Join forces to take on the big players? Or eliminate the competition at the lower levels?
That’s the question as the Justice Department takes on JetBlue and Spirit Airlines in federal court.
The long-awaited trial over the planned merger of JetBlue and Spirit Airlines began Tuesday in Boston, setting the stage for a showdown that could determine the long-term fate of both airlines.
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During the opening statements, both the government and the airlines presented familiar arguments against and in favor of the merger. The DOJ cited JetBlue’s internal analyzes showing that a combined airline could have fares that were 30% higher in some scenarios, noting that even if there are only a few routes on which JetBlue and Spirit compete directly, eliminating the competition whichever route would lead would be sufficient to justify blocking the merger.
The government further argued that it was unreasonable to expect other ULCCs such as Allegiant to emulate Spirit’s competitive position as those other airlines focus more on unserved markets without direct competition from the existing airlines.
JetBlue, on the other hand, has repackaged an argument similar to the one it presented over a year ago at the Northeast Alliance (NEA) pilot: the only way JetBlue can achieve sufficient scale to compete effectively with the ‘Big 4’ airlines by acquiring Spirit. Doing so would allow the combined airline to be more competitive and lower fares in all markets.
As an additional aside, the airlines’ lawyers noted that Spirit had suffered increasing financial losses by attempting to compete in the markets with the “legacy” airlines by using the ultra-low-cost-carrier (ULCC) business model, and that he could probably survive neither. nor compete without change.
While JetBlue’s argument is similar to last year’s NEA trial, which it ultimately lost, the scenario is different now. The NEA has been disbanded and JetBlue is not talking about a partnership with a competitor; it plans to actively acquire a smaller company with a different business model, effectively doubling its size overnight.
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Following the opening remarks, Spirit Airlines CEO Ted Christie was called by the DOJ as the first witness, wrapping up questioning shortly before court adjourned for the day.
The administration’s questions centered around Christie’s opposition to a JetBlue takeover during early discussions between the airlines, while Spirit’s board pushed for a merger with ULCC rival Frontier Airlines.
Despite the preference of Christie’s and Spirit’s board, the airline’s shareholders were enticed by JetBlue’s higher cash offer. In an effort to convince them to vote in favor of the Frontier merger instead, Spirit’s board sent several notices outlining why federal regulators would likely object to the merger with JetBlue.
In one presentation, the board wrote that “the JetBlue proposal essentially represents a high-cost, high-fare airline buying a low-cost, low-fare airline, with half of the synergies coming from reduced capacity and higher fares.”
Other slides in the presentation included commentary suggesting that “JetBlue has stated it will reduce capacity and increase fares on Spirit routes,” along with “Spirit continues to exert a check on JetBlue’s fares.”
Christie dismissed the communications as his views at the time, which he suggested had evolved since then.
The defense will question Christie on Wednesday morning.
The trial is expected to last more than 20 business days, with testimony each morning from experts and other executives, including JetBlue CEO Robin Hayes. A decision by Senior District Judge William G. Young will likely take months.
TPG is reporting from the US District Court in Boston, so stay tuned for the latest news on the Spirit-JetBlue lawsuit.