In January 2024 , a federal judge blocked JetBlue Airways $3.8 billion deal to buy Spirit Airlines, rejecting a merger that he said would hamper competition and lead to higher fares. The ruling marks a victory for the U.S. Department of Justice, which stopped the JetBlue and Spirit deal from going ahead.
The Data:
Figure 1 shows the total revenue shares of U.S. airlines in the year to February 2023.
Why was JetBlue’s attempt to acquire Spirit disallowed?
JetBlue’s attempt to acquire Spirit was disallowed because the court agreed with the Department of Justice that JetBlue was looking for more market power to compete with high-end service airlines, and that consumer interest would be damaged by the disappearance of the lower cost service offered by Spirit.
Which U.S. airlines provide high-end service, and which provide low-cost budget service?
Three large airlines (American, Delta, and United) compete in a high-end market and seven airlines (Southwest, Alaska Airlines, JetBlue, Spirit, Frontier, SkyWest, and Hawaiian Airlines) compete in a budget market.
How does the U.S. Department of Justice determine which mergers to examine and possibly block?
The Herfindahl-Hirschmann Index (HHI) is one tool used to determine which mergers to examine and possibly block. The HHI is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market. A market in which the HHI is less than 1,500 is regarded as competitive. An index between 1,500 and 2,500 indicates a moderately concentrated market, and a merger in this market that would increase the HHI by 100 points is challenged. An index above 2,500 indicates a concentrated market, and a merger in this market that would increase the HHI by 200 points is generally blocked.
How competitive is the U.S. high-end air travel market?
Figure 2 shows the market shares for the high-end market.
The HHI for this market is 34.72 + 34.32 +31.02, which equals 3,342, and indicates a highly concentrated market.
How competitive is the U.S. budget air travel market?
Figure 3 shows the market shares for the budget market.
The HHI for this market is 40.72 + 14.92 + 13.32 + 11.82 + 8.02 + 6.72 + 4.62, which equals 2,325, and indicates a moderately concentrated market.
Why would JetBlue’s attempt to acquire Spirit be challenged?
To see whether JetBlue’s acquisition of Spirit would be challenged, we need to look at the market shares and HHI with the merger. Figure 4 shows the market shares with the merger.
The HHI is 40.72 + 25.12 + 14.92 + 8.02 + 6.72 + 4.62, which equals 2,639, and indicates a concentrated market. The merger increases the HHI by 314 (up from 2,325 to 2,639). Because this increase exceeds 200 points, the proposed merger would generally be blocked.
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