This post originally appeared on News@Northeastern. It was published by Ian Thomsen.
After two years of disruption inflicted by the COVID-19 pandemic, the U.S. airline industry is headed toward another period of uncertainty driven by competing bids for Spirit Airlines, the industry's low-cost carrier.
JetBlue Airways has offered $33 per share in cash to buy Spirit, known (and often criticized) for its no-frills approach. That bid follows a less-expensive merger proposed in February between Spirit and Frontier Airlines, its rival in low-cost travel.
“From a competitive standpoint, either of these mergers will probably result in higher fares,” says Ravi Sarathy, a Northeastern professor of international business and strategy who studies the airline industry. “What is surprising is why it took JetBlue so long to decide to counter the [Frontier] offer.”
JetBlue essentially finds itself in no-man's land, says Sarathy—in the tier below the four major carriers (American, Delta, Southwest, and United) and unable to offer cheaper travel than Frontier or Spirit.
“If Frontier and Spirit merge, they will become the fifth largest airline,” Sarathy says. “What that means is that JetBlue will be stuck.”
JetBlue's bid was made to prevent itself from slipping further down the hierarchy, according to Sarathy. “This is really a defensive move,” he says.
Sarathy spoke with News@Northeastern about the consequences of the potential mergers, the risk that either merger will be quashed on antitrust grounds, and the post-pandemic health of the airline industry. His comments have been edited for brevity and clarity.
What does all of this mean for air travelers?
There's a very big issue for consumers. There was fear that the two lowest-cost airlines—Frontier and Spirit—would, by merging, reduce competition and start raising fares. Exactly the same argument would apply to JetBlue joining Spirit. That's why there's going to be an antitrust issue.
Setting aside antitrust concerns for the moment, what would be the best business outcome for these three airlines?
If you forget about consumers and look at it simply from the perspective of business, the three of them merging would probably make more sense. Because then there would be a very solid, large player that would be much more able to compete with United, Delta, Southwest, and American. But that's not going to happen.
Can JetBlue marry its business with Spirit?
JetBlue used to be low-cost, but they have come up in prices somewhat. In return, they've started offering business class, leather seats, better quality Wi-Fi, and things like that.
So the question would become: Can they operate two different cultures? Spirit is clearly the lowest cost airline there is, and JetBlue is higher cost. Merging two cultures is one of the hardest things in a merger.
How might the federal government react to a merger?
It's hard to know because elections are coming up. The [U.S.] House is fairly close, and the Senate is split. And so I think both parties will be trying to gauge what will play out better. One would assume the Republicans to be more in favor of mergers because they're seen as the pro-business party. But there is a significant populist element these days. So it's hard to know what the Federal Trade Commission will say.
What would be the outcome of a Frontier/Spirit merger?
Since Spirit and Frontier are both low-cost airlines, they'll probably continue to play that card. They may be able to rationalize some routes, which means if they've been flying the same route at roughly the same time, they could try to spread out the flights in order to compete with carriers like Delta or United.
That could also mean better capacity utilization. Let's say, hypothetically, they are filling up the planes with people at about 75%. By merging, they might be able to raise the load factor to 80% over some period of time.
Where would a JetBlue/Spirit merger leave Frontier?
If Spirit changed its model and started trying to become more like JetBlue, then Frontier would be in a good position. It would be left as the lowest-cost airline, possibly.
Overall, what is the health of the airline industry coming out of the pandemic?
Fares are already going up because all of the major players had cut back on the number of flights [during the pandemic]. Airlines have been trying to make up for the losses they had over the last year or two.
And oil prices have almost doubled; fuel is about 20% of the total operating costs of running a flight.
If you look at the last 20 years, there have been times when the airline industry has been doing well. But there has not been a permanent increase. It hasn't risen to a higher plateau. It does well for a while, but then it crashes once again because of various macroeconomic events.