JetBlue hit with DOJ, DOT objections to Spirit buyout

Regulatory approval has been a major concern since the day Spirit Airlines became a takeover target a year ago. Now, seven months after JetBlue won the bidding battle, it must convince US regulators – or a judge – that consolidation is good for consumers. And the Department of Justice will not make that an easy task.

JetBlue continues to hold on to the idea that, even when combined, the two carriers would still be only half the size of any of the Big 4. Keeping the biggest players in check is a noble goal.

But anything that sees fares potentially go up is unlikely to please regulators. And some fares will almost certainly have to go up. Far less certain is JetBlue’s argument that other fares will drop to offset this shift.

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Structural fare shift

Removing a competitor from the market leads to higher fares. So does removing capacity. So JetBlue’s plan to remove competition from Spirit, and also to reconfigure the aircraft to a more generous cabin layout is something of a double whammy.

Spirit today flies with 228 seats on its A321s and 174-182 on its A320s. JetBlue flies those planes with 200 and 150-162, respectively. And JetBlue says it wants to maintain its on-board experience levels through the merger. Simply removing 10-15% of the seating capacity from Spirit’s operations will drive up unit costs. And that’s before considering things like reduced ancillary revenue from selling drinks and snacks on board.

JetBlue CFO Ursula Hurley acknowledges this challenge. She notes that post-merger the airline hopes to maintain JetBlue’s existing cost levels, costs which are higher than Spirit’s.

Throughout the past year JetBlue has said little to argue this point. Instead, it claims to serve a bigger purpose: Lowering otherwise higher fares through competition with the Big 4.

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Higher fares could save passengers money?

In short, JetBlue believes its fares – typically lower on average than the Big 4 – will continue to be lower, even after the merger. And with the larger fleet and footprint the Big 4 will be forced to compete on price with JetBlue, thereby lowering fares for many, many other customers across the country. Even though those directly impacted by the disappearance of Spirit will see higher fares.

The government disputes the “JetBlue Effect” claims. It notes that JetBlue is more likely to raise fares when the Big 4 do in most markets. It also suggests that JetBlue plays signaling games with the others, keeping fares higher while not outright colluding. And JetBlue has shifted at least one pricing policy recently. In its new transatlantic markets the company charges a premium for one-way fares compared to round-trip travel. Historically that was a legacy airline pricing policy it shunned.

There’s also the part where JetBlue isn’t always the lower fare. Southwest was lower on average per the 2022 10-K filings, for example, though those numbers are not always a perfect comparison.

Fighting against themselves

It is also not helpful that during the fight between Frontier and JetBlue Spirit kept publishing claims about why the DOT or DOJ would likely object to a Spirit merger. Trying to counter those now is going to be an uphill battle for JetBlue.

Worth the risk of a judgement?

Typically these lawsuits end up with a settlement reached between the parties. But is that even viable here?

JetBlue aimed to placate the Feds with divestment of Spirit’s holdings in Boston and New York, plus a partial pullback in Fort Lauderdale. That clearly was not enough, give the suit filed. So what else will the Feds demand as a compromise? And will JetBlue cede those bits, or will it take the chance that a court will believe the JetBlue Effect lives on?