Frontier, Spirit merger likely to draw DOJ scrutiny
The proposed merger between Frontier and Spirit airlines announced Monday is likely to draw scrutiny from the Biden administration, which has sought to crack down on mega-mergers and frequently bemoans the domination of the airline industry by a handful of companies.
The budget carriers on Monday made the case that the $6.6 billion deal will allow the newly formed company to take on the four big airlines that service most U.S. flights, providing more consumers with cheaper options.
But they acknowledged they will need to convince the Biden administration.
“We’ve reached out to the administration and we’re really excited about telling our story,” Frontier CEO Barry Biffle said during a call with investors Monday. “This merger is completely different than any other merger in the past in the U.S. This is not about reducing competition and raising fares, this is about getting more low fares to more people in more places.”
Biffle added that he thinks the airlines’ pitch will be well-received by federal regulators.
Experts aren’t so sure. They say that while a merger between two budget carriers may have been a slam dunk under previous presidents, the airlines should expect tough sledding from Biden administration officials who have taken a hard line on corporate consolidation.
In September, the Department of Justice (DOJ) filed a lawsuit to block an alliance between American Airlines and JetBlue, accusing the firms of taking part in a “de facto merger” that would reduce competition and ultimately drive up fares.
That was a reversal from the Trump administration, which controversially approved the deal in its final days. The airlines unsuccessfully argued the alliance would create more competition in Northeast airports that are dominated by Delta and United.
“In a normal environment we would not expect any regulatory hurdles, but given the Biden Administration’s ‘big is bad’ approach that has led to DOJ lawsuit against what appears to be a pro-competition Northeast Alliance by American and JetBlue, we would expect some objection,” Savanthi Syth, an airline analyst at Raymond James, wrote in a memo Monday.
All eyes are on Assistant Attorney General Jonathan Kanter, an outspoken critic of mega-mergers who said last month that the DOJ will challenge any merger that “substantially” lessens competition.
“I think there’s good reason to believe, without knowing what’s going on inside, that Kanter will take a look at this deal, certainly,” said Robyn Shapiro, a spokesperson for the American Economic Liberties Project, an anti-monopoly group that is pushing the Biden administration to tackle corporate consolidation.
“What we’ve seen with most mergers is that corporate executives tout lower fares for customers, then fail to deliver on those promises and all of the other promises they make,” she added.
The Department of Justice declined to comment. The White House on Tuesday said it cannot comment on pending merger action.
“Our administration is committed to protecting competition across a wide range of industries for the benefit of consumers,” a White House spokesperson said. “The Department of Transportation has been very focused on protecting Americans from unfair practices in the airline industry and ensuring they get the refunds and services they deserve.”
Together, Frontier and Spirit would form the nation’s fifth-largest carrier by seat capacity and the seventh-largest by revenue. The airlines said that the merger will save them $1 billion annually, extra cash they will use to expand their routes and hire an additional 10,000 workers by 2026.
Both firms have steadily grown their market share in recent years with a similar business model of ultra-low fares and additional fees. They had a combined 5.4 percent market share in 2019, up from 2.8 percent in 2013, according to the Department of Transportation.
Christopher Anderson, a professor of operations, technology and information management at Cornell University, said in an email that the merger could result in lower prices for travelers due to the airlines’ similar business models.
“In the airline industry, scale matters and this acquisition will most likely result in significant cost savings for the combined airline — this savings will be amplified by the similarities of the fleet and configuration,” he said. “Consumers will benefit from more breadth of the combined itineraries and most likely lower fares through the cost savings and system synergies.”
The Association of Flight Attendants, a labor union with close ties to President Biden that represents 4,600 Spirit employees and 2,900 Frontier employees, struck a cautious tone on Monday’s merger announcement.
“Our first priority is to determine whether this merger will improve conditions for flight attendants just like the benefits the companies have described for shareholders and consumers,” the union said in a statement Monday. “Our support of the merger will depend on this.”
The top four airlines — United, American, Delta and Southwest — control more than two-thirds of the U.S. market. Biden pointed to that figure in his executive order to promote competition, which directed agencies to crack down on unfair baggage and cancellation fees. The White House said that ancillary fees charged by the top 10 airlines increased from $1.2 billion in 2007 to $35.2 billion in 2018.
Biden has ramped up his criticisms of corporate consolidation amid surging inflation, suggesting that large firms are using their power to hike prices, and last week signaled that his administration remains focused on stopping anti-competitive practices.
“Capitalism without competition is not capitalism; it’s exploitation,” Biden said in a speech Friday on the January jobs report. “So I’m going to continue to do everything in my power to work with the Congress to make our capitalist system work better, to provide more competition and lower prices for American consumers.”
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