The war on bidding for spirit can undermine the power of four major airlines

When the dust settled on a large circle of airline consolidation nearly a decade ago, four large companies began to dominate the industry. A new merger could trigger this cozy agreement.

A looming battle for the future of budget carrier Spirit Airlines could lead to a reliable, albeit even smaller, competitor of the industry giants. In February, Frontier Airlines and Spirit announced plans to merge, promising to set up a national-budget airline to help keep fares low. JetBlue Airways made its own $ 3.6 billion offer for Spirit this week, which said late Thursday night it would consider the offer.

Whether Spirit merges with Frontier or JetBlue, the combined company could pose a greater threat to the country’s four largest airlines – American Airlines, Delta Air Lines, United Airlines and Southwest Airlines – which have a combined share of 66 percent of domestic market. The four operate in their own league, especially at their central airports in cities such as Atlanta, Dallas, Houston and Newark, where each controls a large proportion of exits and flights.

To illustrate the unilateral nature of the industry, Alaska Airlines, the fifth largest carrier last year, controlled only 5 percent of the domestic air travel market, while United, the fourth largest, had nearly 13 percent. Combined Frontier and Spirit will control more than 8 percent of the market, and JetBlue and Spirit together will control more than 10 percent.

“You are facing American, United, Delta and Southwest with such a huge fleet and market penetration,” said Samuel Engel, senior vice president and analyst at ICF, a consulting firm. “It is reasonable that a more powerful number 5 will make a stronger competitor.”

Of course, no deal is secure, and in both combinations, executives could struggle to connect the business. The integration of airlines, including their computer systems and the seniority of pilots and flight attendants, has never been easy and has led to widespread flight cancellations and lengthy legal disputes.

Both proposed mergers will also require the approval of antitrust regulators, who under President Biden have been encouraged to challenge deals that may have been successful in previous administrations.

“Both deals pose a new challenge for antitrust agencies,” said Paul Dennis, who represented US Airways in the merger with American Airlines, which ended in 2013. Earlier in his career, he also reviewed mergers and acquisitions at the Department of Justice.

Mr Dennis said regulators looking at airline deals have historically focused on the impact of combining large, legacy airlines – those that have been in business for decades. However, this review will examine whether there is a “unique rivalry” between low-cost carriers that “deserves protection” from the Ministry of Justice.

Regulators are concerned about more than market share. They want to know how the proposed merger affects passengers, including whether the combined company will be able to significantly increase fares on routes where the two companies have previously competed against each other. And the Biden administration is uniquely focused on the impact of corporate transactions on economic inequality, for example by raising tariffs and suppressing wages. It is not always easy to predict the likely impact of a deal, legal experts said.

The merger between Frontier, which focuses on the West, and Spirit, which focuses on the East, will create a larger national budget airline that can pressure larger carriers to cut fares in more cities. But the deal will eliminate their competition on competitive routes, potentially harming cost-conscious passengers.

Frontier and Spirit have also been criticized for poor customer service, and Phil Weiser, Colorado’s Attorney General, where Frontier is based, warned federal regulators last month that the merger “poses a real and immediate risk” that service could deteriorate. if the two companies merged.

JetBlue is already competing with the four major airlines in cities such as New York and Boston, and could challenge them further if it succeeds in acquiring aircraft, airport gates and Spirit staff. Users can benefit from a better flying experience thanks to the benefits that JetBlue offers. But Spirit’s ultra-cheap fares may not survive because JetBlue tends to care for more affluent passengers and expands first-class services such as business-class seats.

Another factor that could complicate JetBlue’s bid for Spirit is that it is already involved in an antitrust lawsuit filed by the Department of Justice. The department is seeking to annul the alliance between JetBlue and American in the Northeast, a deal that an employee described last year as a “de facto merger.” The agency said in its lawsuit that American, the country’s largest airline, would use the partnership to “co-opt a uniquely destructive competitor.” JetBlue and American deny that their deal is anti-competitive and are suing.

JetBlue executives said this week that they intend to continue the company’s partnership with American in the Northeast. They also said the acquisition of Spirit would allow JetBlue to compete more aggressively with the four major airlines.

Some critics of corporate consolidation disagree, saying airline mergers could be bad for consumers and workers.

Under the two deals, the new larger airline will have greater market power in certain cities, especially in Florida, a popular destination where all three airlines compete.

Diana Moss, president of the American Antitrust Institute, a left-wing organization that has long called for tighter enforcement of competition laws, has asked the Justice Department to block the Spirit-Frontier deal. Ms Moss and others published a study in 2013 that concluded that airlines do not provide the benefits they claim will ensure their mergers.

Sen. Elizabeth Warren, a Democrat from Massachusetts, is another skeptic. “The mergers at the airline have led to higher consumer prices and lower wages for workers, and the Department of Justice must carefully examine these proposed deals and challenge them if necessary,” she told The New York. The Times this week, echoing a letter she and other lawmakers sent to regulators last month about the Frontier-Spirit deal.

Since the industry deregulated in the late 1970s, airlines have undergone successive waves of consolidation in search of regional, national and then international power. Financial problems, including a series of bankruptcies, led to the latest wave of major mergers in the 2000s, largely motivated by survival, said William Swelbar, an aviation consultant and researcher at the Massachusetts Institute of Technology’s International Air Transportation Center.

“The last round of consolidation was really about balance sheets,” he said. “I don’t think these companies would do it alone.”

The current deals seem to be accruing quickly. This is because larger airlines have advantages. They can more easily hire pilots who are in short supply. Larger airlines also receive lower prices and better service from aircraft manufacturers. And the easiest way to grow at many airports is to buy another airline that has takeoffs and slots for takeoff and landing.

But some analysts aren’t sure that airlines can easily reap the benefits of size through mergers.

Shares of JetBlue have fallen more than 10 percent since The Times announced its offer for Spirit, in part because investors are unsure of JetBlue’s ability to take full advantage of the acquisition.

Analysts speculate that JetBlue made the offer in part because it feared losing business to the combined Frontier-Spirit, which the airline cited as a potential risk to its competitiveness in its annual report. This is not the first time JetBlue has tried to grow by acquiring another airline. She tried to buy Virgin America, but lost the deal to Alaska Airlines.

Even under ideal circumstances, airline mergers can be difficult to implement. And while Spirit and JetBlue have some overlap, for example in similar aircraft fleets, they work differently. Spirit does its best to keep costs and tariffs low. There is an additional charge for choosing a seat and hand luggage and packing places close to each other. JetBlue similarly tries to keep costs low, but tries to stand out by offering more legroom and free wireless in-flight internet.

“These are two completely different operators with completely different IT structures, with completely different company cultures,” said Robert Mann, an analyst and industry consultant.

The Spirit has not engaged in either. This week, he said he was reviewing JetBlue’s unsolicited offer. In numbers alone, JetBlue’s all-money deal is better, offering an approximate 40 percent premium over Frontier’s initial offer for money and shares, based on stock prices the day before JetBlue unveiled its offer.

Frontier can still increase its offer or change its lineup. (Initially, the Spirit board preferred a deal paid for in stock, according to regulatory documents, but Frontier shares fell after the deal was announced.) Frontier may also offer to pay all costs associated with the risk of regulators challenging the merger in court. . JetBlue guarantees Spirit a reverse fee for the break-up if its transaction is canceled due to antitrust concerns.

Some legal experts have said that any deal could win the support of regulators with some compromises such as an agreement to release gates at some airports.

“I still think that at the end of the day, any deal that could possibly be challenged is likely to be approved,” said Kerry Tan, a professor of economics at Loyola University in Maryland. “Whatever challenges the Ministry of Justice provides, concessions can be made.

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