|Written by:Rachel Chiu|
Government officials are eager to “fix” the airline industry. Over the holidays, two million Southwest passengers were stranded in airports across the country, prompting a Senate hearing and calls for regulation. The Biden administration is, yet again, using antitrust to remedy a problem it is ill-suited to solve. Now, the Department of Justice and Department of Transportation have taken action to halt JetBlue’s takeover of Spirit Airlines. Although the state of air travel could use some improvement, breaking up pro-competitive mergers and acquisitions is not the way to achieve that. By attempting to block the JetBlue-Spirit merger, regulators are effectively reinforcing the market power of larger airlines. The companies announced in October that stockholders approved the $3.8 billion deal. Although the transaction depended upon the required assent from regulators, Spirit and JetBlue anticipated that they would allow the deal to close by the end of the first half of 2024, at the latest. JetBlue offered to divest from all of Spirit’s assets in New York and Boston, along with five gates in Fort Lauderdale, to prevent the airline from commandeering these regions. However, the divestiture commitments failed to appease the Biden administration, and according to JetBlue’s CEO, Robin Hayes, the DOJ staff “came to the table with their minds made up.” It therefore came as no surprise when the Justice Department — joined by Massachusetts, New York, and the District of Columbia — sued to block the merger earlier this week. The complaint alleges that the transaction would eliminate the “largest and fastest-growing ultra-low-cost carrier” and increase fares. Ironically, regulators highlight existing consolidation in the airline industry without appearing to think through how, if their suit is successful, it could worsen this state of affairs. The proposed merger would increase JetBlue’s market share to 9 percent and position the company as the fifth largest U.S. airline, which would only be half the size of each of the “Big Four”: American Airlines, Delta, Southwest, and United. As noted by Senator Mike Lee (R., Utah), “What about the four airlines that control 80 percent of the market?” If regulators believe the airline industry lacks robust competition, they should celebrate this deal rather than condemn it. After all, companies must attain significant resources to become viable competitors against the Big Four. For example, Delta, the oldest domestic airline still in operation, maximizes profits by routing flight traffic from small cities through bigger ones. This process, known as the “hub-and-spoke” model, is not feasible for budget-friendly airlines that do not have such widespread reach. Competitiveness in this capital-intensive market requires scale. It is unreasonable to expect new entrants and small players to achieve economies of scale exclusively through their own means. The DOJ acknowledges that prohibitive barriers exist in the airline industry, yet describes Spirit as a company that can overcome it all: “Spirit has doubled its network in size and, before this deal, [was] expected to continue expanding at a quick pace. The acquisition stops this future competition before it starts.” While it is true that the ultra-low-cost carrier has found success within its niche, it is not enough to support the assumption that Spirit would become “future competition” for established carriers. The DOJ argues that it is trying to “preserve Spirit’s unique and disruptive role” from being diminished by the “rest of the industry — including JetBlue — [which] has been forced to respond to Spirit’s innovations and low prices.” Interestingly, the DOJ made a similar claim in 2021 when describing JetBlue as a “uniquely disruptive low-cost airline.” It is worth considering why such arguments might find support among the public. According to a 2022 Gallup poll, only 27 percent of Americans view the airline industry positively. And indeed the DOJ and DOT refer to the consumer experience in their statements. That said, some of the problems that travelers see in airports can also be attributed to the rising cost of fuel, inflation pressures, and the pandemic’s lingering effects. In 2020, airlines shut down routes and sent home their workforce to respond to the sharp decrease in demand. These changes have impacted travel, though they should not be conflated with the government’s antitrust analysis of competitive harm. If the DOJ wants to alleviate issues such as rising fares and deteriorating service, it should promote competition rather than restrict it. Ultimately, regulators have decided that the quantity of players in the airline industry is more important than competitive strength. That’s good news for the Big Four, less so for consumers.
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