According to The National Law Review, a $6.6 billion merger between Spirit and Frontier Airlines was announced to create a new ultra-low-cost carrier. The combined company would be the fifth-largest carrier in the US, with Frontier controlling 51.5%. Under the terms of the deal, Spirit shareholders would receive 1.9126 shares of Frontier for each Spirit share they own. The proposed merger has not sat well with many people, including politicians and antitrust experts. In April, JetBlue offered to purchase Spirit for $33 a share in cash, a 50% premium over Frontier’s bid. The combined company would be able to overtake JetBlue as the largest low-cost carrier in the US. Despite the higher offer, the Spirit Board of Directors rejected it. The company also reiterated its commitment to the proposed merger. The Department of Justice is now considering whether to challenge the deal in its current form.
Increased Concentration in the Airline Industry
The traditional metrics used to measure the concentration of the airline industry do not take into account the fact that consumers have limited choice when it comes to choosing a carrier for their flight. For instance, they can only choose one of the carriers that offer the service when it comes to their destination. Despite the dominance of the ten largest airlines controlling 90% of the market, there are still significant pockets of competition. The concentration of air travel in the US has increased significantly over the past two decades. Following the merger of Delta-Northwest, United-Continental, and American-US Airways, the combined companies were supposed to deliver on their promise of lower prices and better service. Unfortunately, these promises have not been delivered.
Due to the concentration of the industry, various lawsuits have been filed against the major airlines. In 2010, a class action was filed against AirTran and Southwest for allegedly colluding to raise the prices of their baggage fees. In 2015, the Department of Justice sued United and Delta for allegedly scheming to illegally take over certain landing and takeoff slots at Newark Liberty. In 2021, the department sued American and JetBlue for allegedly a de facto merger eliminating competition in the Northeast by combining their operations.
Decreased Competition Resulting from a Spirit-Frontier Merger
The proposed merger could threaten the already excessive concentration of options available in several cities. According to the American Antitrust Institute, the deal could lead to higher prices and reduced service for customers in places such as Las Vegas, Orlando, Philadelphia, and Puerto Rico. A combination of Frontier and Spirit would eliminate the two largest ultra low-cost carriers, which are typically the only options for customers who are looking to travel to and from single-destination airports. This type of competition is very important to ensure that the prices are not too high for the consumers. The proposed merger would also reduce the competition for certain ancillary services. Both companies have their own business models that allow them to charge varying fees for each service offered. The Department of Justice is likely to look into the deal’s impact on these fees.
Although the proposed merger between Spirit and Frontier is less problematic than one with JetBlue, it still faces various obstacles from the Department of Justice. It’s not often a company refuses an all-cash offer of 50% more than another bid. The agency under the Biden administration is more likely to challenge mergers than its predecessors. It’s also possible that the Department of Justice will require the combined company to make concessions in order to avoid the legal challenges awaiting them post merger.