Bidding war for Spirit could undermine power of four major airlines

When the dust settled on a great round of airline consolidation nearly a decade ago, four major companies came to dominate the industry....

When the dust settled on a great round of airline consolidation nearly a decade ago, four major companies came to dominate the industry. A new merger stampede could challenge this comfortable arrangement.

A simmering fight over the future of low-cost airline Spirit Airlines could give rise to a credible, if even smaller, competitor to the industry giants. In February, Frontier Airlines and Spirit announced plans to merge, promising to create a low-budget national airline that would help keep fares low. JetBlue Airways this week made its own $3.6 billion offer for Spirit, who said late thursday night that he would consider the proposal.

Whether Spirit ends up merging with Frontier or JetBlue, the merged company could pose a more formidable 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% of the internal market. The four operate in a league of their own, particularly at their hub airports in cities like Atlanta, Dallas, Houston and Newark, where they each control much of the gates and flights.

In an illustration of the industry’s lopsided nature, Alaska Airlines, the fifth-largest carrier last year, controlled just 5% of the domestic airline market, while United, the fourth-largest, held nearly 13% . A combination of Frontier and Spirit would control over 8% of the market, and JetBlue and Spirit together would control over 10%.

“You’re up against American, United, Delta and Southwest with such huge fleets and market penetration,” said Samuel Engel, senior vice president and airline industry analyst at ICF, a consulting firm. “It’s reasonable that a beefier No. 5 would make a stronger contender.”

Of course, no deal is a certainty, and in either combination, executives could struggle to mesh companies. Integrating airlines, including their IT systems and pilot and flight attendant seniority rankings, has never been easy and has resulted in numerous flight cancellations and lengthy legal disputes.

Either of the proposed mergers would also require approval from antitrust regulators who, under President Biden, have been encouraged to challenge deals that may have been reached in previous administrations.

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

Mr Denis said regulators reviewing airline deals have historically focused on the impact of combining large, traditional airlines – those that have been in business for decades. This review, however, would explore whether there is a “unique rivalry” between low-cost carriers “worth protecting” by the Justice Department.

Regulators are not only concerned with market share. They want to know how a proposed merger affects travelers, including whether the merged company will be able to significantly increase fares on routes where the two companies previously competed directly. And the Biden administration is uniquely focused on the impact of trade agreements on economic inequality, for example by raising tariffs and cutting wages. It’s not always easy to predict the likely impact of any given deal, legal experts said.

A merger between Frontier, which is focused in the West, and Spirit, which is focused in the East, would create a low-budget national airline that could pressure larger carriers to lower fares in more of cities. But the deal would eliminate their competition on competitive routes, which could hurt cost-conscious travellers.

Additionally, Frontier and Spirit have been criticized for poor customer service, and Phil Weiser, the attorney general of Colorado, where Frontier is based, warned federal regulators last month that the merger “creates a real and pressing risk” that the service could get worse if the two companies merge.

JetBlue already competes with the Big Four airlines in cities like New York and Boston and could challenge them further if it is able to acquire Spirit’s planes, airport gates and staff. Consumers could benefit from a better flight experience thanks to the advantages offered by JetBlue. But Spirit’s ultra-cheap fares may not survive as JetBlue tends to cater to more affluent travelers and has expanded premium services like business class seating.

Another factor that could complicate JetBlue’s bid for Spirit is that it’s already embroiled in an antitrust lawsuit filed by the Justice Department. The department is seeking to cancel an alliance between JetBlue and American in the Northeast, a deal one official described last year as a “de facto merger.” The agency said in its lawsuit that American, the nation’s largest airline, would use the partnership to “co-opt a particularly disruptive competitor.” JetBlue and American deny that their agreement is anti-competitive and take the case to court.

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

Some critics of corporate consolidation disagree and say airline mergers could hurt consumers and workers.

Under either deal, the new major airline would have more market power in certain cities, particularly Florida, a popular destination where the three airlines compete.

Diana Moss, president of the American Antitrust Institute, a left-leaning organization that has long called for tougher competition law enforcement, called on the Justice Department to block the Spirit-Frontier deal. Ms Moss and others have published a study in 2013, which concluded that airlines are not realizing the benefits they claim their mergers will bring.

Senator Elizabeth Warren, Democrat of Massachusetts, is another skeptic. “Mergers in the airline industry have driven up prices for consumers and lower wages for workers, and the Department of Justice must scrutinize these proposed deals and challenge them if necessary,” he said. -she said in a statement to The New York Times this week, echoing a letter she and other lawmakers sent to regulators last month about the Frontier-Spirit deal.

Since the deregulation of the industry in the late 1970s, airlines have undergone successive waves of consolidation as they seek first regional, national and then international strength. Financial problems, including a series of bankruptcies, in the 2000s led to the latest wave of big mergers, driven largely by survival, said William Swelbar, aviation consultant and research engineer at the International Transportation Center air from the Massachusetts Institute of Technology.

“The last round of consolidation was really about balance sheets,” he said. “I don’t think these companies individually would have been successful.”

The current offerings appear to be about to grow rapidly. This is because the big airlines have advantages. They can more easily recruit pilots, who are in short supply. Major airlines also get lower prices and better service from aircraft manufacturers. And the easiest way to expand into many airports is to buy another airline that has gates and take-off and landing slots.

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

Shares of JetBlue have fallen more than 10% since the Times published its offer for Spirit, in part because investors are unsure of JetBlue’s ability to fully capitalize on the acquisition.

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

Even under ideal circumstances, airline mergers can be difficult to achieve. And although Spirit and JetBlue overlap, for example in similar aircraft fleets, they operate differently. Spirit is doing everything it can to keep costs and rates low. It charges additional fees for seat selection and hand luggage and close seating. JetBlue also tries to keep costs low, but tries to set itself apart by offering more legroom and free in-flight wireless internet.

“They’re two completely different operators with completely different IT structures, with completely different corporate cultures,” said industry analyst and consultant Robert Mann.

Spirit did not commit to either deal. He said this week he was considering JetBlue’s unsolicited offer. In numbers alone, JetBlue’s all-cash deal is superior, offering a roughly 40% premium to Frontier’s initial cash and stock offer, based on share prices the day before disclosure of its offer by JetBlue.

Frontier could further increase its offer or change its composition. (Spirit’s board originally favored a stock-paid deal, according to regulatory filings, but Frontier shares have fallen since the deal was announced.) Frontier could also offer to pay all costs. associated with the risk that regulators will challenge the merger in court. . JetBlue has guaranteed Spirit reverse severance if its deal is canceled for antitrust reasons.

Some legal experts have said either deal could win support from regulators with certain compromises like a deal to cede gates at some airports.

“I still think that at the end of the day, any deal that could possibly be challenged would probably be approved,” said Kerry Tan, an economics professor at Loyola University in Maryland. “Whatever challenges the DOJ offers, concessions can be made.”

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Newsrust - US Top News: Bidding war for Spirit could undermine power of four major airlines
Bidding war for Spirit could undermine power of four major airlines
Newsrust - US Top News
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