JetBlue May Need to Give Up AA Alliance to Win Spirit Merger Approval
February 13, 2023
Airline Weekly (Edward Russel)
JetBlue Airways has one big bargaining chip that it can offer the U.S. Department of Justice in exchange for approval of its proposed merger with Spirit Airlines. That chip? Its alliance with American Airlines.
The alliance card, which until now JetBlue executives have said is off the table, may need to be played following reports that the DOJ is preparing to sue to block the $3.8 billion JetBlue-Spirit merger. Because, frankly, it’s a good trump card to sway the firmly anti-consolidation, pro-competition regulator in favor of the deal that JetBlue executives view as critical to the airline’s future.
“I think that is more potent,” said Dr. Bijan Vasigh, a professor at Embry-Riddle Aeronautical University’s David B. O’Maley College of Business, referring to the alliance as a more potent competition concern than the proposed merger.
“American and JetBlue are dominating the northeast U.S.,” he added.
The DOJ, American, and JetBlue are awaiting a judge’s decision in the regulator’s lawsuit to break up the alliance, which was controversially approved in the waning days of the Trump administration. Many expect a ruling in favor of the airlines, and against the government.
All of this back and forth is over a relatively small portion of the U.S. market. JetBlue and Spirit combined carried just over 8 percent of all domestic passengers during the year ending in November, the latest U.S. Bureau of Transportation Statistics via Cirium show. The next smallest carrier, United Airlines, had a nearly 16 percent share, and the Big Four — American Airlines, Delta Air Lines, Southwest Airlines, and United — had a combined 79 percent share.
“This isn’t Pepsi and Coke merging,” JetBlue President and Chief Operating Officer Joanna Geraghty told Reuters earlier in February.
A JetBlue spokesperson Monday reiterated their position that the merger with Spirit would benefit consumers by creating a stronger competitor to the Big Four. “We continue to work through the regulatory process to demonstrate how this merger will increase competition in the airline industry,” they added.
The DOJ, which did not comment on the reports, is likely more focused in its review than the national airline market. The northeast and Florida are where a combined JetBlue-Spirit would have the greatest concentration, and the former is the center of JetBlue’s alliance with American. Together, American and JetBlue had a 51 percent share of U.S. domestic passengers in Boston, and 35 percent at the three main New York airports combined during the year ending in November, according to BTS data. And in Fort Lauderdale, JetBlue and Spirit together had a 46 percent share of travelers.
For comparison, the next largest airline in Boston, Delta, had a 26 percent share of U.S. domestic flyers in the year ending in November, according to BTS. United had just over a 27 percent share of passengers and Delta just under 27 percent at New York’s three main airports. And in Fort Lauderdale, Southwest had a 16 percent share.
To concerns related to those three markets, JetBlue has offered to give up all of Spirit’s assets in Boston and New York, as well as five gates at the Fort Lauderdale airport where both airlines maintain large bases. Spirit uses two gates in Boston for up to 16 daily departures, according to Diio by Cirium schedules. It has 16 slot pairs at New York’s LaGuardia airport, and operates up to 24 daily departures from Newark Liberty airport.
Asset divestitures are the DOJ’s tried-and-true method of blunting airline mergers. When American and US Airways combined in 2013, the regulator filed suit to block the deal that August before reaching a deal in November where the airlines gave up slots and gates at airports across the U.S. The American-US Airways concessions included 17 slot pairs at LaGuardia and 52 pairs at Washington Reagan National airport, plus gates at five other airports. A similar agreement was reached for the merger of United and Continental Airlines in 2010.
Gates, slots, and runway timings in Boston and New York could be a big boost from other budget airlines with little or no presence in the markets. Frontier Airlines, the next largest U.S. ultra low-cost carrier after Spirit — and discarded one-time merger partner — operates up to just two daily flights to Boston and three to LaGuardia; it does not serve Newark, Diio shows. Allegiant Air and Sun Country Airlines are each even smaller in Boston and New York. And neither budget startup Avelo Airlines nor Breeze Airways serves either market directly today.
American and JetBlue have used their alliance to expand in the New York market. The carriers’ combined seat capacity at LaGuardia is up 24 percent in the first quarter compared to four years ago before their partnership and the Covid-19 pandemic, Diio data show. And their combined seats are up 20 percent at New York’s JFK airport, and 12 percent at Newark.
However, in Boston, American and JetBlue have shrunk with combined seats down nearly 12 percent over the same four-year period, according to Diio. One potential reason for that decline is the lack of slot use-it-or-lost-it rules at Boston’s Logan airport versus the New York-area airports that means flights are coming back in line with travel demand. Or, in a more pessimistic view, it could be because American and JetBlue want to depress capacity in order to raise fares.
The DOJ has used airline partnerships as a bargaining chip in merger negotiations in the past. In 2016, the regulator forced Alaska Airlines to all but end its codeshare with American in exchange for approval of the former’s merger with Virgin America. At the time, the DOJ described the settlement as creating the incentive for the combined Alaska-Virgin America to “vigorously compete” with American. (Alaska and American reformed their codeshare in 2020)
What’s different today is JetBlue’s pact with American is much deeper, and understood to be more lucrative, for the airline than the Alaska-American tie up was for Alaska seven years ago. While JetBlue executives have repeatedly declined to put numbers to the partnership, they have emphasized the airline’s growth in New York with slots previously used by American. Without those slots, JetBlue executives have rightly indicated that the airline could not add new flights at either JFK or LaGuardia airports.
“We’re very pleased with the performance of the [northeast alliance] and the acceleration that’s given, frankly, to our New York markets and their recovery,” Geraghty said in January.
Another option on the table for JetBlue and Spirit is something of a throwback to the former’s launch in 2000. The airlines could promise to grow in certain markets — for example, smaller cities that have lost air service due to the industry’s pilot shortage — as a condition of their merger. JetBlue made a similar pledge to Senator Chuck Schumer (D-N.Y.) to serve smaller cities in New York state, including Buffalo and Syracuse, in exchange for the slots it needed at JFK airport for its launch 23 years ago.
JetBlue has already promised additional growth if the merger is approved. In a filing with the U.S. Department of Transportation earlier in February, the airline hinted at potential new service to Hawaii, as well as at least eight new routes from Fort Lauderdale, following the combination.
Ultimately, it will be up the DOJ to decide what would be enough to placate its monopoly concerns. Embry-Riddle’s Vasigh said that this measure changes from administration to administration, with President Biden having taken a very pro-competition position.
“The merger of JetBlue and Spirit does not create as much of a problem as previous mergers,” he said.
Spirit declined to comment, and American did not respond to a request for comment.