When the dust settled on a big round of airline consolidation nearly a decade ago, four big companies came to dominate the industry. A new fusion fight could challenge that cozy arrangement.
A brewing fight over the future of budget airline Spirit Airlines may give rise to a credible, if even smaller, competitor to the industry giants. In February, Frontier Airlines and Spirit announced plans to merge, promising to create a domestic budget airline that would help keep fares low. JetBlue Airways this week made its own $3.6 billion offer for Spirit, which said Thursday night it would consider the offer.
Whether Spirit ends up merging with Frontier or JetBlue, the combined company could pose a more formidable threat to the nation’s four largest airlines: American Airlines, Delta Air Lines, United Airlines and Southwest Airlines, which have a combined 66 percent share. percent of the national market. . The four operate in a league of their own, especially at their hub airports in cities like Atlanta, Dallas, Houston and Newark, where each controls a large share of gates and flights.
In an illustration of the lopsided 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 almost 13 percent. hundred. A combination of Frontier and Spirit would control more than 8 percent of the market, and JetBlue and Spirit together would control more than 10 percent.
“You’re up against American, United, Delta and Southwest with such huge fleets and market penetration,” said Samuel Engel, senior vice president and airline industry analyst at ICF, a consulting firm. “It stands to reason that a beefier No. 5 would be a stronger competitor.”
Of course, neither deal is a certainty, and in either combination, executives could have a hard time getting the deals together. The integration of airlines, including their computer systems and the seniority classifications of pilots and flight attendants, has never been easy and has led to widespread flight cancellations and lengthy legal disputes.
Any of the proposed mergers would also require the approval of antitrust regulators who, under President Biden, have been encouraged to challenge deals that might have been struck in previous administrations.
“Both deals present a new challenge for antitrust agencies,” said Paul Denis, 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 Justice Department.
Mr Denis said regulators examining airline deals have historically focused on the impact of combining large legacy airlines, those in business for decades. This review, however, would explore whether there is a “unique rivalry” among low-cost carriers “deserving of protection” by the Justice Department.
Regulators are concerned about more than just market share. They want to know how a proposed merger affects travelers, including whether the combined carrier will be able to significantly raise fares on routes where the two carriers previously competed head-to-head. And the Biden administration is uniquely focused on the impact of corporate deals on economic inequality, for example by raising fees and stifling wages. It’s not always easy to predict the likely impact of a given settlement, legal experts said.
A merger between West-focused Frontier and East-focused Spirit would create a larger domestic budget airline that could pressure larger airlines to lower fares in more cities. But the deal would eliminate its competition on competitive routes, which could hurt cost-conscious travelers.
In addition, Frontier and Spirit have been criticized for poor customer service, with Phil Weiser, the attorney general of Colorado, where Frontier is based, warning federal regulators last month that the merger “creates a real and pressing risk.” that the service could get worse if the two companies merged.
JetBlue already competes with the Big Four in cities like New York and Boston and could challenge them further if it manages to acquire Spirit’s planes, airport gates and staff. Consumers could benefit from a better flight experience thanks to the benefits offered by JetBlue. But Spirit’s ultra-cheap fares may not survive because JetBlue tends to cater to wealthier travelers and has been expanding premium services like business-class seating.
Another factor that could complicate JetBlue’s bid for Spirit is that it is already involved in an antitrust lawsuit filed by the Justice Department. The department is seeking to undo an alliance between JetBlue and American in the Northeast, a deal one official described last year as a “de facto merger.” The agency said in its lawsuit that American, the nation’s largest airline, would use the partnership to “co-opt an exceptionally disruptive competitor.” JetBlue and American deny that their agreement is anticompetitive and are fighting the case in court.
JetBlue executives said this week that they intended to continue the company’s partnership with American in the Northeast. They also said buying Spirit would allow JetBlue to compete more aggressively with the Big Four airlines.
Some critics of corporate consolidation disagree, saying airline mergers could be bad for consumers and workers.
Under either deal, the new largest airline would have more market power in certain cities, particularly Florida, a popular destination where all three carriers compete.
Diana Moss, president of the American Antitrust Institute, a left-leaning organization that has long called for stronger enforcement of competition laws, has asked the Justice Department to block the Spirit-Frontier deal. Ms. Moss and others published a study in 2013 that concluded airlines are failing to deliver on the benefits they claim their mergers will bring.
Senator Elizabeth Warren, the Massachusetts Democrat, is another skeptic. “Mergers in the airline industry have led to higher prices for consumers and lower wages for workers, and the Justice Department should closely examine these proposed deals and challenge them if necessary,” he 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 experienced successive waves of consolidation as they seek first regional, national, and then international strength. Financial problems, including a series of bankruptcies, in the 2000s led to the latest wave of big mergers, motivated in large part by survival, said William Swelbar, an aviation consultant and research engineer at the International Air Transport Center of the United States. Massachusetts Institute of Technology.
“The last round of consolidation was really about balance sheets,” he said. “I don’t think these companies individually would have made it.”
The current offers seem to be related to rapidly increasing volume. That’s because the larger airlines have advantages. They can more easily recruit pilots, who are in short supply. Larger airlines also get lower prices and better service from aircraft manufacturers. And the easiest way to grow at many airports is to buy another airline that has gates and takeoff and landing slots.
But some analysts aren’t sure airlines can easily reap the rewards of greatness through mergers.
JetBlue’s shares have fallen more than 10 percent since The Times reported on its Spirit bid, in part because investors are unsure of JetBlue’s ability to make the most of the acquisition.
Analysts speculated that JetBlue made its offer in part because it feared losing business with a combined Frontier-Spirit, which the airline cited as a potential risk to its competitiveness in its annual report. This is not the first time JetBlue has tried to grow by acquiring another airline. He tried to buy Virgin America, but lost that deal with Alaska Airlines.
Even under ideal circumstances, airline mergers can be difficult to pull off. And while Spirit and JetBlue have some overlap, for example in similar aircraft fleets, they operate differently. Spirit goes to great lengths to keep costs and fees low. Charge extra for seat selection and hand luggage and pack seats together. JetBlue also tries to keep costs down, but tries to set itself apart by offering more legroom and free in-flight wireless Internet.
“These are two completely different carriers with completely different IT structures, completely different business cultures,” said Robert Mann, an industry analyst and consultant.
Spirit has not committed to any of the agreements. He said this week that he was reviewing JetBlue’s unsolicited offer. In numbers alone, JetBlue’s cash deal is superior, offering a roughly 40 percent premium over Frontier’s original cash-and-stock offer, based on stock prices the day before JetBlue disclosed its offer. .
Frontier could still increase its offer or change its composition. (Spirit’s board originally preferred a paid-in-stock deal, according to regulatory filings, but Frontier’s shares have fallen since the deal was announced.) Frontier could also offer to pay costs associated with the risk of regulators challenging the merger in court. . JetBlue has guaranteed Spirit a reverse breakup fee if their deal is canceled over antitrust concerns.
Some legal experts said either deal could win the backing of regulators with some compromises, such as a deal to get rid of gates at some airports.
“I still think at the end of the day, any of the deals that could possibly be challenged would probably be passed,” said Kerry Tan, an economics professor at Loyola University Maryland. “Whatever challenges the Justice Department offers, trade-offs can be made.”