The airline industry has a competition problem (or lack thereof). Since airlines were deregulated in 1978, the industry has consolidated in waves of mergers and acquisitions. In 2005, there were nine major airlines. By 2014, there were just four — and American, Delta, United and Southwest now control 80% of all US airfare revenues.

That’s made the airline industry “smaller and more concentrated” than ever, per Consumer Report editor William McGee. And they’ve used their great power irresponsibly, halting services from 74 cities during the pandemic and being accused of price fixing.

The “JetBlue Effect”: In 2012, MIT observed that when budget airline JetBlue (NASDAQ:JBLU) entered a market, legacy carriers’ one-way fares would drop ~$32. And to take on the Big Four, JetBlue announced a $3.8B acquisition of discount competitor Spirit Airlines (NYSE:SAVE), which would form the fifth-largest airline by passengers carried — expanding its fleet by over 70% to 500 aircraft.

• JetBlue CEO Robin Hayes argues that it’s a “very tall order” to compete with the Big Four and that airlines could “never, ever get to the size they [Big Four] are based on organic growth.”
• If the merger were approved, Hayes claims that JetBlue will “be able to maintain its roughly 10% cost advantage over the four large carriers” (Fortune).

Bigger isn’t always better

The Department of Justice sued to stop the JetBlue deal in an antitrust case, arguing that airfare would rise if “no-frills, ultra-low-cost Spirit [was] no longer around to ‘undercut everyone else.’” Yesterday, they made closing arguments — leaving the deal’s fate to a US Judge. Their decision could impact whether or not another air giant will be able to do its own deal…

• On Monday, Alaska Airlines (NYSE:ALK) announced that it would acquire Hawaiian Airlines (NASDAQ:HA) in a $1.9B deal, paying a 270% premium to its Friday price for the troubled airline.
• Alaska will maintain both brands and open a new joint hub in Honolulu, where Hawaiian already controls more than 50% of Hawaii flights.

The approval of a JetBlue-Spirit deal would be positive news for Alaska’s proposed Hawaiian merger. Otherwise, both money-losing Spirit and Hawaiian could be in for some turbulence — with their debt downgraded by Fitch to subprime levels, indicating a higher risk of bankruptcy.