Wilfredo Lee/AP Photo
A JetBlue Airways Airbus A320, left, passes a Spirit Airlines Airbus A320 as it taxis on the runway at Fort Lauderdale-Hollywood International Airport, July 7, 2022.
This week, the sixth-largest and seventh-largest U.S. airlines, JetBlue and Spirit, were denied the opportunity to merge. Stripped from context, it doesn’t sound like an earth-shattering development. But the ruling by Judge William Young, a Reagan appointee, signals the end of four decades of unstoppable waves of airline consolidation that have damaged passengers, workers, smaller communities, and commerce. More broadly, it’s another victory for the Biden Justice Department’s aggressive antitrust enforcers, who are drawing the line at additional concentration.
But the really interesting part of the ruling comes when Judge Young recounts the current state of commercial air travel. Here we see that the party ultimately responsible for the failure of JetBlue and Spirit’s merger may be Boeing. And we see that the industry as it stands is actually fatally flawed, and in need of much more than not allowing the sixth- and seventh-largest airlines to merge. It’s a good reminder that while the fine work of the antitrust agencies has stopped the bleeding, they absolutely cannot stop there.
“The airline industry is an oligopoly, with a small group of firms in control of the vast majority of the market,” Young states bluntly, adding that combining JetBlue with Spirit would eliminate the few saving graces we have now, whereby JetBlue competes on quality and Spirit competes on price.
A bigger JetBlue would have more pricing power over consumers, and thus could think about cutting back on legroom and free WiFi and its other “luxurious” amenities. Meanwhile, Spirit’s famously low “unbundled” fares, where the extra fees it charges for everything makes up half of its revenue(!), benefit all passengers by depressing ticket prices for larger airlines. But if Spirit was subsumed into JetBlue’s fleet, it would likely not be replaced by other ultra-low-cost carriers (ULCCs) like Frontier or Allegiant, the judge concluded. It’s worth going through why he concluded that.
Airlines today simply cannot grow, because of a number of factors. There are shortages of both air traffic controllers and pilots, in large part because of voluntary retirements and buyouts during the COVID pandemic. But the bigger issue is that airlines can’t get their hands on any planes. Part of that is a supply chain issue, and part of it is a miscalculation of how many flights would be needed for increased post-pandemic demand. But mainly it’s because they’re all trying to source from one supplier.
If there was a vibrant airplane manufacturing industry, competition could flourish. And, if the Big Four didn’t control four out of five U.S. routes, competition could flourish.
JetBlue has 290 aircraft and Spirit 194. Nearly all of them are Airbus planes, save for 60 JetBlues purchased from the small Brazilian manufacturer Embraer. The only U.S. airplane maker, Boeing, does not serve these two fairly prominent airlines.
Airbus simply cannot keep up with demand; the company, Judge Young points out, has delayed all new orders until 2029. This would be an opportune moment for Boeing to ramp up delivery, but part of the fuselage of one of its jets fell off in midair just two weeks ago, and subsequently it’s mired in changing its quality control process on the fly, in no position to ramp up anything. (Judge Young mentions the incident in a footnote.)
The Boeing near-disaster is the culmination of decades of outsourcing and backsliding on quality, which has poisoned the reputation of a once-proud company. “What used to be a duopoly has become two-thirds Airbus, one-third Boeing,” said one industry analyst to The New York Times. “A lot of people, whether investors, financiers or customers, are looking at Airbus and seeing a company run by competent people… The contrast with Boeing is fairly profound.” As a result, we have really one company making nearly all the new planes in the world.
The ruling also cites rampant engine issues; Spirit uses Pratt & Whitney engines exclusively, and a segment of their fleet has been chronically grounded. Manufacturing bottlenecks and quality issues have stagnated growth for all carriers outside the Big Four (American, Delta, United, and Southwest), which control 80 percent of U.S. routes.
This is the context for why JetBlue and Spirit saw no other way to grow but through acquisition. Concentration and related breakdowns in engineering have placed limitations on the typical means for growth, because of a simple factor: The planes can’t be built.
JetBlue has tried to team up with Virgin America twice, and with Spirit three times. Spirit, which hasn’t been profitable since 2019, has been looking to merge for the better part of a decade, announcing a deal with another airline, Frontier, in February of 2022. But JetBlue swooped in to make a better offer.
JetBlue was planning to dissolve Spirit and reconfigure its planes, cutting about 11 percent of all seats in the process (6.1 million seats on an annual basis). That cannot help but raise prices, especially because JetBlue cannot build more planes to fill the gap. JetBlue would have also needed to use $3.5 billion in debt to make the purchase, on top of taking on Spirit’s $4 billion in debt. This would leave the company with a debt-to-capital ratio of as much as 111 percent—which, Judge Young said, was in line with the Big Four. That, incidentally, is why they have to be bailed out at the slightest hint of problems, because there’s no loss-absorbing capital in the system.
So, if you want to break into this deeply oligopolistic market where capacity for aircraft construction is nil, according to smaller airlines, you have to find totally unprofitable partners and use a mountain of debt to buy them out, solving the problem of consolidation with consolidation.
JetBlue and Spirit told antitrust regulators not to worry, that they would divest certain routes and allow for a cut-rate competitor. But Frontier and Allegiant, the recipients of those routes, said they wouldn’t be able to run them all. Allegiant has no presence in Newark, where they would get slots, for example. And Frontier said in testimony that it would take between five and eight years to fully replace Spirit.
Ultimately, this was why Judge Young blocked the merger. Airline growth is largely impossible given the bottlenecks in manufacturing and workforce. One expert witness for the government calculated that reaching Spirit’s capacity would require Allegiant to grow as much as 757 percent for some routes; its annual growth rate for the last decade has been ten percent.
Therefore, “although other airlines are likely to enter markets left by Spirit… such entry might not be sufficient to replace Spirit’s current presence in the industry,” Young wrote. Passengers who rely on Spirit would be left out in the cold.
If there was a vibrant airplane manufacturing industry, competition could flourish. And, if the Big Four didn’t control four out of five U.S. routes, competition could flourish. But given the world as it is, JetBlue and Spirit argued they could only compete by purchasing market share.
That’s why it was the right thing for the Justice Department to say no, and for the judge to agree. There are some wags now chuckling that Spirit will now have to liquidate, meaning that regulators caused more problems by blocking the merger. But Spirit executives said explicitly in the trial that they had “a long-term plan to return to profitability.” And anyway, a company on the verge of liquidation is unlikely to be the linchpin for a renaissance in air travel, even if it threw all of its problems on a bigger rival.
What JetBlue and Spirit were really signaling through their actions is that they cannot compete in today’s airline industry, given all its aforementioned problems. Their solution, to join together, was found illegal. (The proposed merger between Alaska and Hawaiian Airlines will probably be found illegal too.) But the actual solution to their problem isn’t about JetBlue and Spirit at all. Instead, it must take on the Big Four carriers and the manufacturing duopoly.
“We’ve never had so few scheduled passenger airlines or so much concentration at the top,” aviation expert William McGee explained, “and a 14-year gap without any new entrants.” The government’s hands-off approach facilitated that. A resolution can only be achieved by getting off the sidelines and forcing airlines to serve the entire country at a fair price, and structuring the aviation market so more than only one company can make a decent plane. As Matt Stoller explains, “We are going to have to find ways of dealing with problems in industry aside from hoping that consolidation fixes it.”
It is commendable to stop the merger wave. But it isn’t going to be enough, as this judge’s ruling makes very clear. And that goes for not just airlines, but for the breadth of our concentration problem.
