Spirit, Frontier Test Competition Policy

Eakinomics: Spirit, Frontier Test Competition Policy

Spirit and Frontier Airlines announced a merger valued at $6.6 billion that would create the (as yet unnamed) fifth-largest airline in the United States. The new airline would trail only American, Delta, United, and Southwest airlines in passenger-miles flown. But the really interesting question is whether the Biden Administration will block the merger.

Analysts have weighed in on both sides of the question. “In a normal environment we would not expect any regulatory hurdles, but given the Biden Administration’s ‘big is bad’ approach that has led to DOJ lawsuit against what appears to be a pro-competition Northeast Alliance by American and JetBlue, we would expect some objection,” wrote Savanthi Syth, airline analyst at Raymond James. In contrast: “We believe the proposed transaction will be approved by regulators given the minimal overlap of route networks and the fact that it is likely to be viewed as proconsumer,” said Deutsche Bank airline analyst Michael Linenberg.

Unfortunately, the administration has jettisoned the consumer welfare standard when judging the desirability of mergers. Instead, it will rely on a number of other considerations. From that perspective, the administration may judge that the combined entity is much larger and “big is bad” may prevail as the deciding factor. Or, it could be that measures of industry concentration will be increased—for example, the fraction of passenger-miles flown by the top five airlines—and lead the administration to oppose the merger, even though the two firms overlap on only 520 of over 2,800 flight routes.

Indeed, how one thinks about the merger is influenced by whether you think of the combined airlines as a large low-cost carrier or a low-cost large carrier. If one thinks of the key market as low-cost leisure travel, this might just look like a big increase in market power for the airline in that market. In contrast, given the near-disappearance of international and business travel, the leading four airlines are increasingly competing for leisure travel dollars. From that perspective, the entry of a much lower-cost large airline might be just what is needed.

The only way to know for sure is to carefully identify each market and evaluate the impact of the merger on the well-being of consumers in those markets. That’s the surest way to get things right. It’s just not the administration’s plan