DOJ Makes Case Against JetBlue-Spirit as Airlines Prep Response

Government lawyers finished presenting evidence at an antitrust trial to block JetBlue Airways Corp.’s $3.8 billion takeover of Spirit Airlines Inc. as part of a US crackdown on airline consolidation. Now, the companies will start making their arguments before a federal judge in Boston to revive the long-shot deal.

During the first three weeks of testimony, which ended Tuesday, the Justice Department presented internal company documents and questioned executives to support government claims that the merger would reduce competition and boost fares in an already highly consolidated airline industry.

JetBlue and Spirit will start their final defense of the deal Monday. But they’ve already made their main point that they need to combine to create a company that can viably compete with the big-four airlines — American Airlines Group Inc., Delta Air Lines Inc., United Airlines Holdings Inc. and Southwest Airlines Co., which account for about 80% of ticket revenue in the US.

Here are the key points in DOJ trial arguments so far:

‘Raise Fares’

• The government claims buying Spirit will allow JetBlue to eliminate its fastest-growing, low-fare competitor. “JetBlue’s own analysis of the deal shows that it would reduce the number of seats, reduce choice, and raise fares for millions of Americans,” DOJ lawyer Arianna Markel said in her opening statement.
• The deal would also eliminate the largest carrier among those that offer deeply discounted fares and charge for anything else. JetBlue, with a focus on free Wi-Fi and more leg room, plans to remove 10% to 15% of the seats on Spirit planes and use its expanded fleet to primarily compete with major carriers rather than low-cost airlines.
• Spirit has grown substantially in JetBlue markets from 2017 to 2019, and JetBlue executives speculated Spirit would overtake them in market share by 2025, internal documents and testimony showed.
• “This head-to-head competition lowers prices and benefits consumers,” said Gautam Gowrisankaran, an economics professor at Columbia University who testified for the government. “This head-to-head competition would be lost if the merger were to go forward.”

‘Spirit Effect’

• Spirit’s low fares are a major disruptor in the industry, so losing it to JetBlue would mean higher fares and increases the risk of price coordination among airlines, the government argued. Witnesses described the so-called “Spirit-effect,” when the airline enters a new market and forces other carriers to compete with its lower prices. While JetBlue also can be disruptive in pricing, it will have less flexibility to do so after the merger, the government said.
• JetBlue Chief Executive Officer Robin Hayes testified the airline will have to borrow $3.5 billion to complete the deal, which he acknowledged may limit its ability to respond to changing economic conditions and to invest in the business.
• “However much JetBlue is a disruptive force now, they’ll have incentives to be less of a disruptive force after the merger — if it were to go forward,” Gowrisankaran said.

Spirit’s Concerns

• While Spirit supports the merger now, it initially had the same concerns as the government. CEO Ted Christie testified his team thought JetBlue would eliminate Spirit’s low-fare business model, which would bring a challenge from antitrust regulators. Christie said JetBlue’s plan indicated most of Spirit’s planes would no longer operate in a low-cost carrier model.
• According to the evidence, the CEO’s assessment in a May 2022 earnings call was: “At its core, the JetBlue proposal represents a high-cost, high-fare airline buying a low-cost, low-fare airline with half the synergies coming from reduced capacity and increased fares.” On the witness stand, Christie explained, “We were concerned this would be raised by regulators and wanted to point it out.”
• Instead, executives and the board argued against JetBlue’s offer and in favor of Spirit’s plan to merge with fellow discount carrier Frontier Group Holdings Inc. Spirit Chairman Mac Gardner testified he questioned the “sincerity” of JetBlue’s offer. Various internal documents showed Spirit board members had the same question. One said: “We believe JetBlue’s Real Motivation is to Break up the Spirit/Frontier Merger.”

Divestiture Dispute

• To appease regulators, JetBlue has said it will sell Spirit assets at four major airports to ultra-low cost carriers Frontier and Allegiant Travel Co. But the government said that won’t go far enough, because there’s no guarantee the smaller airlines will fly the same routes as Spirit.
• The government also argued plane shortages, infrastructure limitations and differing business models among other low cost carriers mean there won’t be a sufficient market replacement for Spirit anytime soon.

Overlapping Markets

• The government claims the merger would give JetBlue unfair market power because it currently competes in 183 of the same markets as Spirit, including 51 nonstop overlaps.
• The airlines argue it’s the national market, not local ones, that should be used to assess the combination of JetBlue and Spirit, because airlines frequently enter and exit different routes. But Gowrisankaran said that “simply wouldn’t make sense” in evaluating the impact of the deal on competition.
• “Let’s say we were looking for a market of coffee shops around the courthouse in Boston,” he said. “And we added in coffee shops that were say, in New York near my office. Then that’s not going to illuminate competitive effects, because if you raise prices for coffee shops here in Boston, nobody’s going to go to New York to get their coffee.” Air travel is based on the idea that passengers “live somewhere, they want to go somewhere and they choose flights to get there.”

No Jury

• The trial is slated to last another four days before US District Judge William G. Young, who was nominated by former President Ronald Reagan in 1985. There isn’t a jury. The proceedings are being heard as a bench trial, meaning Young will rule on whether the sale should be permitted to proceed.

The case is US v. JetBlue, 23-cv-10511, US District Court, District of Massachusetts (Boston).

--With assistance from Mary Schlangenstein.

To contact the reporter on this story:
Madlin Mekelburg in Austin at mmekelburg@bloomberg.net

To contact the editors responsible for this story:
Steve Stroth at sstroth@bloomberg.net

Peter Blumberg

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