On February 7th, 2022, two of America’s largest low-cost airlines, Frontier and Spirit, announced a planned merger estimated to be worth around $6.6 billion. While the merger would create the fifth largest airline in the country, the deal could meet significant scrutiny from the Department of Justice’s (DoJ) Antitrust Division and the Federal Trade Commission (FTC), who are becoming increasingly skeptical of the benefits of such mergers.
While both the DoJ’s Antitrust division and FTC might have concerns about the proposed merger of Frontier and Spirit, this history of airline consolidation shows that larger companies can result in lower fares for consumers. As such, the proposed merger represents a real win for consumers.
If the merger ultimately leads to improvement in consumer welfare, failure to approve the merger could see Americans paying more than they need to for flights.
Four airlines, American, Delta, United, and Southwest, currently dominate the U.S. airline industry. t. These four airlines collectively hold a 65% share of the market and carry 62% of domestic passengers. Conversely, Frontier and Spirit hold just under 10% of the market and carry 5% of domestic air travelers.
When Frontier and Spirit merger announced details of the merger, they estimated the new airline would operate more than 1,000 daily flights, hire 10,000 additional workers, increase service to underserved routes across the U.S., Latin America, and the Caribbean and deliver $1 billion in annual consumer savings. If these estimates are correct, it should be abundantly clear that the merger is in the best interest of consumers.
While the deal could generate substantial consumer welfare, it is occurring at a time when antitrust enforcers have expressed deep skepticism of mergers. For example, earlier this year, the DoJ’s Antitrust Division ad FTC announced plans to “strengthen enforcement against illegal mergers.” In addition, both agencies proposed to presume “that certain transactions are anti-competitive” as well as using a “market definition in analyzing competitive effects.” Both these measures would make it harder for mergers, like the Spirit and Frontier deal, to go ahead. The DoJ has also taken steps to break up the Northeast alliance between Jetblue and American Airlines.
While the DoJ and FTC might be questioning the value of mergers, they cannot ignore the reality that consolidation of the industry has lowered fares for consumers. For example, in the aftermath of the terrorist attacks of September 11th, 2001, and the Great recession, airlines merged and consolidated into fewer but larger companies. Most notably, Trans World Airlines was acquired by American Airlines for $1.5 billion in 2001, U.S. Airways bought America West in 2005 for $1.5 bn, and Delta acquired Northwest Airlines in 2008 for $2.6 billion.
As a result of these mergers, the average cost of airfares fell from $515 in 1995 to just $286 in 2021, a decline of almost 45%. As a result of this price decline, the number of passengers increased substantially between 2010 and 2019 before collapsing due to the COVID-19 pandemic.
While the Department of Justice is increasingly skeptical of mergers, it has in the past recognized that consolidation in the industry can benefit consumers. For example, after deploying advanced quantitative studies covering proposed mergers in the airline industry, the Antitrust Division found proposed mergers could “produce substantial and credible efficiencies that will benefit U.S. consumers and are not likely to substantially lessen competition.”
In particular, the DoJ noted that airline mergers would provide efficiency savings “in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks.”
While the FTC and DoJ’s Antitrust division have yet to reveal their respective positions on the proposed merger between Frontier and Spirit, their newly found hostility to mergers makes it likely that the deal will meet resistance. Unfortunately for consumers, this resistance could leave them paying more and facing diminished consumer welfare.
It will be in the best interest of consumers if the FTC and DoJ conduct a welfare analysis and then clear the merger for take-off.