Why logic supports the merger of JetBlue, Spirit

SOMETIMES, THE MOST logical reasoning can lead to an illogical result. At any moment of the day, for example, you may be happier eating Swiss chocolate than baked tofu, but that does not make candy the right choice hour after hour. By the same logic, the recent decision by US District Judge William Young to block a merger between two smaller airlines on antitrust grounds appears correct at every legal turn, yet promises to diminish competition that could benefit consumers.

After a protracted bidding war in 2022, JetBlue, the sixth largest airline in the US, inked a deal to acquire Spirit Airlines, the seventh largest. The Biden Justice Department and several states sued to block the merger on the grounds that it would lessen competition and harm consumers. The two airlines, which have a history of bringing lower fares and new product innovation to the market, argued that, by combining, they would better be able to compete against the largest US airlines. After an analytically rich trial, Judge Young sided with the government.

Careful reasoning in the court’s decision ultimately focused on whether competition will be lessened in just a small number of routes where the two carriers overlap, not the larger national context.

After acknowledging that antitrust concerns could broadly be offset by new airlines entering the market or other “potential pro-competitive benefits,” Judge Young concluded that the relevant consideration is whether competition would be lessened for any one consumer.

Ultimately, he embraced the government’s heart-stirring example of “a college student in Boston hoping to visit her parents in San Juan, Puerto Rico” who “must rely on Spirit.” This is the customer the judge concluded would be harmed. “To those dedicated customers of Sprit,” he wrote, “this one’s for you.”

The problem with this logical analysis is that it denies JetBlue and Spirit all the tools to take on the big boys. Together, Delta, American, Southwest, and United carry over three quarters of all US airline traffic, a share which gives them advantages that are difficult to match when it comes to both sales and operations.

In the marketplace, airlines with a national footprint are at the head of the line for negotiating lucrative corporate travel deals, because corporations want a supplier that can meet all (or most) of their company’s air travel needs. At home, the largest airlines also benefit from scale economies in technology and analytics. They are able to spread the cost of advanced IT across a larger base, and then draw on the large datasets to improve operational efficiency. Similarly, their larger aircraft fleets give them more room to optimize schedules and buffer disruptions, like Pratt & Whitney’s engine problems that have recently caused Spirit to ground as much as 5 percent of its capacity, including a complete withdrawal from Denver’s airport.

Facing this dynamic, it would be reasonable to expect smaller airlines to add new planes and new routes as fast as possible so that they too could enjoy scale economies, Unfortunately, as a result of structural barriers, the best most airlines can manage is to grow by a few aircraft per month. There is a finite supply of available aircraft, a limited pool of commercial pilots for hire, and an iron lock on some of the most important airport gates and departure times. Relying on organic growth alone, it could be years before JetBlue or Spirit have the same reach as the largest US airlines.

The irony is that all of the large US airlines, including Southwest, which has historically followed a distinct business model, got where they are today through mergers. Today’s American Airlines is a relatively recent combination of American, US Airways, and Trans World (TWA).

The Delta behemoth was formed in 2008 when Delta merged with Northwest Airlines. United includes the former Continental Airlines. And Southwest acquired AirTran, with its almost 150 aircraft, in 2011. None of these companies would be where they are today through organic growth alone.

In the current case, JetBlue has been positioned as the predator, the large airline hungry to swallow its consumer-friendly competitor whole. This perception is partly of JetBlue’s own doing. In announcing the deal, JetBlue management made known its plan to remove seats from Spirit’s famously cozy cabins in favor of the more expansive JetBlue experience, and sunset Spirit’s howling yellow brand. In his decision,

Judge Young drew special attention to this point, making the case that Spirit plays a uniquely important disruptive role in the industry and consumers would be singularly deprived without it.

Undiscussed, however, is that at many times in recent history, JetBlue has played the industry’s renegade-in-chief. It was JetBlue that launched seat-back television when other airlines were still projecting stale movies on a single screen at the front of the cabin. JetBlue shook up the industry again when it introduced a competitive – and flat – first-class product on transcontinental routes at an affordable price, forcing incumbents to make new investments in their onboard products.

Over the years, JetBlue has formed partnership agreements with many long-haul airlines that have enabled the airline to start new international routes, especially in Boston, where airport operator Massport recently had to expand the international terminal. Indeed, a 2013 research paper described the way new service from a low-cost airline can bring down fares for all passengers as the “JetBlue Effect.”

In the time since JetBlue started its bid to take over Spirit, new challenges have arisen for both airlines. Neither carrier has announced a profit since then, and many observers believe that Spirit is in especially precarious financial condition. At the other end of the industry, Delta posted liquidity of $7.8 billion at the end of the third quarter.

Competitive dynamics in air travel are complex. Although most consumers focus primarily on price and schedule when choosing their flights, at least some — more often the higher value consumers — consider other amenities.

As Judge Young noted in his analysis, “An airline’s relevance and value to consumers often hinges not just on the price and specific route, but also its nationwide loyalty program, airport presence, national and international route network, and product offerings.” That is, an airline with more service nationally, and more product offerings, can sometimes have an edge.

In the current US airline market, the largest airlines hold this advantage. By prohibiting airlines number 6 and 7 from coming together, Judge Young has inadvertently strengthened the position of the largest incumbents. It’s logical.

Samuel Engel is a lecturer of marketing at the Questrom School of Business at Boston University.