When the dust stopped for a big round of airline mergers nearly a decade ago, four big companies took over the industry. The new merger may challenge this comfortable arrangement.
A battle brewing over the future of budget airline Spirit Airlines could lead to the emergence of a credible, albeit smaller, competitor to the industry giants. In February, Frontier Airlines and Spirit announced plans to merge, promising to create a national budget airline that would help keep fares low. JetBlue Airways this week made its own bid, worth $3.6 billion, to buy Spirit, which said late Thursday night it would consider the proposal.
Whether Spirit ends up merging with Frontier or JetBlue, the combined company could pose an even more serious threat to the country’s four largest airlines — American Airlines, Delta Air Lines, United Airlines and Southwest Airlines — which together hold a 66 percent share of the domestic market. The four operate in their own league, particularly at their central airports in cities such as Atlanta, Dallas, Houston and Newark, where each controls a significant share of gates and flights.
In an illustration of the unbalanced nature of the industry, Alaska Airlines, the fifth-largest airline last year, controlled just 5 percent of the domestic air travel market, while United, the fourth-largest, had nearly 13 percent. Frontier and Spirit combined will control 8 percent of the market, and JetBlue and Spirit together will hold more than 10 percent.
“You’re facing America, the US, the Delta and the Southwest with such massive fleets and market penetration,” said Samuel Engel, senior vice president and aviation industry analyst at ICF, a consulting firm. “It is plausible that a stronger No. 5 would make a stronger competitor.”
Of course, neither deal is considered certain, and in both groups, executives can struggle to integrate businesses. Integrating airlines, including computer systems and seniority ratings for pilots and flight attendants, has never been easy and has led to widespread flight cancellations and lengthy legal wrangling.
Any of the proposed mergers would also require the approval of antitrust regulators who under President Biden have encouraged defying deals that may have been passed in previous administrations.
“Both deals present a new challenge for antitrust agencies,” said Paul Dennis, who represented US Airways in its merger with American Airlines, which closed in 2013. Earlier in his career, he also reviewed mergers and acquisitions at the Department of Justice.
Mr. Dennis said regulators scrutinizing airline deals have historically focused on the impact of bringing together big, legacy airlines – those that have been in business for decades. This review, however, will explore whether there is a “unique rivalry” between low-cost airlines that are “worthy of protection” by the Department of Justice.
Regulators care about more than market share. They want to know how the proposed merger affects travelers, including whether the combined company would be able to raise prices significantly on the ways the two companies previously competed head-on. The Biden administration is uniquely focused on the impact of corporate deals on economic inequality, for example, through raising prices and suppressing wages. Legal experts said it is not always easy to predict the potential impact of any given transaction.
The merger between Frontier, which is centered in the west, and Spirit, which is centered in the east, would create an airline with a larger national budget that could pressure larger airlines to lower fares in more cities. But the deal will eliminate competition on competitive routes, which could hurt cost-conscious travelers.
In addition, Frontier and Spirit have been criticized for poor customer service, and Phil Weiser, the attorney general in Colorado, where Frontier is based, warned federal regulators last month that the merger “creates a real and urgent risk” that service could go wrong if the two companies were merged.
JetBlue already competes with four major airlines in cities like New York and Boston and could challenge them even more if it could get Spirit planes, airport gates and staff. Customers can benefit from a better flying experience thanks to the privileges offered by JetBlue. But Spirit’s ultra-cheap fares may not last because JetBlue tends to cater to more affluent travelers and is expanding premium services like business class seats.
Another factor that could complicate JetBlue’s bid to acquire Spirit is that it is already embroiled in an antitrust lawsuit brought by the Department of Justice. The department is seeking to nullify an alliance between JetBlue and Americans in the Northeast, a deal that one official described last year as a “virtual merger.” In its lawsuit, the agency said American, the nation’s largest airline, would use the partnership to “select a uniquely disruptive competitor.” JetBlue and the US company deny their deal is non-competitive and are fighting the case in court.
JetBlue executives said this week that they intend to continue the company’s partnership with American in the Northeast. They also said that buying Spirit would allow JetBlue to compete more aggressively with the Big Four airlines.
Some critics of corporate mergers differ in opinion and say airline mergers may be harmful to consumers and workers.
Under either agreement, the new larger airline will have more market power in certain cities, particularly Florida, a popular destination where all three airlines compete.
Diana Moss, president of the American Antitrust Institute, a left-leaning organization that has long advocated stricter enforcement of competition laws, asked the Justice Department to block the Spirit-Frontier deal. Ms. Moss and others published a study in 2013 concluding that airlines do not provide the benefits that mergers claim.
Senator Elizabeth Warren, a Democrat from Massachusetts, is another skeptic. “Aviation industry mergers have driven up prices for consumers and lower wages for workers, and the Department of Justice needs to closely scrutinize and challenge these proposed deals if necessary,” she said in a statement to The New York Times this week. Echoing a letter she and other lawmakers sent to regulators last month about the Frontier Spirit deal.
Since the industry was deregulated in the late 1970s, airlines have gone through successive waves of consolidation as they first sought regional, national and then international power. Financial problems, including a string of bankruptcies, in the 2000s led to the latest wave of large mergers, driven in large part by William Soilbar, an aviation consultant and research engineer at the Massachusetts Institute of Technology’s International Air Transport Center. them to survive.
“The latest round of consolidation was really all about balance sheets,” he said. “I don’t think these single companies would have succeeded.”
Existing deals seem to be about rapidly scaling up. That’s because the larger airlines have advantages. They can easily recruit pilots who are in short supply. Larger airlines also get lower fares and better service from aircraft manufacturers. The easiest way to grow at many airports is to buy another airline that has gates and slots for takeoff and landing.
But some analysts aren’t sure airlines can easily reap the benefits of big through mergers.
JetBlue stock is down more than 10 percent since The Times announced its bid to buy Spirit in part because investors aren’t sure JetBlue will be able to fully benefit from the acquisition.
Analysts speculated that JetBlue made its bid in part because it feared losing its business to Frontier-Spirit combined, which the company noted as a potential risk to its competitiveness in its annual report. This isn’t the first time JetBlue has tried to grow by acquiring another airline. She tried to buy Virgin America, but lost that deal to Alaska Airlines.
Even in ideal conditions, airline mergers can be difficult to implement. While there is some overlap between Spirit and JetBlue, for example in similar fleets, they operate differently. Spirit does everything in its power to keep costs and prices low. They charge extra for seat selection, hand baggage and close-to-close package seats. Likewise, JetBlue is trying to keep costs down but is trying to differentiate itself by offering more legroom and free wireless internet while flying.
“These are two completely different operators with very different IT structures, with very different company cultures,” said Robert Mann, an industry analyst and consultant.
Soul did not commit to any deal. This week, it said it was reviewing JetBlue’s unsolicited bid. By numbers alone, JetBlue’s all-cash deal is superior, offering nearly a 40 percent premium to Frontier’s original cash and stock offering, based on stock prices the day before JetBlue announced its offer.
Frontier can still raise its offer or change its configuration. (Spirit’s board originally favored a paid-in stock deal, according to regulatory filings, but Frontier shares have fallen since the deal was announced.) Frontier could also offer to pay any costs associated with the risk that regulators would challenge the merger in court. JetBlue guaranteed Spirit a reverse breakup fee if its deal was canceled due to antitrust concerns.
Some legal experts said that either agreement could win the support of regulators with some concessions, such as an agreement to withdraw gates at some airports.
“I still believe that at the end of the day, either of the two appealable deals is likely to be approved,” said Keri Tan, professor of economics at Loyola University in Maryland. “Whatever challenges the Department of Justice presents, concessions can be made.”