Senator Elizabeth Warren asked the DOT to block JetBlue’s proposed acquisition of Spirit Airlines with a very strange basis for her request.
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JetBlue’s Spirit Airlines Acqusition
Earlier this summer, JetBlue Airways attempted to thwart a merger between Spirit Airlines and Frontier Airlines that would have created the largest Ultra-Low-Cost Carrier in the US and the fifth largest airline in the United States after the “Big 4”, American, United, Delta, and Southwest.
JetBlue made ever-increasing bids to buy Spirit after missing out on a chance to buy Virgin America a few years ago (which ultimately was acquired by Alaska Airlines.) The carrier wanted an opportunity to grow and by buying the carrier, it could instantly increase its aircraft (that align with its) fleet, as well as hard-to-come-by flight attendants, pilots, and crews.
The acquisition faces significant hurdles to regulatory approval due to the DOJ suing JetBlue and American Airlines over its prior approved Northeast Alliance (NEA) codeshare agreement. The trial is set to begin on September 26th, 2022.
While JetBlue CEO, Robin Hayes, is rather confident the Spirit deal will be affirmed, reasonable doubt exists based on the fact that the DOJ is already taking the carrier to court.
Senator Warren Asks Department of Transportation To Block Merger
Rather than go through yet another Department of Justice suit, Senator Elizabeth Warren (D – Massachusetts) has suggested the Department of Transportation simply say “no” to the transfer of certificate citing an antiquated law.
“Senator Elizabeth Warren urged federal airline regulators to block JetBlue Airways Corp.’s proposed merger with Spirit Airlines Inc. by invoking a rarely used authority from the 1950s to argue that the $3.8 billion deal isn’t “consistent with the public interest.” – Bloomberg
The law forgoes any need for the DOJ to build a case denying the acquisition and instead citing simply that the public interest wouldn’t be well served by JetBlue swallowing Spirit.
Without doubt, JetBlue would file suit against the DOT if this action was taken, not only for its significant financial investment in the current deal, the rare use of the law, but also that the DOT would then have to prove that it was not in the best interest of consumers. This burden of proof transfer would make the DOT’s ability to uphold its decision significantly more difficult.
Warren Might Have The Right Result, But Wrong Logic
Senator Warren cited in her letter some of the reasoning behind her position:
“Airline industry competitiveness is in free fall, and consumers are feeling the consequences. Today, the four largest airlines—American, Southwest, Delta, and United—control 80% of the domestic market, more than at any point in the modern history of commercial aviation. This dominance has been achieved through a series of airline mega-mergers that have reduced service quality and increased fares, and has contributed to the increase in delays, cancellations, and involuntary rebookings that airline passengers experience today. Consumer complaints to DOT have increased more than 300 percent from pre-pandemic levels, and air fares have outpaced inflation.” – Senator Warren
However, prior airline mergers don’t necessarily mean that JetBlue shouldn’t be able to acquire Spirit. That suggests that solely by being last to the party, JetBlue is ineligible. JetBlue would have a case in this instance as well to sue either the DOT or DOJ that they should be given at least the same opportunity to grow in the way that the Big 4 have.
It’s not just JetBlue and its premium offering that might price out Spirit customers that has Sen. Warren up in arms. In March, she argued that creating the world’s largest ULCC would be just as concerning for US air travelers. The Senator also names Delta, United, American, and Southwest – all of which merged or acquired other carriers – but fails to mention Alaska Airlines which did exactly what JetBlue attempted to do years ago with Virgin, and now with Spirit.
This site has mentioned many times in the past that if Airbus had a surplus of A320s available, and thousands of pilots, and tens of thousands of support staff were all available – neither the DOT nor DOJ could (or should) have any basis for stopping JetBlue from adding them to its business. If this was a true purchase that didn’t eliminate a competitor, there would be nothing wrong with this purchase at all.
Sen. Warren also failed to mention that JetBlue had the second most delayed flights in June, and was a consistent source of consumer complaints. Spirit, for the avoidance of doubt, did not make the top 3 on the same list. Alaska, who merged with Virgin, had better on-time flight rankings (1st), fewest cancelled flights (2nd) as well.
What is most confusing to this writer is why Senator Warren has essentially voiced support for the status quo for which she vehemently opposes. By suggesting that the Frontier-Spirit merger would be bad for consumers because airline mergers of traditional airlines have not gone in the customers favor, despite that proposed deal making a very large ULCC, she has also opposed expansion by acquisition because bigger airlines = bad.
But that just keeps the Big 4 big and the littler five fighting amongst each other in a pen that the Big 4 don’t play in. The system she despises, she is keeping as-is by coming out against both deals. And if both deals would have only led to more customer concentration, then how have those carriers been able to grow their position to “more than at any point in the modern history of commercial aviation?” Perhaps the Senator can explain how maintaining smaller carriers, which by her own words has proven ineffective, will somehow become more effective in the future by continuing the same system.
What I consider most shocking about the Senator’s approach is that it disadvantages a significant employer in her constituency. Due to temporary cancellations, JetBlue only recently ceded marketshare to Delta at Boston Logan International Airport. Still, JetBlue has been a huge carrier for years in Boston, and holds about 30% of departures. For one of the state’s largest employers trying to get bigger and edge out these mega-airlines, wouldn’t it make sense that she back such a move? Wouldn’t Massachusetts voters want her to fight for companies that provide jobs in her state, and not against them?
While the Senator is clearly misguided in her approach to the concern, I too would like to see Spirit stay independent or form a larger ULCC carrier to challenge the Big 4. However, this is because I see the ULCC market as less homogenous than network carriers. For example, Spirit has a robust loyalty program, it serves business markets, and flies primarily to large municipal airports with a regular schedule. Frontier flies less regularly, dodges business markets, has a weaker loyalty program, and chooses secondary airports more often. Allegiant, even less frequent, serves still smaller tertiary markets to secondary airports (like Grand Island, Nebraska to Mesa, Arizona) and a limited loyalty program, applying almost no pressure at all to the business markets that push prices to nosebleed levels amongst the Big 4.
Senator Warren has the right answer, but when she shows her work, it’s a miracle she got there in the end. She suggests that the DOT can simply wave a magic wand to make the challenge of JetBlue’s acquisition go away, she proposes remedying a market dominated by a few players, by keeping it the way that it is now, and she does so at the detriment of the people she represents. We hold third graders to a higher standard on math quizzes (rejecting the answer if the path to achieve it was wrong) than we do the good Senator. The truth is, if the DOT followed her recommendation, the acquisition could be even more likely to be approved based on the unqualified use of a rule that hasn’t been enacted in 70 years and ignoring how other companies were permitted to grow but JetBlue should not be.
What do you think? Is the Senator right? What about her proposed methodology?
She’s on the war path.
She’s always on the war path!!
I don’t think Spirit and JB should be allowed to merge, especially if the NE Alliance remains in place. However, just say “no” is not going to fly in the courts. I can easily see an appeals court saying that the law is too broadly written to have a narrow issued decided upon…..and declaring it unconstitutional. She knows better. Seems she was just trying to send something out the door rather than do nothing.
El Lewis… the only thing unconstitutional would be blocking their merger. We live in America (not sure anyone remembers that anymore) WTF should stop a business from merging. It is NOT a monopoly whatsoever. Spirit / JetBlue’s biggest base would be FLL where they would combine for 50% of the traffic. Are you saying that Delta / American/ SW/ United must now go back and un-merge? Spritis BIGGEST base gives them a smaller % of traffic than any other airline hub out there! LOOK at all the code sharing the big 3 do…. no one stops them, not much anyway. So they get to MERGE…code share and do whatever they want but the little guys cannot merge. Even with the NEA, they are smaller than DL at JFK. On a side note.. I’ve never know someone who likes or trusts Elizabeth Warren has a good plan for anything, so maybe this is a good thing. F*** all these leftists who will not let American thrive.
Surely it’s Doug Parker and Robert Isom, not all the “Leftists” keeping American from thriving, right? I give AA a ton of money and I’m super liberal. No way I’m the one holding them back!
Sounds like something has been ruffling her headdress feathers.
Why can’t JetBlue be nationalized with Warren as the CEO?
Kyle, respectfully, you’ve got it all wrong. US airlines have been allowed too much consolidation, and there should be no more. Just because the prior mergers were approved (when they shouldn’t have been) is not a logical reason to approve another bad one. In 2019 before the pandemic, according to IATA, North American airlines (read primarily USA) were only about 20% of global airline revenues but 65% of global net profit. In 2022, IATA forecasts that the North American region will be the only profitable one in the world. Why do you think US carriers are so uniquely profitable? Two words: less competition.
Warren Buffet mistimed his foray into the airline industry after literally slamming it and saying avoid it for decades. Unfortunately, he bought in right before a global pandemic. But he was right, that the landscape had changed, that these forever unprofitable companies that still delivered safe, expanding connectivity to Americans had transformed themselves via mergers into a profitable industry. When Buffet changed his tunes on airlines, I guarantee this isn’t a pro consumer argument. It’s a pro capital argument.
Remember, competition policy doesn’t exist to guarantee competitors a profit, it exists to guarantee consumers that there is competition. In Asia, one can choose to pay a premium and fly SQ with champagne in the lounges and a flat bed on board, or you can choose to fly a budget airline at a tiny fraction of the cost. Similar in Europe (well minus the flat beds). In the USA, we have commoditized product and outside of hyper competitive nonstop routes, the network carriers do not compete much on product or much on price.
My younger friends who move to the USA for school with the hopes of seeing the country during their time here are shocked and disappointed to learn that, unlike where they’re from, there are essentially no cheap tickets to most places in the USA.
We need to stop thinking the government is here to ensure businesses make guaranteed profits and remember the government is here to ensure competition for consumers. Riskless capitalism doesn’t work for banks and it certainly shouldn’t be the norm for airlines.
@William Dryden – I appreciate your well thought out comment, but some of your assertions are incorrect.
For example, you cited “less competition” as the reason for American carrier profitability, but that’s not really the reason. Many countries outside of the US have government sponsored airlines meaning that they have more employees than needed, corruption, and general bloat. State-run carriers are very rarely profitable let alone on a global competitive scale. Thai, Garuda, the Chinese carriers, Emirates, Etihad, Qatar – none of them have to report their profit and none of them would want to. You also don’t factor in size of country, economic resources of travelers and businesses, alternative transportation methods (trains), nor tax policy.
You say “Remember, competition policy doesn’t exist to guarantee competitors a profit, it exists to guarantee consumers that there is competition.” But I am not sure that a bunch of smaller carriers does that better than one larger competitor. If that was true, wouldn’t the smaller carriers have already had an impact on these dominant players? Wouldn’t Ryan Air and the pressure it has put on European carriers be a great model of how a larger ULCC like what Frontier-Spirit would have been able to do in the US market? With the smaller independent carriers as they are now, Alaska is a huge force on the west coast but presents no challenge on the east coast, the opposite is true for JetBlue. Hawaiian isn’t even the largest carrier in the US to Hawaii, so they really don’t play a part (Alaska is despite United offering 107 different flights to the islands from across the network pre-pandemic.)
“My younger friends who move to the USA for school with the hopes of seeing the country during their time here are shocked and disappointed to learn that, unlike where they’re from, there are essentially no cheap tickets to most places in the USA.” This is categorically false. I have outlined $14 tickets from Pittsburgh to Orlando, I have listed $385 trans-Atlantic flights in this exact post. It’s a big country, however. It might be cheaper to go from Munich to Frankfurt than it is from Boston to New York, but is it cheaper to fly from London to Cairo (4+ hours) than it is from Boston to Las Vegas (4+ hours) – almost certainly no.
“We need to stop thinking the government is here to ensure businesses make guaranteed profits and remember the government is here to ensure competition for consumers.” I agree, which is why Sen. Warren and the rest of the government should stay out of the business model. But you can’t both whine about the government allowing mergers (which they wanted to do and sued the government to complete) and then also say that the government needs to step in to provide competitive measures. Further, you haven’t proven that a bigger Frontier-Spirit nor JetBlue-Spirit fails to pose a threat to the big airlines. Remember that pre-pandemic which had the same number of airlines and competitive landscape, still held to that point the most travelers and the lowest costs on record. In that regard, it seemed to be working pretty well for both parties.
I’m with William on this.
Let’s just compare Europe and the USA. In spite of the much greater competition provided by rail in Europe, our aviation sector is much more competitive, even with Lufthansa’s multiple purchases in Belgium, Switzerland, Austria and perhaps Italy next). Ryanair, the largest airline within Europe, accounts for 16% of capacity, so our top 4 must be well below the 80% level you quote for the USA (https://airserviceone.com/ryanairs-share-of-intra-european-capacity-up-to-16-italy-passes-spain-to-be-1-country-market/)
As for economic resources – presumably, you’re referring to household income, GDP/capita or similar – much of Europe is rather closer to the USA than Asia.
@kyle. You lost me at Elizabeth Warren…
I think I’ll have me, a beer.
Her mindset about focusing on protecting 7MM Mass residents from monopolistic tendencies >>> the ~500 or so B6 full-timers living in the metro Boston area (which wouldn’t change with a Spirit merger anyways). But that doesn’t fit with your anti-Blue state mantra (kind of like your made up statistic about electricity generation in NY state).
I’m a proud liberal, but never been a fan of Elizabeth Warren, who is a knee-jerk thinker, not a constructive politician. I say let JetBlue merge with Spirit and sink itself further into the operational mess and lousy company that it already is, and prep it for a merger with one of the big 3, hopefully AA. That would solve both AA and B6’s problems relative to UA and DL.