• Wed. Oct 5th, 2022

What would a spiritual merger mean for the airline industry?

ByKimberly A. Brochu

Apr 6, 2022

After two years of disruption inflicted by the COVID-19 pandemic, the US airline industry is heading for a new period of uncertainty due to competing bids for Spirit Airlines, the industry’s low-cost carrier.

JetBlue Airways offered $33 per share in cash to buy Spirit, known (and often critical) for its no-frills approach. The deal follows a lower-cost merger proposed in February between Spirit and Frontier Airlines, its low-cost travel rival.

Ravi Sarathy, Professor of International Business and Strategy. Photo by Alyssa Stone/Northeastern University

“From a competitive perspective, either of these mergers will likely result in higher rates,” says Ravi Sarathy, a professor of international business and strategy from the Northeast who studies the airline industry. “What is surprising is why it took so long for JetBlue to decide to counter the [Frontier] offer.”

JetBlue essentially finds itself in no man’s land, Sarathy says — in the bottom tier of 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,” says Sarathy. “What this means is that JetBlue will be blocked.”

JetBlue’s offer was made to keep itself from sliding lower in the hierarchy, according to Sarathy. “It’s really a defensive move,” he said.

Sarathy spoke with [email protected] on the consequences of potential mergers, the risk that either merger will be canceled on antitrust grounds, and the post-pandemic health of the airline industry. His comments have been edited for brevity and clarity.

What does all this mean for air travellers?

There is a very big problem for consumers. There were fears that the two cheapest airlines, Frontier and Spirit, would reduce competition and start raising fares by merging. Exactly the same argument would apply to JetBlue joining Spirit. That’s why there will be an antitrust problem.

Antitrust concerns aside at the moment, what would be the best business outcome for these three airlines?

If you forget about consumers and just look at it from a business perspective, merging the three would probably make more sense. Because then there would be a very solid big player who would be much better able to compete with United, Delta, Southwest and American. But that won’t happen.

Can JetBlue marry its activity with Spirit?

JetBlue used to be inexpensive, but its prices have risen somewhat. In return, they started offering business class, leather seats, better WiFi, and more.

The question would then become: Can they make two different cultures work? Spirit is clearly the cheapest airline out there, and JetBlue is more expensive. Merging two cultures is one of the most difficult things in a merger.

How might the federal government react to a merger?

It is difficult to know because the elections are approaching. the [U.S.] The House is quite close and the Senate is divided. And so I think both parties will try to assess what will go better. One would assume that Republicans are more in favor of mergers because they are seen as the pro-business party. But there is a strong populist element these days. So it’s hard to know what the Federal Trade Commission will say.

What would be the result of a Frontier/Spirit merger?

Since Spirit and Frontier are both low-cost airlines, they will likely continue to play this card. They may be able to streamline some routes, meaning if they flew the same route around the same time, they might try to spread out flights to compete with carriers like Delta or United.

It could also mean better capacity utilization. Let’s say, hypothetically, that they fill the planes with people about 75%. By merging they might be able to increase the load factor to 80% over a period of time.

Where would a JetBlue/Spirit merger leave Frontier?

If Spirit changed its model and started trying to look more like JetBlue, then Frontier would be in a good place. It might still be the cheapest airline.

Overall, how healthy is the airline industry coming out of the pandemic?

Fares are already rising as all the major players have reduced the number of flights [during the pandemic]. Airlines have tried to make up for the losses they have suffered over the past two years.

And oil prices have almost doubled; fuel accounts for approximately 20% of the total operating costs of a flight.

If you look at the past 20 years, there have been times when the airline industry has done well. But there was no permanent increase. It did not reach a higher plateau. It does well for a while, but then it crashes again due to various macroeconomic events.

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