The US launched a two-part effort to block JetBlue Airways Corp.’s $3.8 billion acquisition of Spirit Airlines Inc. Tuesday, filing an antitrust lawsuit and withholding certification required for the carriers to combine operations.
(Bloomberg) — The US launched a two-part effort to block JetBlue Airways Corp.’s $3.8 billion acquisition of Spirit Airlines Inc. Tuesday, filing an antitrust lawsuit and withholding certification required for the carriers to combine operations.
In a complaint filed in federal court in Boston, the Justice Department said the combination would lead to higher prices for consumers by eliminating Spirit as a deep fare discounter. Bloomberg had previously reported the move was likely to come as soon as Tuesday. New York, Massachusetts and Washington, DC, joined in the antitrust suit.
“The merger of JetBlue and Spirit would result in higher fares and fewer choices for tens of millions of travelers, with the greatest impact felt by those who rely on what are known as ultra-low-cost carriers in order to fly,” Attorney General Merrick Garland told reporters in Washington.
Separately, the Department of Transportation said in a press release it “fully supports” the Justice Department’s action and was taking its own steps to block the deal.
DOT said it would deny the airlines’ request for an exemption allowing them to operate as a single carrier while awaiting final approval of the deal. It is also investigating the takeover request to determine if it violates rules governing unfair and deceptive practices, and unfair competition, the agency said.
The denial is the first time in decades the transportation agency has invoked its authority to block certificate transfers. It has previously withheld approval during litigation.
The deal would make JetBlue the fifth-largest US carrier based on domestic passenger traffic, giving it a broader network and the size to lure passengers away from larger competitors with lower fares and better onboard service.
“We will vigorously defend our position that a combined JetBlue and Spirit will be a game changer for consumers nationwide, creating the most compelling national low-fare challenger to the dominant US carriers,” Spirit Chief Executive Officer Ted Christie said in a statement from the airlines.
The DOJ “has got it wrong on the law here and misses the point” that the combination would create a competitor for the four largest US airlines that control 80% of the market, JetBlue CEO Robin Hayes said. The two carriers are confident they can win at trial and integration planning will continue, he said in an interview.
‘Higher Prices’
The Justice Department cited JetBlue’s own internal research in its decision to fight the acquisition. It said the carrier’s internal calculations found that when Spirit begins flying a route, fares fall as much as 17% and rise by as much as 30% when the discount airline stops flying between cities. JetBlue and Spirit have significant overlap on more than 150 routes that serve more than 30 million passengers each year, the prosecutors said in their complaint, with the two airlines offering the only service on some routes between Florida and Puerto Rico.
JetBlue told lenders financing the deal that it planned to earn 24% more per seat than Spirit does today by removing seats from Spirit’s airplanes and “adjusting” prices, according to the complaint.
“If the acquisition is approved, JetBlue plans to abandon Spirit’s business model, remove seats from Spirit’s planes, and charge Spirit’s customers higher prices,” the department said.
But JetBlue pushed back on those claims. Its CEO said the proposed combination will more than offset seats taken from Spirit planes by “meaningfully” increasing the number of flights and operating some JetBlue aircraft with 200 seats compared to 182 on Spirit. Customers on the combined carrier will “save a lot more money” than if they were flying on either carrier separately, he said.
JetBlue and Spirit offered to divest overlapping routes to assuage antitrust concerns — a remedy the Justice Department accepted in previous airline mergers. But there’s no guarantee that the buyer of any landing slots or gates would fly the same route, Principal Deputy Assistant Attorney General Doha Mekki said.
“In airline cases, divestiture of routes don’t actually happen,” she said.
Hayes called the DOJ characterization of the possible divestitures “disingenuous,” adding that rival airlines have expressed significant interest in the assets it has offered to shed. “The reality is when carriers get access to constrained markets through divestitures, they don’t walk away from it,” he said.
NEA Alliance
The lawsuit marks the second against JetBlue by the Biden Justice Department, which is also seeking to unwind its alliance in the northeast US with American Airlines Group Inc. The DOJ suit to block the deal with Spirit will be heard by US District Judge Leo T. Sorokin, who also presided over the JetBlue-American alliance trial last year and has yet to issue a decision.
Garland said the JetBlue-Spirit combination would “exacerbate” issues the government had with the American alliance.
The new lawsuit doesn’t immediately stop JetBlue’s acquisition of Spirit, but it means the companies must now look for concessions to appease regulators or prepare for a lengthy court battle.
Shares of Spirit rose 4.7% — the most since October — to $17.13. JetBlue fell 2.9% to $8.16.
The DOJ decision reverses years of a laissez-faire attitude among regulators about airline industry concentration, which was tacitly encouraged over the past two decades after most carriers were forced into bankruptcy. Several were green-lit during the George W. Bush and Barack Obama administrations after relatively minor concessions such as giving up gates or flying slots at congested airports or in cities where the merged airline dominated service.
Consolidation Wave
A wave of consolidation eliminated five of the 10 biggest US airlines between 2005 and 2013 and left about 80% of domestic market share in the hands of four carriers.
JetBlue had acknowledged Monday the likelihood of a DOJ lawsuit, and said it would “vigorously pursue” any change in the DOT’s approach to takeovers and certificate transfers over the past 30 years. The deal would remake Spirit in the mold of JetBlue, eliminating the largest of the country’s ultra-discount carriers that are favored by the most price-conscious travelers. It comes after JetBlue last summer bested an offer by rival Frontier Group Holdings Inc.
Read more: ‘Top Gun’ Deal Morphs Into Airlines’ Fiercest M&A Brawl in Years
JetBlue’s planned conversion of Spirit’s jam-packed planes to a more roomy seating arrangement would likely result in higher average fares and reduced options for travelers, opponents had claimed. Spirit’s business model has offered rock-bottom fares in exchange for add-on fees for everything from a printed boarding pass to an in-flight cup of coffee or bottle of water.
Separately, JetBlue agreed that the combined airline would add “hundreds” of new daily flights to Florida and create at least 1,000 jobs to help resolve concerns over the planned Spirit takeover, the Florida attorney general’s office said Monday as it announced the end of an antitrust review. JetBlue also agreed to maintain all Spirit and JetBlue facilities in the state, and to pay $1 million to cover costs of the investigation and future compliance with the agreement.
–With assistance from Zoe Tillman, Alan Levin and Ryan Beene.
(Updates with JetBlue CEO comments from ninth paragraph/)
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