There has been a ton of buzz lately in the aviation space regarding the US Department of Justice working on a potential block to the JetBlue-Spirit merger. The main reason for such a block by the government would be on the grounds of reduced competition within the US domestic airline industry, leading to increased fares and less options for consumers. I think such a move by the Department of Justice will be a huge mistake, because JetBlue acquiring Spirit is a net positive to consumers and should be championed.
The Fight for Spirit Airlines’ Love
Back in October 2022, Spirit Airlines shareholders finally approved its sale to JetBlue following a lengthy and dramatized saga of airline bachelorette; JetBlue and Frontier Airlines battling it out to try and win over the hearts of Spirit Airline shareholders. In the very end, after months of back and forth, the acquisition was finalized between the two airlines with a very lucrative bid of $3.8 billion and an even more lucrative $350 million dollar breakup fee to Spirit if the deal were to fall through. This is a very big incentive and safety net for Spirit, as whether or not the Biden Administration will agree to move forward with such an acquisition in the airline industry is still a huge unknown.
Massive Airline Consolidations had Killed Competition in the US
At a high level, it does make sense that such an acquisition where the 6th largest US airline acquiring the 7th largest US airline would be bad for consumers and the US government should block such a deal. This has been especially evident in the past two decades with the extreme consolidation in the industry with mergers and acquisitions such as Delta merging with Northwest in 2008, United merging with Continental in 2010, and American combining with US Airways in 2013. However, if we dive a bit deeper in this current scenario with the JetBlue acquisition of Spirit Airlines, we will find that consumers will actually benefit from this merger, contrary to conventional wisdom. Let me explain why this is the case and why we, as consumers and airline passengers, should champion this deal.
Unlike Prior Deals, JetBlue-Spirit will Increase Competition and Benefit Consumers
With these prior airline consolidations, we now have three legacy US carriers (American, Delta, and United) firmly at the top and holding over 50% market share in the US in terms of total passenger carried. The share of total revenue is likely much higher as these traditional airline fares are at the higher end versus low cost carriers such as Southwest and JetBlue. This kind of dominance and oligopoly is bad for consumers, as these three legacy airlines can maintain the higher prices with their established operating hubs throughout America. This is why, with JetBlue acquiring Spirit, a combined bigger and better JetBlue will propel its size and allow it to directly compete against these three US carrier head-to-head in all their key markets across the country. For context, this bigger JetBlue will become the 5th largest airline in the US, leapfrogging Alaska Airlines, and with just a little more than half the annual passengers as United in 4th place.
This acquisition would yield JetBlue with an additional fleet of almost 200 Airbus A320 family an aircraft type that JetBlue is already flying and familiar with), as well as Spirit’s highly coveted gate slots on the West Coast in hyper competitive and slot restricted airports such as Los Angeles LAX and San Francisco SFO. These additional resources will help JetBlue expand its existing hub and spoke model, while continuing to compete with the legacy airlines on lower fare prices, ultimately increasing competition in this market and push fare prices down.
Ultra Low Cost Market Segment will be Fine Without Spirit
On the Low Cost Carrier (LCC) and Ultra Low Cost Carrier (ULCC) airline market, while the loss of Spirit will be a significant blow to this market segment in the short term, this segment is a much easier one to penetrate with a lower barrier of entry compared to the traditional airline market. An aspiring LCC or ULCC can look to start up with just a few narrow-body Airbus A320, Boeing 737 or the exciting new Airbus A220 and Embraer E195-E2. An example of this would be up and coming low cost carrier Breeze Airways, which began operations in 2021 and already have 27 narrow body aircrafts in its fleet with a total of 80 Airbus A220 on order, and operating flights to more than 34 destinations. Another exciting ultra low cost airline would be the newly rebranded Avelo Airlines, operating 15 Boeing 737s to 34 different destinations. There’s also the potential for European ultra low cost powerhouses Ryanair and Wizz Air to explore expanding into the US if they see fit. Even with Frontier Airlines being the standout big player in the US ULCC space following the departure of Spirit, the consumers in this segment are ultra price sensitive. Therefore, there is not much room for Frontier to play with in terms of fares before they alienate and lose these budget-minded flyers. What I’m trying to explain here is that, the ultra low cost market is alive and very competitive, and with its lower cost and barriers to entry, it will continue to be a healthy and competitive landscape even without Spirit Airlines.
A Note on Southwest Airlines, the King of US Low Cost Carriers
Now, some might be wondering where Southwest Airlines fit in all this. It is important to note that while Southwest has almost 20% market share in passengers carried in the US, their revenue is much lower compared to the legacy airlines due to a lack of appeal to most business travelers and, on average, much lower fares as they compete on price (i.e. United Airlines reported 2022 revenues of $45 billion while Southwest reported 2022 revenues of $24 billion with comparable annual passengers of around 150 million). Also, Southwest has a different operating model that is similar to most low cost carriers, which is to operate point to point routes instead of concentrating operations in a number of large hubs for connections (the traditional hub and spoke model). Furthermore, Southwest will often operate these point to point routes out of alternative or smaller airports instead of the larger ones to save on costs (i.e. Chicago Midway instead of Chicago O’Hare and Dallas Love Field instead of Dallas Fort Worth). Therefore, Southwest will never directly be competing with the three legacy carriers in hubs and specific routes even despite its larger size, whereas JetBlue operates a more traditional hub and spoke model out of the same major airports as the legacy carriers, such as New York JFK, Boston Logan BOS, and Los Angeles LAX.
The Biden Administration Needs to Approve this Deal to Benefit Consumers
At the end of the day, the Department of Justice will be making a huge mistake to block this deal. JetBlue and Spirit merging would create a bigger and better JetBlue, with more planes, more operating bases, and most importantly, more precious gate slots at competitive airports such as Los Angeles (LAX) and San Francisco (SFO) to better compete with the three legacy US airlines. I hope that the lobbyists in Washington D.C. (which are surely funded and backed by the three large legacy airlines) do not win on this deal and that the consumers can finally catch a victory in the multiple Ls this industry has taken over the past two decades. A bigger and more competitive JetBlue is bad news for American Airlines, Delta Air Lines, and United Airlines, which is good news to consumers and better for the competitive landscape of this industry.
