Many of us are well aware of the efforts to merge Spirit Airlines with JetBlue Airlines. In fact, the merger began with Spirit and Frontier Airlines, however, Frontier was out-bargained by Jetblue with a more favorable deal that Spirit accepted. This means that the new merger would be able to rival the big-four; airlines Southwest, American, Delta, and United.
We have not heard much about the merger in a while and thought that things were going well. However, things are not going well because the deal is being hampered by the US government.
Economist and market analyst believes that the merger would mean greater competition for the big-four as the merger will provide even greater availability of services at lower prices for travelers. While opponents believe that this merger violates antitrust regulations. Whichever side of the fence you’re on, one thing is for sure, the customers and employees of the firms involved are not having a particularly favorable time at this time, as they are missing out on the potential benefits of this deal.
In this week’s full article, we share some details on what’s been holding up the deal between Spirit and JetBlue airlines, shedding some light on how sometimes bureaucracy and regulation can stymie deals that could be beneficial to employees, the paying customer, and the general public.
For additional readings on the Spirit merger, please see also: ‘Airline Mergers: A Solution To The Pilot Shortage?’, and ‘Airline Formations and Mergers’
Yet again, the government destroyed a business partnership that not only promised but actively delivered benefits to consumers. The Northeast Alliance (NEA), a partnership between airline companies JetBlue and American Airlines, was ruled against in federal court after a battle with the Department of Justice (DOJ). Like the rulings of cases that came before it, this antitrust action is void of common sense.
The NEA clearly does not establish a monopoly. JetBluemakes up just 5.5 percent of the airline market. Adding that to American’s 17.5 percent gets the market nowhere close to actual monopoly conditions. But, given that the NEA only services certain regions, it would be inappropriate to simply add their total market shares together.
This partnership only involves sharing certain business operations in select geographical areas. The NEA only services four international airports: Boston Logan, John F. Kennedy, LaGuardia, and Newark Liberty. To put this into perspective, out of these airports, JetBlue only has a significant market share in New York (24.6 percent) and Boston (30.7 percent). Adding American Airlines’ market share will not significantly increase the concentration of the market in any of these regions because American Airlines’ market concentration outside of New York and Boston does not exceed 10.1 percent. In fact, most of American’s business is concentrated outside of regions where it has a high market share.
Regardless of whether the NEA violated the Sherman Antitrust Act or not, the partnership was for the betterment of the consumer. JetBlue and Americanmade sure to reiterate this fact in their respective announcements regarding JetBlue’s departure from the NEA.
The NEA joined the two companies in “code sharing (offering seats on each other’s flights) and slot swaps (pooling their gates as well as takeoff and landing times).” Furthermore, the partnership included other benefits such as frequent-flyer program reciprocity and loyalty benefits that could be used with both companies. Essentially, this partnership offered consumers a better-quality product at a higher quantity. The gate and seat sharing certainly aided in the expansion of both companies into the northeast, providing a competitive force that did not previously exist.
The departure of JetBlue from the NEA has freed them from having to staff airports in the Northeast. Additionally, this has stoked uncertainty about JetBlue’s continued provision of flights in the Northeast. For the time being, JetBlue announced that it would continue to provide flights and the benefits that the NEA offered, but they will not last. The competitive advantage that the NEA enjoyed will disappear in the long run. This antitrust action is therefore anticompetitive; it stifles the market.
This reveals the inconsistency of antitrust. What is the point of competition if not for obtaining an advantageover your competition? Whenever a company does successfully compete, they are labeled a “monopolist.” Yet antitrust laws are intended to preserve competition. This is absurd. The standard of perfect competition is not competition at all.
Ludwig von Mises states in his book Human Action, “The term monopolistic or imperfect competition is applied today to the cases in which there are some differences in the products of different producers and sellers. This means that almost all consumers’ goods are included in the class of monopolized goods.”
All goods sold on the market are done so in the spirit of monopoly. That is the competitive process.
Murray Rothbard states further,
The pure-competition theory, however, is an utterly fallacious one. It envisages an absurd state of affairs, never realizable in practice, and far from idyllic if it were. In the first place, there can be no such thing as a firm without influence on its price. The monopolistic-competition theorist contrasts this ideal firm with those firms that have some influence on the determination of price and are therefore in some degree “monopolistic.”
So-called monopolistic tendencies are integral to all selling activity. JetBlue and American had what could be perceived as a monopolistic advantage, but the total power they accumulated was far from problematic according to any standard. In fact, the agreement was aimed at improving consumer welfare rather than exploiting the consumer.
The restriction of quantity that is the characteristic mark of the mainstream understanding of monopoly did not occur under this agreement. The goods offered by these companies were extended rather than restricted.
The DOJ’s claim that this agreement would cause the consumer “hundreds of millions of dollars in harm” is unfounded. JetBlue is one of the leading low-costairlines in the world and is ranked one of the highest in consumer satisfaction across a number of margins. There is no indication outside of the bad economics of the DOJ that this won’t continue. This deal was finalized in the last days of the Trump administration, and so far, it has not been damaging as the DOJ insinuated it would be. In fact, both JetBlue and American emphasized in their press releases that the DOJ once lauded the two for expanding competition into the Northeast.
Ironically, the DOJ killing this partnership has led to JetBlue focusing efforts on acquiring Spirit. Currently, the DOJ is attempting to block the merger between the two companies, a move that is even more ridiculous than the destruction of the NEA.
The combined market power of JetBlue and Spirit is 10.4 percent. This combined market share would not rival the power of the “big four” airlines—United, Southwest, Delta, and American—the smallest of which has a market share of 15.6 percent. It would, however, give the two small companies a competitive edge against the industry titans.
There is no good rationale for blocking the JetBlue-Spirit merger. Keeping the small companies small does not make the market more competitive; instead, it preserves the market power of the large airlines that risk losing their superior positions.
The same applies to the NEA. The companies that benefited most from the destruction of the JetBlue-American agreement are the companies that already have a superior position in the Northeast. For example, United has 56.7 percent of the market in Newark airport, which was subject to the NEA.
Special interests likely abound. Those that stand to win are the “big four” airlines, but JetBlue is the biggest loser here, having its opportunity to utilize some of American Airlines’ resources crushed and the chance of merging with a smaller competitor blocked.
These antitrust cases are just more examples of the government stepping into voluntary arrangements to stifle real competition and harm consumer welfare. Again, antitrust action lacks economic sense.
Benjamin Seevers is a Mises Institute Fellow and holds a BA in economics from Grove City College. He will begin his PhD in economics at West Virginia University in fall 2023. His research interests include private governance, public policy, and libertarian ethics.
This article was published on the Mises Wire on August 05, 2023, with the title “Flying into Foolishness: The DOJ “Saves” Consumers from Low-Cost Airlines. The views expressed are the author’s, and do not constitute an endorsement by or necessarily represent the views of On Aviation™ or its affiliates.
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