Smaller airlines that operate in the shadow of the nation’s four dominant air carriers are increasingly feeling pressure to merge with others to gain access to more planes and airport gates.
Those dynamics were on display in a federal courtroom in Boston on Tuesday where JetBlue Airways tried to persuade a judge to let it buy Spirit Airlines for $3.8 billion. It was also at play this past weekend when Alaska Airlines proposed acquiring Hawaiian Airlines for $1.9 billion.
The outcome of these deals could be pivotal for the companies and the U.S. airline industry, in which four companies control more than two-thirds of the national market and exert dominance over big 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 when American Airlines combined 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 those companies controls so many gates and takeoff and landing slots at their hub airports that they are unlikely to ever lose more than a small percentage of travelers flying to and from those cities. Bigger airlines also generally pay less for planes and other equipment because their size allows them to negotiate better deals.
“The power of size in this industry is tremendous,” said Christopher Raite, a senior analyst at Third Bridge, a research firm. “There are just these inherent advantages that size gives you.”
The dominant position of the big four airlines featured prominently in JetBlue’s defense arguments in a federal antitrust case brought by the Justice Department against its acquisition of Spirit. In his closing arguments on Tuesday, Ryan Shores a lawyer for JetBlue, said that smaller airlines “need the network breadth to be able to compete with the larger airlines.”
The Justice Department’s 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 contended that more than 135 million airline passengers a year would suffer if Spirit was no longer helping to push down fares on the routes that those travelers fly. By acquiring it, Mr. Duffy said, JetBlue would turn into the kind of market-dominating giant that it says it want to compete against.
If it completes the Spirit acquisition, 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 would have a combined 8 percent share.
In the trial, which was argued before Judge William G. Young of the U.S. District Court for the District of Massachusetts, the government argued that the acquisition would reduce competition, especially on the 262 routes where Mr. Duffy said the airlines compete. The merger would increase JetBlue’s market share on more than a dozen routes to more than 50 percent, according to an analysis of data from Cirium, an aviation data provider. All of that newfound dominance would be on routes to and from Florida, where Spirit is based, though the impact may decrease because the airlines plan to give up some airport access if the deal is approved.
The Justice Department also argued that Spirit is unusually disruptive, accounting for about half of all service offered by the nation’s lowest-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 staggering” level of faith that those companies would “grow faster than they ever have before and then some, that they would take on legacy airlines in a way they never have before, that they would fly in ways and places fundamentally at odds with their established business strategies.”
A larger JetBlue is 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’s jets to match its own roomier configuration, which the government said would further drive up ticket prices. The Justice Department estimated that the deal would ultimately cost consumers $1 billion to $2 billion annually in higher fares.
In defending the merger, JetBlue has pointed to its history of disrupting the industry, a fact acknowledged by the Justice Department last year when it successfully sued to strike down an alliance between JetBlue and American in Boston and New York. With more planes and routes, JetBlue said it would have the ability to lure away more passengers from the big airlines, forcing them to cut fares or work harder to win or keep 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 for years to come,” said Mr. Shores, a partner at the law firm Cleary Gottlieb Steen & Hamilton.
JetBlue has also said it would give up access to some airport takeoff and landing slots in New York, Boston and Florida, where it and Spirit would have a substantially high share of the market. The airline accused the government of being too myopic in its focus on a small number of routes, rather than the deal’s national benefits. Airlines can and do shift routes and planes opportunistically, and some will no doubt compete with the larger JetBlue while picking up some of Spirit’s business, the airline argued.
One thing that JetBlue, the Justice Department and many experts agree on is that the industry has become overly concentrated. Previous administrations allowed large mergers that ushered in the dominance of the big four airlines.
Under President Biden, the Justice Department is seeking to aggressively enforce antitrust laws, chiefly by preventing further consolidation.
Of course, that strategy is unlikely to make the industry more competitive than it is now, especially at airports where the four largest companies are already dominant. Over the past year, for example, more than half of the flights into or out of Dallas-Fort Worth International Airport were operated by American, according to Cirium. United controls a similar share of flights at Newark Liberty International Airport. And about two out of every three flights that left or arrived in Atlanta in the past year were operated by Delta.
Having fewer competitors also increases the likelihood that companies will at least tacitly coordinate with one another, antitrust experts said. Corporate executives can more easily monitor changes to fares and schedules of their competitors and adjust their own tactics accordingly when there are just a few large companies. Companies are also less likely to engage in bruising fare wars because there is little to gain when each business has its own hub airports from which they fly most of their planes.
“Smaller competitors, typically, are the one that breaks 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 purchasing something for $100 and you’re a small competitor and can price it at $70 or $80, you stand to gain a lot of share and business against the major sellers.”
JetBlue was founded in 1999 and quickly found its footing, becoming one of the few carriers to remain profitable after the Sept. 11 terrorist attacks. The company earned a reputation as a scrappy, force. In a 2013 white paper, researchers at the Massachusetts Institute of Technology found that when the airline operated in a market, fares dropped, calling it the “JetBlue Effect.”
But some airline analysts say that JetBlue had lost its maverick ways in recent years as it chased premium travelers and profits.
If the deal is allowed to go through, JetBlue would expand its fleet and work force by more than 50 percent, operating more than 450 planes and employing about 34,000 people. JetBlue primarily operates in Boston, New York, Los Angeles and several destinations in Florida. Spirit’s network is more diffuse, but is particularly dense in Florida and in the East.
The judge in the trial did not say when he expected to issue a final decision. JetBlue has said it plans to finish integrating Spirit’s operations no later than the first half of 2024.