Merger of Spirit with Frontier Facing Antitrust Scrutiny
Lawmakers, special interests, others oppose further market concentration of ultra-low-cost carriers.
In early February, Frontier Airlines and Spirit Airlines announced a $6.6 billion merger that gives Frontier a 51.5% majority stake in a combined airline that will become the nation’s fifth-largest carrier and largest high-speed carrier. low cost (ULCC). Spirit shareholders will receive 1.9126 Frontier shares plus $2.13 in cash for each Spirit share, which has an implied value of $22.54 as of May 4.
The deal does not sit well with lawmakers, special interest groups or antitrust commentators, several of whom have written to the Justice Department opposing the merger. It also doesn’t sit well with JetBlue, which offered to buy Spirit for $33 a share in cash in early April — a roughly 50% premium to Frontier’s offer. JetBlue will be surpassed in size by the combined Spirit-Frontier.
Nevertheless, despite paying a significantly higher payout to shareholders, Spirit’s board of directors on May 2 rejected JetBlue’s offer and reaffirmed its commitment to Spirit-Frontier. The question now is whether the DOJ’s antitrust division, which sent the merging parties a second request for information, will challenge the transaction in its current form.
Concentration in the airline industry has increased since the early 2000s
Traditional measures do not paint an accurate picture of concentration in the airline industry, as consumers cannot choose between every airline for every flight – they are limited to airlines offering flights to and from their destination, that is to say, they must choose from carriers serving the “city pairs” of interest to them. So, although 10 airlines control around 90% of the overall market, each with a market share of between 1% and 20%, there is significant concentration at the city-pair level where the competition actually takes place. Concentration on a city-pair base has increased dramatically over the past two decades following the merger of Delta-Northwest in 2008, United-Continental in 2010, and American-US Airways in 2013. Unfortunately, these mergers appear to have no achieved the promised efficiencies. , while prices have gone up and the quality of service has gone down.
Problematic concentration in the airline industry has led to several antitrust challenges in court against carriers brought by private plaintiffs and the government. In 2010, private plaintiffs filed a class action lawsuit alleging unlawful baggage fee collusion between AirTran and Southwest. In 2015, the DOJ filed suit against Delta and United, alleging the pair illegally conspired to acquire takeoff and landing slots at Newark Liberty International Airport. And in 2021, the DOJ and six state attorneys general filed suit against JetBlue and American, alleging a de facto merger agreement that eliminated competition between the two at four major Northeast airports.
The Spirit-Frontier merger raises several competition concerns
Spirit and Frontier are the seventh and ninth largest airlines. The combined entity would be the fifth largest airline with a 9% market share nationwide. Although the resulting national market share would not be a problem using traditional concentration parameters (for example., an increase in the Herfindahl-Hirschman Index, or HHI, a commonly accepted measure of market concentration), the transaction nevertheless raises several competition concerns.
On the one hand, the airlines are not competing in a unified national market and the agreement threatens excessive concentration for several dozen city pairs. A letter sent by the American Antitrust Institute to the DOJ cites Cleveland, Las Vegas, Myrtle Beach, Orlando, Philadelphia, Ft. Myer, Puerto Rico and Tampa as destinations that could be significantly affected.
Additionally, a Spirit-Frontier combination would eliminate competition between the two largest ULCCs, a segment that serves price-sensitive consumers who often travel to and from single-airport destinations. This type of competition is particularly important because studies indicate that it stimulates price competition between full-fare carriers, as customers begin to default if prices are too much higher than ULCCs.
The merger would also reduce competition for ancillary services, for example., baggage handling, early boarding, etc. Both airlines use an “unbundled” business model, in which they charge fees for virtually all services offered, generating around half of their revenue from these fees. Spirit and Frontier were among the first to introduce such fees and now compete vigorously on these fees. The DOJ is likely to pay particular attention to the impact of the merger on ancillary fees (President Biden specifically mentions competition for ancillary fees in his 2021 antitrust executive order).
JetBlue’s proposal could raise greater antitrust concerns
Businesses generally do not reject all-cash offers that are 50% higher than the accepted offer. But Spirit’s board did just that, saying JetBlue’s proposal raised greater antitrust hurdles. While it’s hard to guess the board’s rejection of JetBlue’s $33/share cash offer, it appears JetBlue’s proposal would have been more likely to be challenged by the DOJ.
First, there is a greater overlap of routes between JetBlue and Spirit. While Frontier is based primarily in the West, JetBlue and Spirit fly primarily in the East. As a result, the merger of JetBlue and Spirit would result in even greater concentration at the city-pair level. In one case, Fort Lauderdale-Hollywood International Airport, the combined company would be responsible for about half of all departures.
Second, acquiring JetBlue would eliminate a ULCC carrier from the market instead of creating a ULCC juggernaut, as Spirit-Frontier promises. JetBlue uses a full-price business model, offering many more services and amenities at higher prices. According to reports, JetBlue would integrate the Spirit fleet into its existing business rather than operating Spirit as a separate ULCC.
Third, JetBlue is already in the DOJ’s crosshairs over an alleged anti-competitive combination. The DOJ is currently in a lawsuit against JetBlue’s Northeast Alliance (“NEA”) with American Airlines in federal court, with the trial set to begin in September. The NEA covers operations at four major airports in the Northeast – Logan in Boston, John F. Kennedy and LaGuardia in New York, and Newark Liberty in New Jersey. According to the lawsuit, the deal is effectively a merger that eliminates competition between JetBlue and American at airports where JetBlue and American have a substantial presence. While the fate of a proposed Spirit-JetBlue merger may not necessarily be linked to the NEA litigation, the DOJ is unlikely to ignore competition concerns raised by the NEA when assessing the legality of a project. acquisition of Spirit.
Will the DOJ challenge a Spirit-Frontier merger?
While less problematic than a combination with JetBlue, the Spirit-Frontier merger still faces headwinds at the DOJ. As highlighted above, the merger raises significant concentration issues for many city pairs and has been the subject of public opposition from lawmakers, interest groups and high-profile antitrust commentators. . The merger occurs in an industry that has seen several anti-competitive mergers over the past two decades and is currently under investigation by the DOJ, which has already issued a second information request to Spirit and Frontier. Finally, agencies under the Biden administration seem more willing to challenge mergers than under previous administrations. Overall, then, it seems the Spirit-Frontier merger will likely require material concessions from the merging parties for the deal to avoid a legal challenge. Based on the effects of recent airline mergers, this should be a good thing for airline passengers.