There is a crisis in air travel. Americans pay higher prices per domestic flight mile than Europeans, with worse service. Airlines also routinely eliminate service to cities. Three airlines — American, Delta, and United — have cut 74 cities, like Duluth, Minn., and Lincoln, Neb., from service since the COVID-19 pandemic, hollowing out the economic viability of entire regions. It didn’t used to be this way. America invented the airplane and the airline and once had the best air grid in the world.
One key reason for the collapse in the quality of air transportation is consolidation. For decades, the federal government stood by as the airline industry consolidated via dozens of mergers; now there are fewer scheduled passenger airlines (12), a greater concentration at the top, and the United States just saw its longest stretch without a single new-entrant carrier in a century (14 years from 2007 to 2021). The industry is down to a few competitors, and each is king over its own routes. Collectively, they all seek to manage or cut capacity instead of competing, because it is through their control of capacity that they maintain pricing power.
The fly in the ointment for dominant airlines is ultralow-cost carriers, the most successful of which is Spirit Airlines, which competes on price and aggressively expands its capacity. After an ugly post-pandemic moment, prices are finally coming down, due in part to the competition that Spirit offers. In response, the industry attempted to buy off this pesky competitor, with an acquisition offer by JetBlue in 2022.
Fortunately, the Departments of Justice and Transportation reversed decades of inaction and seek to block this merger. It’s an excellent move, and the case is currently being heard in a federal courtroom in Boston.
The government’s argument against the merger is simple. Internal documents show how this merger will increase prices and make flying more inconvenient in dozens of cities. JetBlue’s lawyers accidentally revealed documents in the lawsuit showing the carrier plans to increase prices on the acquired Spirit routes, by as much as 40 percent.
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When JetBlue originally proposed to acquire Spirit in early 2022, Spirit’s board of directors found the acquisition “inconceivable” as it would “increase prices for consumers.” And this makes sense; research from MIT shows that the presence of an ultralow-cost carrier like Spirit decreases fares for other airlines by up to 21 percent, whereas low-cost carriers like JetBlue do so by only 8 percent.
In response, JetBlue makes two arguments. First, this acquisition would help JetBlue compete against the big guys, and any routes it abandons will be quickly filled by competitors. Second, the specific low-cost strategy of Spirit is no longer viable, since Spirit and JetBlue both recently reported quarterly losses.
The argument from JetBlue is that you need a big airline to fight a big airline. Spirit and JetBlue represent only about 4 percent and 5 percent, respectively, of the national market, so the merger would create a stronger competitor against the big four carriers. But no one flies a “national market”; passengers fly from, say, Boston to Dallas. It doesn’t matter if there are other airlines that fly from Boston to Anchorage, if that’s not where you’re going. So even a smaller player like Spirit can exert considerable influence, as it does on 13 nonstop routes out of Chicago and 19 nonstops out of Detroit.
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In the case, the DOJ contends that big airlines tacitly collude, using what is called “flashing” ticket prices. One airline will indicate through a private pricing database that it is considering raising prices on a route, in hopes that the others will follow suit. They often do, which leads to the overall higher prices in the United States versus Europe. Spirit, however, is what’s known as a “maverick” competitor. It tends not to play the flashing game, competing on a lower cost structure.
For this reason, the industry is focused on eliminating Spirit, because that will remove pressure on all of them to lower prices. For instance, Frontier Airlines CEO Barry Biffle testified that other low-fare carriers would create a “frenzy” by filling the void left by Spirit. Yet there are significant documented aircraft shortages and pilot shortages, and this is an industry that often benefits from cutting capacity, not adding it.
The ultralow-cost carrier segment is also quite viable. Since 2009, ultralow-cost carriers have been able to triple in size, whereas the dominant network carriers have shrunk. It’s true there are higher fuel prices leading to temporary losses, but this is quite common in this cyclical industry and was not the case when the merger was announced. Frontier, which lost money in this latest quarter, is still expanding its fleet of jets. Spirit would have expanded, but since its merger agreement, JetBlue has told Spirit to stop acquiring new planes. Indeed, JetBlue has acknowledged at trial that it has too much capacity, which leads to the question: Why are Spirit and JetBlue doing this deal? And why are rivals advocating for a competitor to get stronger?
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District Judge William Young would be wise to consider two similar merger trials from a similarly concentrated market. In 2011, AT&T tried to buy T-Mobile, another “maverick” competitor bringing down prices in the highly concentrated mobile phone industry. T-Mobile and its economic experts argued that it desperately needed to be acquired by AT&T or it would fail. What actually happened was the opposite. After the deal, T-Mobile invested, offered awesome perks, and expanded network coverage. Prices in the industry overall fell.
In 2020, the industry cried wolf again. This time, it was Sprint, saying it would collapse if its merger with T-Mobile couldn’t go through. The judge in that case bought the arguments, overruling objections from antitrust enforcers. The judge’s decision was premised on two promises from the industry, similar to the ones JetBlue is offering today. First, T-Mobile argued it would remain an aggressive cost competitor. And second, a fourth entity — DISH — would enter the cellphone market in force, exactly like the promises that new airlines will fill the void left by Spirit. Neither promise panned out: customers paid more, and DISH flamed out.
In other words, despite what JetBlue and its backers would have you believe, the answer to rampant consolidation is not more consolidation. Rather, it is ensuring that passengers have access to competitive airfares across all the routes they need to travel throughout the country. JetBlue’s acquisition of Spirit would deny this for American air travelers, and President Biden’s Justice Department is right to fight it.
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Matt Stoller is research director at the American Economic Liberties Project.
