I sat in bed last night and read the entire 109-page decision of Judge William Young in US v JetBlue, which blocked the merger between JetBlue and Spirit. Bottom line: I think the opinion represents spurious legal analysis.
Blocked JetBlue-Spirit Merger Based Upon Spurious Logic
Yesterday, US District Judge William Young held that the JetBlue-Spirit merger could not proceed because it violated the Clayton Act. The heart of his ruling:
While it is understandable that JetBlue seeks inorganic growth through acquisition of aircraft that would eliminate one of its primary competitors, the proposed acquisition, in this Court’s attempt to predict the future in murky times, does violence to the core principle of antitrust law: to protect the United States’ markets –- and its market participants — from anticompetitive harm.
The Clayton Antitrust Act of 1914 was meant to curb mergers and acquisitions that tended to create monopolies to the detriment of US consumers. Specifically, §7 of the Act prohibits mergers when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
Seizing on this, Judge Young pointed to specific anecdotes, like “a college student in Boston hoping to visit her parents in San Juan or a large Boston family planning a vacation to Miami that can only afford the trip at Spirit’s prices” to argue, “It is this large category consumers, those who must rely on Spirit, that this merger would harm.”
The close of his opinion reads like the pronouncement of a politician, not a neutral arbiter of the law:
Spirit is a small airline.
But there are those who love it.
To those dedicated customers of Spirit, this one’s for you.
Why?
Because the Clayton Act, a 109-year-old statute requires this result –- a statute that continues to deliver for the American people.
The problem is that “love” for Spirit Airlines should not govern whether a merger between JetBlue and Spirit should proceed. Nor should it matter whether customers currently rely on Spirit Airlines for transport, especially when the company is losing millions of dollars, suggesting a business model that is broken.
The key word here is substantial. Would there be a “substantial lessening of competition” because of this merger? I don’t see this proven by the US Government or its expert witnesses. Rather, I see such forecasts as inconclusive and therefore unpersuasive. There remains tremendous competition in the US airline industry. This is not like the only two market entrants are merging into one: there remains robust competition and the idea that a larger JetBlue could challenge American, Delta, United, and Southwest was glossed over by Judge Young.
Ultimately, The Clayton Act is not about maintaining cheap and unsustainable pricing, but about protecting consumers from the nefarious effects of collision aimed at undercutting the market system. Judge Young got it wrong.
JetBlue + Spirit Consider Appeal
JetBlue and Spirit have responded to Judge Young’s ruling with the following statement:
“We continue to believe that our combination is the best opportunity to increase much needed competition and choice by bringing low fares and great service to more customers in more markets while enhancing our ability to compete with the dominant U.S. carriers.
“JetBlue’s termination of the Northeast Alliance and commitment to significant divestitures have removed any reasonable anti-competitive concerns that the Department of Justice raised. We are reviewing the court’s decision and are evaluating our next steps as part of the legal process.”
In short, an appeal is under consideration.
CONCLUSION
While I was personally opposed to the JetBlue-Spirit merger, I don’t agree with Judge Young’s ruling blocking it. It relies on a series of assumptions and a stretching of the word “substantial” that is not warranted under The Clayton Act or the fact pattern he faced.
No, Spirit Airlines will not liquidate and both carriers will find a way to groan on…likely apart…but one way or the other, the status quo cannot continue if both JetBlue and Spirit continue to lose money.
Why do you think they won’t appeal if the legal reasoning is awful?
I was very disappointed B6 did not appeal the AA NE partnership ruling. Hopefully it will appeal this decision.
Well, Jet Blue might view this as an opportunity to get out of a merger whose terms many (like myself) viewed as disaterous. Jet Blue’s stock tanked upon announcement of the merger, so Jet Blue might be pleased with not being able to move forward.
The idea that JetBlue overpaid (greatly overpaid) for Spirit is a different issue and one that I quite agree with you on.
Respectfully, it’s interesting that your article here is, based on a couple admittedly weird but cherrypicked sentences from the conclusion of the opinion, but doesn’t address the 100 preceding pages of legal reasoning based on economic analysis and expert witness testimony nor the myriad legal precedent the judge references, not to mention the fact that given that the Clayton Act is designed to weigh in favor of the government if they can establish a prima facie case, it’s entirely reasonable for the judge to rule as he did.
Is it your opinion that the increased consolidation across the industry we have seen over the past three decades have, on balance, benefitted consumers? When I look at the fact that (a) Profit-per-passenger is 3x higher in the U.S. than in Europe, (b) in 40/100 largest airports, a single airline controls the majority of the market, and (c) the fact that Spirit’s own Board of Directors found that “when Spirit stops flying a route, average fares go up by 30%,” the answer seems pretty clear to me.
I’m aware of the prima facie standard, but I tend to be sympathetic to the Spirt-JetBlue position that “market share [is reduced] to a level that would undermine the Government’s prima facie case” and also to their so-called “efficiency defense” argument. Ultimately, I don’t believe that the Government proved by a fair preponderance of the evidence that the acquisition threatens competition, even noting the factors you mention.
As a consumer, I am personally against consolidation and think the mergers of the 2010 era were disastrous.
But I also do not see that same interplay here.
Thanks for your expert economic and legal opinion, Matthew.
Thanks for putting in the time to read the decision. I haven’t gotten around to doing so at least yet, but I think there would be substantial lessening of competition and of the benefits consumers get from Spirit and JetBlue remaining separate airlines that do compete with each other and with the other airlines.
…. if they were allowed to combine together.
If there is a possibility of Jetblue overpaying for Spirit why would they appeal the decision? Jetblue’s new CEO should renegotiate any attempts to merge. It would make no sense for her to rescue an incompetent CEO decision.
This may be more likely than a direct appeal, since the judge specifically declined to bar JetBlue and Spirit from a future merger under different terms. But if a judge blocked under these terms, I would think the merger would be blocked under terms more favorable to B6.
Lets face it. The 1000’s of precedential cases and rulings should come down to the intent of anti-trust law. Would the merger adversely affect consumers? The Jet Blue purchase of Spirit will drive up prices and reduce choice.
There should only be three major airlines in the US.
All the LCC do is allow the scum of the nation to travel, something they probably can’t afford to do anyway. They clog up the limited infrastructure with the LCC low class customers.
I can only assume you’re joking? Within Europe, where we do have genuine competition, around one third of all flights are operated by LCCs/ULCCs (source- Eurocontrol). But that average figure belies significant variations so, in Spain, for example, I think we’re past the 50% mark. Therefore, for us ‘scum’, the (U)LCC carriers are the default option.
I was amazed that a Judge in the USA would write as casually as “this one’s for you”. To the point where I had to get a mate to download the decision for me and have a read myself. So so bizarre.
When I read it on omaat yday I assumed it was a news outlet quote.
collusion, not collision
Spirit is the cheapest seat on almost any route it serves. Major airlines had to even create a whole “basic economy” to compete with Spirit. If Spirit is bought out, the cheapest seat disappears and so “Basic Economy”, so, although small, Spirit’s influence on pricing is very large. If you need further proof, compare New York – Miami prices before and after Spirit took two terminals at MIA.
Actually there are a bunch of analysts out today saying Spirit will file for bankrupcy this summer and Jetblue can then try to get the leases on their aircraft cheaply. The aircraft is very valuable (all Airbus, no falling-apart Boeings) so there might be competition with other airlines.
B6 could also pick up some experienced pilots as they flee NK during bankruptcy.
Is nobody else going to comment on how the judge referenced Daniel Webster’s argument in Dartmouth College v. Woodward (1819) in one sentence and then a 2002 song by Reel Big Fish in the next?
So much for the Freedom of American Capitalism. Get rid of the judges.