either carrier as #6 or #7.
In Detroit, Spirit flies 19 nonstop routes and is the only competitor to American, Delta, and/or United on 11 of those routes. At Chicago/O’Hare, Spirit operates 13 nonstop routes and is the only competitor to American and/or United on seven of those routes. And it’s crucial to remember that DOT data confirms consumers benefit from lower fares due to Spirit’s mere presence on a route even if they never fly Spirit.
MYTH #2: JETBLUE WILL COMPETE VIGOROUSLY AGAINST THE BIG FOUR.
I was in the courtroom in Boston last fall when JetBlue’s attorneys made this argument that a larger JetBlue, having acquired Spirit, would fight the oligopolistic Big Four airlines on behalf of desperate consumers. Young saw through it: “Spirit has, since 2017, offered prices consistently lower than JetBlue and the legacy airlines.” Furthermore, an MIT study in 2016 found Low Cost Carriers like JetBlue cause fares to drop 8% in markets on average, while Ultra Low Cost Carriers like Spirit generate a 21% drop. In a stunning revelation last August, JetBlue filed redacted court documents confirming it planned to raise fares post-merger by “at least 24%” and “as high as 40%.”
Some of the most damning testimony at this trial came from JetBlue’s co-defendant, Spirit. Earlier, in 2022 Spirit had rejected an acquisition offer from JetBlue, opting instead to merge with Frontier Airlines and calling JetBlue’s deal “illusory.” In rebuffing JetBlue, a Spirit corporate presentation stated: “At its core, the JetBlue proposal represents a high-cost, high-fare airline buying a low-cost, low-fare airline with half the synergies coming from reduced capacity and increased fares.” Spirit also claimed “the so-called ‘JetBlue Effect’” on spreading low fares “has significant defects and overstates the impact of JetBlue on legacy carriers.”
JetBlue also competes with the legacy carriers far less than it claims; it continually aligns with the majors rather than the upstarts, even via its lobbying efforts. LCCs and ULCCs have their own trade group—National Air Carrier Association—but while Spirit is a member, JetBlue is not. Instead, JetBlue is part of Airlines for America, the lobbying organization for larger carriers, including all of the Big Four. JetBlue’s actions have made it clear for years that it has no intention of competing with the Big Four—it wants to join them and make it the Big Five.
Consider the Northeast Alliance agreement JetBlue had with American, whereby the two carriers coordinated schedules and pricing in some of the busiest American airports. In recent years JetBlue’s corporate strategy is clearly not to compete with legacy carriers on price.
MYTH #3: THE BIG FOUR AREN’T ACTUALLY THAT BIG.
Dozens of publications regularly contend that the Big Four oligopoly still faces robust competition, as National Review did when it stated they control 70% of the U.S. market, employing a Statista pie chart as evidence. What Statista and even the DOT continually ignore is that the “regional partners” comprising a large portion of the rest of the market—such as American Eagle, Delta Connection, United Express, and Alaska/Horizon—are actually carrying passengers on behalf of the larger carriers, and over which the Big Four still have pricing power and control.
For example, American Eagle flights, which customers book and purchase via American Airlines, are operated by six different carriers many travelers have never heard of: Air Wisconsin, Envoy, Piedmont, PSA, Republic, and SkyWest. And SkyWest, for example, commands a 2.8% slice of Statista’s pie. But SkyWest is not an airline you can book (Google them and try it); instead SkyWest flies on behalf of not just American, but also Alaska, Delta, and United.
MYTH #4: IT’S NOT AN OLIGOPOLY.
Others point to JetBlue’s small national market share to downplay the proposed merger’s importance. National Review asked: “How could a firm with one-tenth of the market and the fifth-largest firm in the industry be any sort of monopoly?” The distinction is pedantic, and the answer, of course, is what Judge Young wrote: “The airline industry is an oligopoly that has become more concentrated due to a series of mergers in the first decades of the twenty-first century, with a small group of firms in control of the vast majority of the market.”
Most Americans have very few airline choices thanks to mergers and consolidation. And the problem is even more acute in regional markets, where hundreds of domestic airports are served by only two or three carriers, or even only one. DOT’s quarterly airfare reports have unequivocally shown, for more than a decade, that if you fly a route exclusively served by any combination of American, Delta, and/or United, then you’re virtually guaranteed to be paying far more than national averages.Young said it best:
Summing it up, if JetBlue were permitted to gobble up Spirit—at least as proposed—it would eliminate one of the airline industry’s few primary competitors that provides unique innovation and price discipline. It would further consolidate an oligopoly by immediately doubling JetBlue’s stakeholder size in the industry. Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier.
MYTH #5: SPIRIT WILL GO BANKRUPT WITHOUT A JETBLUE MERGER.
Proponents of the JetBlue-Spirit merger often claim that the airline industry is so dysfunctional that mergers are the only way to prevent bankruptcies, specifically suggesting that Spirit would go bankrupt without the merger. (Note this same fear-mongering over bankruptcy is now being employed by pundits claiming Hawaiian will shut down if it isn’t acquired by Alaska.)
The case of Spirit is more unusual. Merger reviews have long incorporated “failing firm” and “flailing firm” defenses where companies can assert, and prove, that they would shut down absent a merger. When I watched the opening arguments in court, there was no suggestion Spirit would shut down without JetBlue’s acquisition. Rather, those arguments grew weeks later via social media, blogs, and media reports. But Spirit never made such a claim.
Nonetheless, in his ruling, Young discussed the failing firm defense and referred to claims that Spirit was “struggling financially” as a “Hail-Mary pass” to get the merger approved. He concluded JetBlue and Spirit “presented no evidence that Spirit was in such a dire financial situation that it had no hope for the future; instead, multiple Spirit executives testified that the airline had a plan to return to profitability.”
Indeed, three days after the court’s ruling, Spirit issued an investor update calling its performance and reliability “strong” while posting higher than expected revenue despite a loss in Q4 2023. That same week, a Spirit representative denied rumors of a bankruptcy reorganization: “Spirit is not pursuing nor involved in a statutory restructuring.”
Halting Consolidation
Our airline industry has never been so contracted. In 45 years of deregulation since 1979, there have been 45 airline mergers or acquisitions, averaging one a year; for context, there were a total of 11 in the 40 years of regulation (1938-1978). The U.S. now has 12 scheduled passenger airlines, the fewest total since the industry’s earliest days in the 1910s. For 14 years between 2007 and 2021, there were NO new-entrant airlines, the longest such stretch in U.S. airline history. The oligopoly of the Big Four—American, Delta, Southwest, and United—now control 80% of the domestic market, an unprecedented level of domination that continues to harm consumers, workers, corporations, cities, and even entire regions of the country. And Alaska Airlines and Hawaiian Airlines are up next.
As someone who testified numerous times in the House and Senate against airline mergers, such as United-Continental Airlines and American-US Airways, I had a ringside seat to the ineffectiveness of the DOJ across multiple administrations under both parties. The DOJ’s protests against mergers were tepid at best, like suggesting minor givebacks by forfeiting a few takeoff and landing slots at crowded airports. Then the Department’s rubber stamp came down time and again. Until recently that is. The current DOJ stepped up not only against the JetBlue-Spirit merger, but also against the American-JetBlue “Northeast Alliance” partnership, in which Judge Leo Sorokin also ruled in the DOJ’s favor in May 2023, in the same Boston court.
In April 2022, the American Economic Liberties Project filed comments with the DOJ and Federal Trade Commission calling for an immediate halt to the bleeding caused by rampant consolidation by placing a moratorium on all airline mergers and acquisitions.
Let’s hope Judge Young has indeed stopped the bleeding. Now we can begin the real work of restoring meaningful competition to the U.S. airline industry for the first time in decades.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
