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DOJ Makes Our Skies Less Friendly

Airliners on the tarmac at Fort Lauderdale. JTOcchialini. CC-BY-SA-2.0

There should be an adage regarding the dangers of 100-page  — or longer — judicial rulings that claim to protect the public interest. That was the length of US District Court Judge William Young’s musings on why he sided with the Department of Justice in blocking the merger between Spirit and JetBlue airlines. In his great wisdom, Judge Young decided that consumers must be protected from Schrödinger’s merger, an unholy union that would place downward pressure on the fares charged by major airlines, while also harming customers of low-fare airlines such as Spirit. As Kimberlee Josephson has noted in this space, this attitude stems from a larger, misbegotten belief that any combination of firms immediately leads to higher prices for consumers.

One major problem is that the Biden Administration has an antitrust obsession, though to be fair, so did the previous administration. In issuing an Executive Order on competition early during his first year, Biden embraced the paradigm of antitrust populism, a Brandeisian doctrine which holds that the consumer welfare standard – the use of empirical analysis to determine the merits or drawbacks of any proposed merger – is insufficient to the task of protecting…consumer welfare.

In competition law, the consumer welfare standard is the measurement of mergers to determine whether they would harm consumers in any relevant market. While empirical tools of econometrics are often used, it is inherently a judicial paradigm in which the end goal is to ensure the highest level of consumer welfare that cannot be increased by judicial decree. Proponents believe that any combination of sizeable firms into a larger entity is bad, and that small-to-midsized firms are inherently beneficial to the “public good.” This ignores innovations and the economies of scale that often accompany the combination of resources, and the inefficiencies that often doom even the most promising of smaller firms.

The poster child for Biden’s antitrust shenanigans is, rightly, Federal Trade Commission head Lina Khan, who seems to take the President’s EO as a mandate to pillage and destroy. But she is hardly the only party energized by this increasingly quixotic mission. Jonathan Kanter, the head of the DOJ’s Antitrust Division – and, because bad ideas aren’t the only things that get recycled, a former antitrust attorney at the FTC – has also risen to the challenge, having brought some 26 enforcement actions in fiscal year 2022. Interestingly enough, the combined enforcement actions of the FTC and DOJ are slightly lower in number than they were under the Trump Administration, but attempts to deter mergers through other means such as stonewalling consent agreements has risen.

There is little to suggest that a consolidation of Spirit and JetBlue would be harmful to consumers, and much to suggest that it would be beneficial. If, as the DOJ argues, lack of cost competition is injurious to the consumer welfare, then prohibiting a merger between two popular but money-losing low-cost carriers…adds to the lack of cost competition. The top four airlines control roughly 70 percent of industry market share. If the merger were to go through, the top four carriers would still control roughly 70 percent of industry market share. Moreover, while network effects generally prevent smaller carriers from expanding nationally, the same network effects would somewhat loosen the price floors the Big Four’s dominance creates.

How can I make that argument after pointing out that the Big Four’s market share would still be roughly the same? Well, ironically enough, I didn’t; the same DOJ that deep-sixed the merger did. In US v. American Airlines, the DOJ noted that there was a “JetBlue Effect,” a lowering of airfares across all carriers when JetBlue expands its routes. A good deal of this effect can be attributed to the higher level of amenities JetBlue offers to consumers who purchase more than their lowest-cost Blue Basic fare. Unlike their barebone counterparts Spirit, Frontier, and Allegiant those amenities are not terribly different in quality from the discount options offered by major carriers.

Additionally, the majority of low-cost carriers offer a menu of a-la-carte amenities that often substantially raise their prices beyond that of the initial basic ticket. Historically, JetBlue’s prices tend to be more transparent, which in itself provides a service to those looking for lower-cost options. Combining fleets would extend this transparent pricing structure to a greater number of customers, while also upgrading the quality of the current Spirit fleet, as JetBlue intended to bring Spirit’s inventory up to its own standards. Current Spirit employees would also benefit, as they were in line to receive significant pay and benefits increases.

Even if you were to disagree with everything written here, and hold that this was some sort of victory for the consumers, you would likely have to deem it a pyrrhic one. Spirit faces a bill of some $1.1 billion in maturing debt next year, the airline has been losing money for half a decade, and likely needs to be acquired in order to survive. Some observers believe that it may be facing bankruptcy proceedings sooner rather than later. As Frank Easterbook once pointed out in his excellent article Limits of Antitrust, there’s really no way for a court (or regulatory agency) to know the proper balance between competition and cooperation, as real equilibrium in the market is a constantly shifting target. As such, while the damage done by allowing “anticompetitive” mergers dissipates over time, the benefits of erroneously prohibiting beneficial ones are lost forever.

There’s an excellent chance that the DOJ and Judge Young have caused the very thing they purport to protect against: fewer choices among low-cost carriers and lessened price competition.

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