Aviation Week Network's Karen Walker sits down with editors to get the latest on the JetBlue-Spirit merger and discuss the legal battle between the U.S. Justice Department and the two East Coast-based carriers—as well as ULCC survival, competitiveness and implications for the Alaska-Hawaiian link-up.

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Transcript

Karen Walker:

Hello everyone, and thank you for joining us for Window Seat, our Aviation Week and Air Transport Podcast. I'm ATW and Aviation Week Network Air Transport editor-in-chief Karen Walker, and I am delighted to welcome you onboard.

Karen Walker:

So joining me today are some of my colleagues at the Aviation Week Network, who are all based on the US East Coast. So a big welcome to Aviation Week senior editor Christine Boynton, CAPA senior analyst, Americas, Lori Ranson and ATWM Routes senior editor Aaron Karp. And today we're going to discuss the latest developments in this long-running saga of attempts by two US East Coast-based airlines, JetBlue Airways and Spirit Airlines, to complete a merger.

Karen Walker:

Now, that attempt hit a major roadblock last week when a US judge announced his ruling on a lawsuit against the deal that was brought by the US Department of Justice. District Judge William Young concluded the proposed 3.8 billion acquisition would violate something called Section 7 of the Clayton Act. Essentially, he was agreeing with DOJ that the merger would reduce competition, particularly low-cost competition.

Karen Walker:

In a small, bright spot for JetBlue and Spirit, Judge Young denied a DOJ request that the two airlines be permanently barred from combining and, indeed, they have jointly announced their intent to appeal the decision.

Karen Walker:

So the story goes on, but what does this all mean for the airlines involved and the broader US airline landscape where the four majors, American, Delta, Southwest and United, all got to be massively dominant via mergers?

Karen Walker:

Christine, I'd like to start with you because you covered most of the hearings from the Boston Court where they were held. Give us a few of the key moments and then I'm going to ask you, were you surprised that the outcome of the decision?

Christine Boynton:

Sure. I was in court for the first few days of opening statements and testimony and for closing arguments on the final day.

Christine Boynton:

For key moments I would say that three really stood out to me. One, when Judge Young said to the DOJ, "Now what happens if I enjoin this merger and Spirit goes belly up," noting their dire projections for their finances over the last couple of years and for the full year 2023. Two, another hypothetical he posed about a decision showing potential restraint where he said, "Potentially would a deal with more divestitures be something I should look at, rather than a full injunction?" And three, I'd say the testimony from Spirit's CEO describing their financial outlook and position, which I just sum up as fairly dire. Those were just three key moments for me.

Christine Boynton:

We also got a bit of a peek behind the curtain from Ted and Robin about their explorations of a merger and how far back those decisions really went for each airline and which other carriers were being examined as possibilities.

Christine Boynton:

They also went into some detail about JetBlue's decision to not appeal the NEA. Spirit actually specifically requested that they commit to abandon that partnership, should they need to, for approval of their own deal. And that was something that Ted called, quote, "come hell or high water clause."

Christine Boynton:

But ultimately, was I surprised? I guess a little bit yes and a little bit no. The hypotheticals that Judge Young raised in closing arguments were intriguing to hear those thoughts. And from the bits I saw, I thought the airlines had set up a very compelling case on why and how this combination would work both for them and for consumers. But we also have an administration that is examining very closely industry consolidation.

Christine Boynton:

So I think, ultimately, the main argument about preserving Spirit's ULCC presence is kind of a tough one for me to swallow, given their financial performance over the past four years and a more recent industry trend shifting favor maybe away from the ULCC model in general.

Karen Walker:

Right, yeah. And so just a quick point there, Ted and Robin that you referred to, that's Ted Christie, CEO at Spirit, and Robin Hayes, the CEO at JetBlue, of course. So we're going to talk a little bit also about particularly Robin and where things are going on the JetBlue side there.

Karen Walker:

But Lori, an interesting aspect, of course, is that this involves two independent carriers, each much smaller than the majors. And they're known for innovation, but they're also known for bringing low fares into markets that are dominated by the majors. They've been really good at that. So what are your thoughts? Wouldn't they be better together, as opposed to apart, dealing with this level of competition?

Lori Ranson:

I agree with that. I think it's a little bit of a no-brainer if you just look at the industry at large and combined, Spirit and JetBlue, would still be half the size of United, which is the smallest of the Big Four carriers so it doesn't change the dynamics at the top of the marketplace at all.

Lori Ranson:

And they are two independent carriers. They have different models. JetBlue has kind of... It used to be called this low-cost hybrid carrier, and now that's kind of migrated to value carrier, longtime passenger favorite, initially live TV, then free Wi-Fi, high-end snacks, more legroom. Spirit is very much... introduced the a la carte model. You kind of have to know how to navigate around Spirit to take advantage of the low fares.

Lori Ranson:

But still, both carriers have increased traffic in the marketplace. They have their own set of challenges right now.

Lori Ranson:

But a combination in the US market, just given the sheer size of the Big Four, shouldn't be considered as a threat. And I think it kind of shows sometimes the DOJ doesn't really study the specifics of the US airline industry when they're making these considerations or if they're making these arguments.

Karen Walker:

Yep, absolutely.

Karen Walker:

So to pick up on that, Aaron, you've covered many of the big merger deals that created the four majors that was Delta with Northwest, United with Continental, American with US Airways and Southwest with AirTran. So what happened in the US political landscape that's allowed those mergers to go ahead and for them very successfully so, but now we can't let this smaller one go ahead?

Aaron Karp:

Yes. So I think one thing we should note is that those round of airline mergers, particularly if you look at US Airways-American Airlines were not easy for the airlines. The Obama Justice Department and six Attorneys Generals sued to stop US Airways and American Airlines. There was a lot of back and forth, a lot of court hearings, a lot of moments where it seemed like the merger wouldn't go through. But it eventually did go through and, as you said, it created sort of this new landscape of the Big Four that were all created through mergers. And there's this sense that the ladder was pulled up after that and there's all these other carriers that are trying to compete and they're all too small.

Aaron Karp:

I think there is a sense over the last decade that customer service has gotten worse. And whether that's true or not, among politicians, I think there's a view that airline customer service has gotten worse and they view one reason it's gotten worse is because there was all this consolidation and now they want to stop further consolidation.

Aaron Karp:

I also think that there's a very sort of anti-corporate protecting consumers' mindset in both political parties in the United States right now. Politicians in both parties are quick to say, "We're going to protect you from the airlines, from Big Tech, from Big Pharma, from this and that, and we're standing up for the little guy." So I think the atmosphere is, the incentive is, "Let's look like we're standing up for the little guy and let's look like we're standing up to the big guy," and I think there's an optics aspect to this.

Aaron Karp:

The Attorney General Merrick Garland, after the ruling came through, said this was "a victory for tens of millions of travelers." And that, to me, that's such an abstract concept in not defining who those travelers are at all. Perhaps he's referring to people that are flying on Spirit. But it's just easy to say that, but how do you define that?

Aaron Karp:

And one thing I was thinking about is you heard the judge saying this is for the Spirit customers, the Attorney General was talking about, or the people that Judge Young was talking about when he said, "This one's for you," how many people out there knew that they were the "you"? Because it's so broadly defined that I think it's just easy to say, "This is pro-consumer," without looking at any of the details.

Karen Walker:

It's interesting that this has been sort of presented in some ways by the judge, but as you say, by DOJ and the administration, as a win for the small guy, a win for the people who couldn't afford to fly unless they had those ultra low fares. But if Spirit goes out of business because of this, who wins?

Karen Walker:

Lori, I'm going to come to you because while this is not the same, there's been an interesting case that's sort of similar in Colombia that you've been tracking a lot, which was with Viva, an ultra-low cost carrier that was struggling financially. The proposal was to merge with Avianca and that fell apart. Talk about that a little bit, Lori.

Lori Ranson:

Yeah. So Viva was struggling during and post-pandemic because governments in Latin America did not give sort of any aid similar to what other airlines received so Avianca decided to acquire and merge with Viva. The approval process by the Colombian government took an extraordinarily long period of time and, during that time, Viva's financial situation continued to deteriorate. Early last year, it kind of went into its own financial restructuring, but ultimately, it went out of business because the government just dragged its feet. And then after it went out business, the government finally said, "Well, I think we'll approve this on certain conditions" that Avianca just found weren't attractive.

Lori Ranson:

So ultimately what happened is a ultra-low cost competitor exited the market and now you have the two biggest airlines in Colombia, Avianca and LATAM Airlines Group. I mean, they are lower cost now because both have been through bankruptcy protection and exited, but they are full-service carriers. And so if you were trying to protect the consumer in Colombia, that didn't happen. And I'm sure LATAM and Avianca would argue that they're offering lower fares, but still, a competitor is eliminated.

Lori Ranson:

So in this case, I agree with what everyone here is saying. The irony is the judge is saying, "This is for you," but there's a very real chance that these consumers won't benefit because Spirit could exit the marketplace. And then what happens to the fares that Spirit offered in the marketplace?

Karen Walker:

So yes. So the longer this goes on, the more problematic it is for Spirit, correct?

Aaron Karp:

Yes. I think one thing that everyone's talking about what happens if Spirit goes under, but the truth is, is Spirit is very weak right now, and they're pulling out of markets. For example, they pulled out of Denver completely earlier this month, and so they're no longer competing there with Frontier. And there are routes like Las Vegas-Denver, Denver-Miami, where Frontier has dropped off and so Frontier doesn't have, or I'm sorry, Spirit has dropped out so Frontier doesn't have to worry about matching their fares.

Aaron Karp:

And so the consequences to the consumer are already being seen in certain markets because the airline is already very weak. And so the airline completely collapsing doesn't just happen overnight, and it could limp along as a very weak airline for a long time.

Karen Walker:

Christine, at the moment, yes, JetBlue and Spirit are saying they're going to appeal, so they're going to continue with this. As Aaron pointed out, some of these past mergers did take a long while to get through. But are there other potential suitors for Spirit, in particular, waiting in the wings?

Christine Boynton:

Well, I know Frontier's name has been raised in discussions about this, and then they, of course, lost a bidding war for Spirit to JetBlue at the start of all of this. But they intended at that time to pay for the transaction in part with shares, and the value of those shares have since significantly decreased. They're another example of a ULCC struggling at the moment, so I'm really not sure.

Karen Walker:

And Lori, we've got this other merger proposal now on the table, which is Alaska Airlines, based in Seattle, is proposed to merge with Hawaiian Airlines. What are your thoughts on what the outcome so far, the legal outcome, if you like, on the JetBlue case? Does that have implications for the Hawaiian-Alaska deal?

Lori Ranson:

I think logically it should not because it's a totally different deal, similar business models, they're keeping the Hawaiian brand, not a lot of route overlap. I think it would be good for the consumer because you still have the Hawaiian brand in Hawaii, but a stronger Hawaiian.

Lori Ranson:

I have my doubts, simply because you see what happened with American and JetBlue. Their alliance was forced to dissolve. You can see what happens here with JetBlue and Spirit. I just believe that this particular Department of Justice, sort of agreeing with what Aaron said, they're very, very anti-consolidation so they're going to try and poke holes in the arguments that those two airlines are going to make. And I wouldn't be surprised if there is a challenge, simply because of the precedents that have been set in these last few cases.

Lori Ranson:

I mean, I guess the one sort of wild card is there is an election here in the US this year. And so if there's a change in administration and DOJ philosophy, does that hurt or help this proposed combination? I don't think that's a question any of us can answer right now.

Karen Walker:

That's right. So just looking at the JetBlue side of things a little bit more deeply, one of the things that has also come up, been announced very recently is that Robin Hayes, who has been CEO at JetBlue for a long while, very highly-regarded person with a long track in the airline industry, so he announced he's going to retire on February 2nd, and he will be succeeded by Joanna Geraghty, who is the president. Again, she's a longtime person at JetBlue, lots of experience so it's a very smooth succession. It's exactly what succession should be. She's well-known to everybody at JetBlue.

Karen Walker:

But Joanna is now taking the reins just as this whole saga continues and is probably only going to get more expensive and more lawyers, et cetera. Any of you would like to chip in about what does this mean in terms of managing that succession and transition while still managing all of this side with Spirit? You know, JetBlue has entered the European market, wants to grow that. It's an awful lot to handle, yes? Christine.

Christine Boynton:

I think one thing that Joanna will be maybe challenged with is perhaps it's time for JetBlue to take a good long look at who is our customer base and who are we as an airline? Where do we want to focus our energy?

Christine Boynton:

One of the things that, the very brief statement that JetBlue and Spirit released in announcing their intent to appeal, that this was consistent with the terms of that agreement, but how much energy are they putting behind this appeal? We don't know that yet. And as Judge Young's, his main argument seems to be Spirit being eliminated as a ULCC from the marketplace.

Christine Boynton:

I don't know how you make that more palatable to DOJ without committing to keep Spirit's brand and model intact in at least some markets. And then where is JetBlue taking on that kind of loss-making model? So there's going to be a lot, well, certainly on her plate in this transition, so certainly a daunting task ahead of her.

Karen Walker:

Absolutely. Aaron, your thoughts on that?

Aaron Karp:

Yeah. I think, as Christine said, one of the things JetBlue has to do is define itself and I think exactly who their customers are. And they're sort of in this middle ground where they're not an LCC, they're not a major. They have this Mint product, which their premium product, which allows them to compete very well on pricing with majors on business class.

Aaron Karp:

But yes, I think her task will be to define who is JetBlue? What is JetBlue? If we can't merge, how do we move forward? Do we have to be an airline that takes specific niches and emphasizes on those? Whereas I think the desire had been to become a fifth competitor in the US market, and if that's not possible, where does JetBlue fit in?

Karen Walker:

And Lori, last word from you on sort of the future of JetBlue?

Lori Ranson:

Sure. I agree with everything that Christine and Aaron said.

Lori Ranson:

I think her challenge is she has to define JetBlue, both internally and externally. She's got to start communicating probably with the employees immediately, sort of, "Are we going to go through with this merger? Are we going to fight it? What are our alternative plans? We do need to define ourselves." And that's important to do to employees so they feel like they have a purpose and mission going forward.

Lori Ranson:

She also has to do that to the financial markets, who are going to be waiting to see what JetBlue's strategy is going forward, if the appeal is unsuccessful.

Lori Ranson:

So I think those are very formidable tasks, and sometimes investors are impatient and so I think she really... And I'm sure that she's put some thought into this. She's been involved in the whole Spirit merger from the get-go. And I think she's a very intelligent person. She knows the industry. She kind of probably knew the odds of this. So my bet is she's putting some thought into this and know she needs to act very quickly for the employees and for investors as well.

Karen Walker:

Very good thoughts. Yeah, absolutely. I mean, she certainly hasn't gone into this not aware or not deeply understanding of the issues. And I'm going to just say it is fantastic to see finally a woman running a US airline, a significant US airline. That's a really good thing. But yes, she is going to certainly have her work cut out for her.

Karen Walker:

Thank you very much, Aaron, Christine and Lori, for your time today and a good discussion. Thank you also to our producer Cory Hitt and, of course, a huge thank you to our listeners for following Window Seat. Remember to follow us on Apple Podcasts or wherever you like to listen.

Karen Walker:

And so until next week, this is Karen Walker disembarking from Window Seat.