Implications of the JetBlue/Spirit Merger Blocking

By: Dominic Miranda

Edited by: Clark Mahoney and Connor Tooman

In March of 2023, a civil antitrust lawsuit was filed by several states and the United States Department of Justice (DOJ), including California, New York, Maryland, and Massachusetts, along with the District of Columbia, to prevent Spirit Airlines from merging with JetBlue Airways Corporation.[1] The lawsuit, intended to block the $3.8 billion deal, was filed in the Massachusetts District Court, with consumer protection as the primary reasoning.[2] A trial was initiated later in October, in which both sides pleaded their cases for 17 days.[2] The judge in this case faced an economic dilemma since the airlines in question have valid arguments to consider. However, on January 16th, 2024, JetBlue’s intended acquisition of Spirit Airlines was found to be unlawful and blocked by the U.S. District Court for the District of Massachusetts, citing the probability of “anticompetitive harm”  in the form of an increase in fares that would result from the merger.[2] The overall goal of the Antitrust Division of the DOJ is to preserve the integrity of the economy, and they overlook all potential airline mergers. In this case, they believe that allowing this merger to go through would be a net negative for the US economy, so this article will investigate whether this harm is likely to manifest, as well as what comes next for these airlines. 

According to the Federal Aviation Administration (FAA), “a merger combines all aspects of two airlines’ operations into a new entity under a single operating certificate”, and it is their job to award this certificate based on safety standards.[3] JetBlue sought a merger with Spirit Airlines to improve its standing in the aviation industry, which many other airlines have done and will try to do with these procedures. The merging of airlines is not uncommon in the United States, as it has had 7 successful purchases in the industry within the last 8 years, with the most notable being the purchase of Virgin America by Alaska Airlines.[4] This leads many to question the Massachusetts District Court’s decision by asking “What’s different about this one?”

In the recent past, major players in the aviation industry like American Airlines, United, Delta, and others have been involved in mergers and acquisitions.[4] For the most part, the intent is to help with expanding their company in different ways, like their fleet, number of pilots, employees, or occupied airport gates. According to Khezrimotlagh et al., “There are two views in the literature to address airline mergers’ drives: efficiency gains and market power gains”.[5] In their study, they compared major US airlines pre and post-merger in terms of their technical efficiency, which was decomposed into the production efficiency and consumption efficiency.[5] It was found that for four major US airlines (Delta, Southwest, American, and United), their production and consumption efficiency scores increased post-merger across the board, with the consumption efficiency being more substantial.[5] This indicates a successful economic merger from these airlines’ point of view. From the recent track record, it appears that well-planned and executed mergers or acquisitions can have a beneficial effect on the health of major airlines in the US, and can be shrewd business decisions. Airlines have a great incentive to participate in a merger of sorts, and airlines’ defense of mergers will likely include the claim that the improved efficiencies will benefit the consumers in the long run. 

Additionally, Spirit Airlines is looking to push through its own financial struggles. Spirit has “lost more than $1.6 billion” since 2019, and Bank of America analysts are predicting that the Spirit stock will “underperform,” which suggests “there is a risk the airline might not be able to make debt payments due in September 2025”.[6] Spirit having lost money over the past four years is detrimental for the airline. They seem to be struggling to return back to pre-pandemic levels of consumption, which can give us clues as to why they intend to sell their assets. Spirit’s share prices were down 15-16% on Friday, January 26th, reflecting the lack of confidence that investors have in Spirit as its own entity.[7] By selling the Spirit fleet, employees, and gates to JetBlue, they are cutting their losses and shifting the management onto JetBlue. Now, without the possibility of a merger, there is a chance that Spirit will go bankrupt and the market will lose out on the assets that they bring to consumers. The airlines’ counsel would likely use this to point out that in the event Spirit’s assets exit the market, it would be even worse for competition and the consumer than an acquisition. This may be the only way for the assets to be salvaged. 

Before analyzing the impact on competitors’ prices that a merger between JetBlue and Spirit would have,  one should look at the results that past mergers have had on fares. In a study conducted by Haobie Fan on the 2010 United-Continental merger, “the results of price effects indicate that merging firms and rivals respond differently to the merger in … three types of markets, hub markets, leisure markets, and big-city markets”.[8] Essentially, the effect that this merger had on prices was too varied to conclude a directional relationship. The companies involved touting that “economic analysis shows that JetBlue’s presence on a nonstop route decreases legacy fares by ~16%”, indicating that the change could keep fares low.[9] Despite this, statistics like these should be taken with a grain of salt, as they were likely found in an airline-sponsored study. Another study by Das concluded that “the merger between American and US Airways has been beneficial to the consumers in terms of lower average prices in the larger markets.”[10] These examples seem to indicate that a major airline merger will not always lead to increased fares, which can negate the potential anticompetitive harm mentioned by the Massachusetts judge. 

As of Friday, January 26th, JetBlue and Spirit were looking to appeal the judge’s decision, but JetBlue is currently threatening to terminate the deal due to disagreements on terms, forcing them to pay Spirit $470 million in termination fees.[11] Although the terms of the contract included a clause to pursue an appeal, the likelihood of an appeal passing is quite low according to experts.[6] Furthermore, the DOJ had already blocked a partnership between American Airlines and JetBlue in the US northeast, where they would agree to avoid each other in major markets, with the DOJ taking this as a clear violation of their antitrust stance.[12] According to some, these serve as indicators that the near future of mergers is looking dim, with “Deutsche Bank analyst Michael Linenberg [saying] the government’s success in blocking [both deals] ‘are likely to cast a shadow over future airline (merger and acquisition) activity’.”[6] Airlines that are still reeling from the pandemic may face even more difficulties completing mergers intended to recoup their losses. For instance, although it is not entirely certain what the DOJ will do, Alaska and Hawaiian Airlines should brace for legal hurdles of their own with their intended merger based on recent rulings.[6] The recent wave of antitrust lawsuits is part of a concerted effort by the current Biden administration, and the survivability of deals like these likely depends on who is in charge, given that the president appoints the head of the DOJ, the attorney general.

Notes:

1. U.S. Department of Justice Office of Public Affairs. “Justice Department Sues to Block JetBlue’s Proposed Acquisition of Spirit.” Last updated March 7, 2023. https://www.justice.gov/opa/pr/justice-department-sues-block-jetblue-s-proposed-acquisition-spirit.

2. U.S. Department of Justice Office of Public Affairs. “Justice Department Statements on District Court Decision to Block JetBlue’s Acquisition of Spirit Airlines.” January 16, 2024. https://www.justice.gov/opa/pr/justice-department-statements-district-court-decision-block-jetblues-acquisition-spirit.

3. Federal Aviation Administration. “How Does That Work? The FAA’s Safety Role in Airline Mergers.” Accessed January 28, 2024. https://www.faa.gov/newsroom/how-does-work-faas-safety-role-airline-mergers.

4. Airlines For America. “U.S. Airline Mergers and Acquisitions.” Accessed January 28, 2024. https://www.airlines.org/dataset/u-s-airline-mergers-and-acquisitions/.

5. Khezrimotlagh, Dariush, Sepideh Kaffash, and Joe Zhu. “U.S. Airline Mergers’ Performance and Productivity Change.” Journal of Air Transport Management, May 9, 2022. https://www.sciencedirect.com/science/article/pii/S0969699722000473#sec4.

6. Koenig, David, and The Associated Press. “JetBlue’s Failed $3.8 Billion Merger Could Send Spirit Airlines into Bankruptcy, Wall Street Analysts Warn.” Fortune, January 18, 2024. https://fortune.com/2024/01/18/will-spirit-airlines-go-bankrupt-chapter-11-jetblue-merger/.

7. Sider, Allison. “JetBlue Warns It Might Scrap Spirit Airlines Takeover next Week after Merger Block.” Wall Street Journal, January 26, 2024. https://www.wsj.com/business/airlines/jetblue-warns-it-might-scrap-spirit-airlines-takeover-next-week-after-merger-block-9bd6bd25.

8. Fan, Haobin. “When Consumer Type Matters: Price Effects of the United-Continental Merger in the Airline Industry.” Economics of Transportation, February 12, 2020. https://www.sciencedirect.com/science/article/pii/S2212012219300875#sec5.

9. JetBlue + Spirit. “The Best of Both Airlines.” April 13, 2023. https://lowfaresgreatservice.com/.

10. Das, Somnath. “Effect of Merger on Market Price and Product Quality: American and US Airways.” Review of Industrial Organization 55, no. 3 (July 10, 2019): 339–74. https://doi.org/10.1007/s11151-019-09717-2.

11. AP News. “JetBlue Tells Spirit Airlines That It May Terminate Its $3.8 Billion Buyout Offer Challenged by US.” January 26, 2024. https://apnews.com/article/spirit-airlines-jetblue-merger-warning-2d34827417dfaab8dd781d9671293fca.

12. Koenig, David. “American Airlines and JetBlue Must Abandon Their Partnership in the Northeast, Federal Judge Rules.” AP News, June 21, 2023. https://apnews.com/article/airlines-american-jetblue-antitrust-competition-04516894671f1f44461ffaa76663dbf0.

Bibliography:

Airlines For America. “U.S. Airline Mergers and Acquisitions.” Accessed January 28, 2024. https://www.airlines.org/dataset/u-s-airline-mergers-and-acquisitions/.

AP News. “JetBlue Tells Spirit Airlines That It May Terminate Its $3.8 Billion Buyout Offer Challenged by US.” January 26, 2024. https://apnews.com/article/spirit-airlines-jetblue-merger-warning-2d34827417dfaab8dd781d9671293fca.

Das, Somnath. “Effect of Merger on Market Price and Product Quality: American and US Airways.” Review of Industrial Organization 55, no. 3 (July 10, 2019): 339–74. https://doi.org/10.1007/s11151-019-09717-2.

Fan, Haobin. “When Consumer Type Matters: Price Effects of the United-Continental Merger in the Airline Industry.” Economics of Transportation, February 12, 2020. https://www.sciencedirect.com/science/article/pii/S2212012219300875#sec5.

Federal Aviation Administration. “How Does That Work? The FAA’s Safety Role in Airline Mergers.” Accessed January 28, 2024. https://www.faa.gov/newsroom/how-does-work-faas-safety-role-airline-mergers.

JetBlue + Spirit. “The Best of Both Airlines.” April 13, 2023. https://lowfaresgreatservice.com/.

Khezrimotlagh, Dariush, Sepideh Kaffash, and Joe Zhu. “U.S. Airline Mergers’ Performance and Productivity Change.” Journal of Air Transport Management, May 9, 2022. https://www.sciencedirect.com/science/article/pii/S0969699722000473#sec4.

Koenig, David. “American Airlines and JetBlue Must Abandon Their Partnership in the Northeast, Federal Judge Rules.” AP News, June 21, 2023. https://apnews.com/article/airlines-american-jetblue-antitrust-competition-04516894671f1f44461ffaa76663dbf0.

Koenig, David, and The Associated Press. “JetBlue’s Failed $3.8 Billion Merger Could Send Spirit Airlines into Bankruptcy, Wall Street Analysts Warn.” Fortune, January 18, 2024. https://fortune.com/2024/01/18/will-spirit-airlines-go-bankrupt-chapter-11-jetblue-merger/.

Sider, Allison. “JetBlue Warns It Might Scrap Spirit Airlines Takeover next Week after Merger Block.” Wall Street Journal, January 26, 2024. https://www.wsj.com/business/airlines/jetblue-warns-it-might-scrap-spirit-airlines-takeover-next-week-after-merger-block-9bd6bd25.

U.S. Department of Justice Office of Public Affairs. “Justice Department Statements on District Court Decision to Block JetBlue’s Acquisition of Spirit Airlines.” January 16, 2024. https://www.justice.gov/opa/pr/justice-department-statements-district-court-decision-block-jetblues-acquisition-spirit.

U.S. Department of Justice Office of Public Affairs. “Justice Department Sues to Block JetBlue’s Proposed Acquisition of Spirit.” Last updated March 7, 2023. https://www.justice.gov/opa/pr/justice-department-sues-block-jetblue-s-proposed-acquisition-spirit.