DOJ: It's good for consumers to have an independent Spirit
The government’s case doesn't have much to do with JetBlue. Instead, it wants to save an innovative airline that consumers rely on.
When I heard whispers the U.S. Department of Justice planned to file suit to block JetBlue’s proposed merger with Spirit, I wondered if the government would get it wrong, perhaps by arguing it needed to protect the JetBlue Effect: that circa-2003 argument that the airline lowered prices in competitive markets. As insiders know, this has not been particularly true in years. JetBlue is just another bloated legacy-type carrier with rising costs set against limited revenue opportunities.
For JetBlue’s sake, I still hope the merger goes through. As the No. 6 U.S. airline, JetBlue is too small to compete effectively with the Big Four. Even in its key focus cities of Boston, New York and Fort Lauderdale, JetBlue is undersized. Spirit may not be the perfect partner, but at least the acquisition would bring airplanes and pilots, along with a clear market-dominant competitive position in Fort Lauderdale.JetBlue doesn’t have any of those now, which is a problem in an industry in which market position can determine profitability. As United CEO Scott Kirby likes to say, paraphrasing fictional NASCAR driver Ricky Bobby (played by Will Ferrell): “If you’re not first, you’re last.”
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But the government's role here is to protect competition, not prop up a sagging East Coast airline. And in its complaint filed Tuesday, the Department of Justice makes a surprisingly potent argument. Rather than attack JetBlue for gobbling up a competitor, the government props up Spirit, noting the discounter provides a valuable service to consumers by keeping industry fares low. An independent Spirit may not be great for investors, or for JetBlue, but I buy that it is beneficial for consumers, especially for people who could not afford to fly before ULCCs entered the U.S market. Sneer all you want, but Spirit does make it possible for people to fly who could not afford to before. If the deal goes through, it is reasonable to say it “would put travel out of reach for many cost-conscious travelers,” as the complaint states.
Let’s examine some arguments the Department of Justice makes in its complaint.
Spirit is a real disrupter
We like to think only new entrants are capable of disrupting an industry, but the government notes Spirit has kept its competitors on their toes since it shifted to become an ultra-low-cost carrier in 2006.
The complaint calls out two questionable behaviors — “cozy oligopoly behavior,” according to the complaint — that most U.S. airlines use to signal competitors not to dump capacity or drop fares, but says Spirit rarely engages in either one.
The first is ATPCOsignaling. This is when, according to the government, airlines file phony fares to get a competitor’s attention. In one case, it said, JetBlue noticed that Southwest was selling cheaper fares than JetBlue between Boston and Baltimore. “To address the issue, JetBlue filed — and then quickly canceled — a fare in ATPCO with the intention of alerting Southwest to the discrepancy in the two airlines’ fares," the complaint says, adding that airlines call this behavior "flashing."
The second behavior is called “cross-market initiatives.” According to the complaint, an airline under a fare attack in one market files a low fare in what it may calculate is a competitor’s most profitable nonstop route. As the government notes, the offending airline may withdraw its sale once its competitor uses cross-market initiatives.
This is not top secret behavior in the airline industry. Anyone who pays attention to new routes and knows how to use Google Flights can see when an airline engages in cross-market initiatives. What I did not realize, however, is that Spirit doesn’t play either game, or rarely plays it. And that means consumers benefit.
“Even though it knows that the other airlines coordinate, it also believes it has 'no obligation' to 'follow the herd' when it comes to such actions," the complaint says.
Spirit has low prices
Sometimes regulators or politicians believe an airline is a price-setter, even when data suggests otherwise. But I think we can agree Spirit, with its ultra-low costs, often sets its own prices without worrying about industry standards. It is not unusual to see it severely undercutting the competition.
“A Spirit pricing executive acknowledged that when other airlines attempt to initiate price increases, Spirit generally doesn’t follow along,” the complaint says, also noting JetBlue's analysis concluded that Spirit almost always keeps one fare in the market that is lower than any other carrier's lowest fare. By contrast, the government argues, JetBlue almost always matches industry price norms.
Spirit catches criticism for its ancillary charges, but the airline is cheap. Its prices, including ancillary charges, are about 30 percent lower than the competition, the government concludes.
"Spirit’s independence limits how successfully JetBlue and the Big Four can coordinate to maintain higher fares," the government says. "The elimination of Spirit as an independent airline removes this important competitive restraint on the remaining airlines."
It’s just supply and demand
If you don’t buy the government’s first two arguments, the third is hard to quibble with: Any merger would reduce seat supply. And since, at its most basic level, airline pricing is a function of supply and demand, less capacity should lead to increased prices.
If JetBlue acquires Spirit, it will remove 10 to 15 percent of the seats (20 to 28 seats) on every aircraft, the government notes. "Fewer seats means fewer passengers—and higher prices for those who can still afford to make their way onto the plane," the government says. "This is unlikely to stop business travelers flying on corporate expense accounts, but would put travel out of reach for many cost-conscious travelers."
Spirit also has been growing seat supply faster than any other competitor — by far. Since 2010, the airline's capacity has grown roughly 500 percent according to industry data. During the same period, JetBlue, itself a growth carrier, increased capacity by only 87 percent. As an independent company, the complaint argues, Spirit is expected to continue its torrid growth pace. But under JetBlue's leadership, such growth is less likely.
Spirit has a unique network
You can make the argument that other airlines would fill the void left by Spirit. Sun Country, Avelo, Frontier, and Allegiant all have similar cost structures and could offer the same types of flights and prices. If the merger eventually goes through, they might copy what worked for Spirit.
But the government correctly notes that none of these airlines has a network that looks like Spirit's, so there’s no guarantee its routes will be covered by an ultra-low-cost competitor. Spirit likes to fly in thick markets, like Chicago to Los Angeles, more than once per day. It runs toward legacy airline competition, not away from it, at airports in Newark, Houston, Atlanta, and Miami, as the complaint notes.
Some competitors also prefer flying only a couple of frequencies per week on each route. According to the government, Spirit is three times more likely than Frontier and seven times more likely than Allegiant to fly at least daily on a route.
My final takeaway
I suspect JetBlue’s marketing acumen and its New York City base are masking a real problem: The airline is in considerable trouble. For its own future, it probably needs to find a way to settle with the government and take over Spirit. Otherwise it will be too small of a player to compete with the Big Four.
But the government makes cogent arguments in its complaint. For almost two decades, since the airline morphed models, Spirit has played its own game, refusing to participate in industry schemes to raise prices. If Spirit goes away, consumers may be harmed.
Do you disagree? Leave a comment or email me at email@example.com.
Better yet, tell me your favorite story about an airline using cross-market initiatives or ATPCO signaling.
The government doesn’t like this idea of Fort Lauderdale strength but I think it is overreaching. JetBlue needs bigger hubs to compete with the Big Four.
This is the Airline Tariff Publishing Company, which, as defined in the complaint “provides all airlines with detailed, real-time access to other airlines’ published fares.”
I am reminded of the old US Airways Advantages fare program, which the Department of Justice examined in 2013 with the American merger. US Airways used to significantly undercut a competitor’s nonstop routes with one-stop options. Yes, after the merger went through, another airline could have launched the same program. But I am not sure any did.
Meanwhile, Frontier no longer flies to LAX.
Would love to see ULCC segment grow much larger similar to how Ryanair has managed to become the far largest airline in Europe. I’d bet on ULCC model and rather have JetBlue turn into Spirit than current proposal. #KeepSpiritFree
No other airline merger has been looked at this way - DOJ normally focuses on overlapping routes and overall dominance, both of which are not real concerns here. It is suggested that a small airline "needs" scale ("distressed carrier") - but jetBlue doesn't say they can't survive without Spirit.
No other merger has effectively picked a winner; the Market is left to decide whether NW or CO or US management and business practices should prevail. Would DOJ like the merger if SAVE were the victor here? Quite ironic given the govt attitude to Spirit ten years ago when they began charging for carry-ons!!!!