In July of 2022, JetBlue announced its plan to acquire Spirit Airlines in a massive $3.8 billion deal. The news of the potential merger caused Spirit Airlines stock to soar 60%—but this celebration from shareholders proved to be too soon. After over a year of negotiating and ultimately being sued by the Justice Department, JetBlue has lost its long battle to acquire one of its biggest competitors.
On January 16, 2024, the Justice Department announced that they had successfully blocked the potential merger. The court found that JetBlue’s proposed takeover of Spirit was unlawful under long-standing antitrust laws. The potential merger was said to do “violence to the core principle of antitrust law: to protect the United States’ markets—and its market participants—from anticompetitive harm”.
Did the court get it right? When taking a closer look at the purpose of antitrust laws and the economics behind them, blocking the merger was a no-brainer—and a huge victory for consumers.
Antitrust Laws
The first antitrust laws were passed by Congress in 1890 and were “aimed at preserving free and unfettered competition as the rule of trade.” The two primary bodies of law that govern competition today are known as the Sherman Act and the Clayton Act—the same laws enacted over 100 years ago. Unlike other bodies of law, Congress gave the court the authority to tailor antitrust enforcement through court jurisprudence, to determine whether certain acts were legal restraints of trade. Antitrust laws give the government, as well as consumers, a variety of avenues to enforce anticompetitive practices. In this case, the Antitrust Division of the Justice Department sued Jetblue and Spirit Airlines to stop the potential merger on behalf of consumers.
The Clayton Act specifically addresses whether a merger is permissible. Section 7 of the Clayton Act prohibits mergers and acquisitions if the merger "substantially lessens competition, or tends to create a monopoly." Central to these laws is the goal of protecting consumers in the United States. If the Clayton Act did not exist, larger companies would be able to limit competition and take advantage of consumers—which means consumers would pay higher prices in the long run. The Justice Department successfully argued that the merger would substantially lessen competition in violation of the Clayton Act.
Economics of the Airline Industry
Despite its near collapse during the onset of COVID-19 in 2020, commercial aviation in the US has continued to drive the economy and remain fundamentally important to the lives of millions. Every day, commercial airlines in the United States transport more than 2,500,000 passengers, over 59,000 tons of cargo, and operate just over 25,000 flights. Compared to 2021 where airlines continued to face demand and supply chain issues stemming from COVID-19, in 2022 and 2023, the American commercial aviation market has stabilized and has continued to grow to new heights. For the first time ever, at the end of 2022, American commercial aviation accounted for just over 5% of U.S. Gross Domestic Product (GDP).
While the number of flights continues to increase year after year and as the profits sustained by many airlines continue to balloon in the post-COVID marketplace, 2022 only saw the emergence of 10 new airlines – the lowest in recorded history. While many economists point to rising gas prices, supply chain issues, and policy changes as the primary catalyst, it has become increasingly clear that the commercial aviation industry is increasingly hegemonic and difficult to break into. For perspective, the “Big Four” – Southwest, United, Delta, and American Airlines – control over 74% of all the available airline seats every year, and the prices they set, are commonly considered the industry standard, and as such, are normally not subject to large, marketplace fluctuations. Therefore, any potential newcomers to the market must account for extreme barriers to entry, including high operational costs, access to consumers, and most importantly, prohibitively high startup costs that would keep most from getting its first plane in the sky. While the Big Four can reshuffle entire fleets, adjust pricing and timetables, and offer incentive packages to consumers on a moment's notice, smaller companies cannot, making it difficult for them to attract the same consumer base. Further, as airline pricing is largely elastic – meaning that as prices decrease, demand increases – any existing or new profit margins are to be collected at the top, not those at the bottom.
As the Big Four continue to dominate the commercial aviation market, many smaller, yet regionally, competitive airlines are struggling to compete. The economics are nearly becoming insurmountable, and many are seeing mergers as the only way to survive future pricing and operational issues.
Credit: JTOcchialini | Flickr
The Court’s Opinion
In his comprehensive 113-page opinion, U.S. District Judge William G. Young took a firm stance against the proposed merger between JetBlue Airways and Spirit Airlines, emphasizing the deal's anticompetitive nature by citing U.S. antitrust laws. Judge Young highlighted that the merger would essentially eliminate one of JetBlue's main competitors, Spirit Airlines, thereby undermining the essential tenet of antitrust law: shielding the American marketplace and its participants from the detrimental effects of unfair competition. This decision resonates with the broader legal and regulatory scrutiny that mergers and acquisitions, especially in critical sectors like the airline industry, are subject to under the Sherman and Clayton Act.
Judge Young identified the detrimental effects the merger could have on consumers, particularly those relying on Spirit's low-cost model. He cited examples of consumers, such as a college student in Boston and a large family planning a trip to Miami, who would be adversely affected by the merger due to increased fares and this reduction of choices. His ruling underscored the significant role Spirit Airlines plays in providing a competitive check on fare prices in the industry, noting that the merger would likely eliminate Spirit's unique, low-price model, ultimately leading to higher prices and reduced options for consumers.
Implications for Future Airline Mergers and Antitrust Enforcement
Judge Young's decision on the JetBlue-Spirit merger sends a clear signal to the airline industry about the current administration's stringent approach to antitrust enforcement. This ruling aligns with President Joe Biden's broader policy initiative to promote competition and limit corporate consolidation. The administration's stance has been evident in various sectors, not just airlines, as part of an effort to ensure that mergers and acquisitions do not lead to monopolistic practices or harm consumer interests.
The case may have lasting implications for how future mergers are approached and reviewed by regulatory bodies, particularly in industries where the competition is already limited. The judgment suggests that mere divestitures or promises of future competition may not suffice to mitigate antitrust concerns. Instead, comprehensive analyses that consider the merger's impact on consumers and the competitive landscape will be paramount.
Furthermore, the decision could embolden regulatory agencies to pursue legal action against mergers they view as anticompetitive more aggressively. It may also encourage companies to more carefully assess the antitrust implications of their merger plans, potentially leading to more negotiated settlements with regulators or reevaluations of merger strategies altogether.
Conclusion
The JetBlue-Spirit merger saga underscores the rigorous enforcement of antitrust laws aimed at preserving competition and safeguarding consumer interests. Judge William G. Young's ruling not only reaffirms the core principles of antitrust law, but also signals a cautious approach toward airline consolidations, reflecting broader policy goals to prevent corporate dominance and ensure market fairness for all participants. This decision ultimately benefits the average American consumer by fostering a competitive market that is likely to result in lower prices and more choices in air travel.
*The views expressed in this article do not represent the views of Santa Clara University.