An End to Airline Consolidation?
Antitrust enforcers and Pete Buttigieg step up on the Jetblue-Spirit merger. Plus Silicon Valley Bank falls apart, Google gets spanked, Elon Musk tries to intimidate the FTC, and how to regulate AI.
https://mattstoller.substack.com/p/an-end-to-airline-consolidation?utm_source=substack&utm_medium=email
Since 2001, most flyers can see that the U.S. airline industry has gotten much worse, with bad service, cancelations, and often higher prices through opaque fees. And one key reason, though not the only one, is monopolization.
Over the last twenty years, Delta bought Northwest, United bought Continental, American bought TWA, America West, and U.S. Air. On the low-cost carrier segment, Southwest bought AirTran, Alaska bought Virgin America, and JetBlue engaged in a quasi-merger with American Airlines via its Northeast Alliance. From over a dozen competitors twenty years ago, we are now down to four major airlines - United, Delta, American Air, and Southwest - and these control upwards of 80% of the industry, with a few smaller carriers managing the rest.
As a result, most people can only fly one or two airlines from where they are to where they are trying to go, so airlines don’t have to offer reasonable prices or customer service. Though it’s hard to find good pricing data that includes fees, it seems clear that U.S. airlines are costly and inefficient. In 2017, The Economist noted that the profit per passenger in the U.S. was three times that of Europe. At the time, dropping fuel prices had led to fare wars in Europe as airlines competed for customers, but not in the U.S. Instead, domestic airlines all just took higher profit margins.
Broad national market shares understate the problem. Competition in air travel is also about specific routes. If you need to go from Boston to Orlando, you care about who flies to Orlando, not who has market share in aggregate for all flights within the U.S. As of 2015, in 40 of the largest 100 airports, a single airline controls a majority of the market.
And even having rivals on a route doesn’t always guarantee competition. Firms often raise prices in the hopes that rivals will follow along. Think about how one airline will start charging a certain kind of fee, and then the rest start doing it too, knowing that they can essentially collectively hike prices. That’s a harmful practice called ‘price leadership,’ and it’s how all concentrated industries work.
Despite these problems, the government, though it occasionally raises concerns, hasn’t stopped an airline merger since the 1980s. So last year, during a bidding war over Spirit Airlines, a lot of analysts assumed consolidation would continue. JetBlue CEO Robin Hayes ignored the skepticism from enforcers, perhaps finding it unimaginable the government would block such a merger. I mean, it’s just one more merger piled on top of so many others. And as it would be the sixth biggest airline buying the seventh biggest, it seemed so small.
But Hayes misread the situation, and did not seem to care that the Biden administration has made competition part of its policy agenda. So on Tuesday, Hayes was faced with a complaint from the Antitrust Division, along with the state attorneys general of New York, Massachusetts, and D.C., calling the merger unlawful. A lot of people thought the Antitrust Division would challenge, and presumably JetBlue thought they could win a case. But what was not expected was that Department of Transportation Secretary Pete Buttigieg announced that his department would also use its authority to oppose the merger. The DOT, as I noted last week in my piece on Buttigieg’s “moment of truth,” has a much easier time stopping such combinations, but hasn’t even tried since the 1980s. Upon this set of announcements, Spirit’s stock dropped 8%.
And I have to say, I understand why the stock fell. I’ve read a lot of merger complaints at this point, and this is probably the closest I’ve ever seen to a slam-dunk case. So what is the argument against this merger and why is it so strong? The gist is that Spirit Airlines is an ultra low-cost carrier that tends to engage in price wars to take market share, so removing it from the market will raise prices and cut capacity.
The reason this complaint is so devastating is because it uses Spirit’s own analysis. Last year, there was a bidding war between Frontier and JetBlue over who would get to buy Spirit. At the the time, Spirit wanted to merge with Frontier, and JetBlue’s offer was unsolicited. So Spirit’s Board of Directors commissioned “top-tier aviation and economics consultants” to analyze JetBlue’s offer. What they found is that it would be almost impossible to win an antitrust case if the government chose to challenge, because Jetblue’s “stated plans” would result in higher prices and less capacity. "Spirit estimates,” so goes the complaint, “that when it starts flying a route, average fares fall by 17%; JetBlue estimates that when Spirit stops flying a route, average fares go up by 30%."
Here’s a slide Spirit showed shareholders urging them to reject the deal.
 |
|
 |
An End to Airline Consolidation?
Antitrust enforcers and Pete Buttigieg step up on the Jetblue-Spirit merger. Plus Silicon Valley Bank falls apart, Google gets spanked, Elon Musk tries to intimidate the FTC, and how to regulate AI.
| |||||||||||||||
Welcome to BIG, a newsletter on the politics of monopoly power. If you’re already signed up, great! If you’d like to sign up and receive issues over email, you can do so here.
This week, I’m writing about how the Biden administration moved to block the JetBlue-Spirit Air merger, and more broadly, airline consolidation. Plus:
Silicon Valley Bank fell apart. What happened? Does it matter?
The Antitrust Division caused more resignations among private equity controlled corporate boards.
Google got spanked in Virginia
Elon Musk is quietly trying to face down Lina Khan.
Who cleans up the messes that AI-powered chatbots make?
 |
Since 2001, most flyers can see that the U.S. airline industry has gotten much worse, with bad service, cancelations, and often higher prices through opaque fees. And one key reason, though not the only one, is monopolization.
Over the last twenty years, Delta bought Northwest, United bought Continental, American bought TWA, America West, and U.S. Air. On the low-cost carrier segment, Southwest bought AirTran, Alaska bought Virgin America, and JetBlue engaged in a quasi-merger with American Airlines via its Northeast Alliance. From over a dozen competitors twenty years ago, we are now down to four major airlines - United, Delta, American Air, and Southwest - and these control upwards of 80% of the industry, with a few smaller carriers managing the rest.
As a result, most people can only fly one or two airlines from where they are to where they are trying to go, so airlines don’t have to offer reasonable prices or customer service. Though it’s hard to find good pricing data that includes fees, it seems clear that U.S. airlines are costly and inefficient. In 2017, The Economist noted that the profit per passenger in the U.S. was three times that of Europe. At the time, dropping fuel prices had led to fare wars in Europe as airlines competed for customers, but not in the U.S. Instead, domestic airlines all just took higher profit margins.
Broad national market shares understate the problem. Competition in air travel is also about specific routes. If you need to go from Boston to Orlando, you care about who flies to Orlando, not who has market share in aggregate for all flights within the U.S. As of 2015, in 40 of the largest 100 airports, a single airline controls a majority of the market.
And even having rivals on a route doesn’t always guarantee competition. Firms often raise prices in the hopes that rivals will follow along. Think about how one airline will start charging a certain kind of fee, and then the rest start doing it too, knowing that they can essentially collectively hike prices. That’s a harmful practice called ‘price leadership,’ and it’s how all concentrated industries work.
Despite these problems, the government, though it occasionally raises concerns, hasn’t stopped an airline merger since the 1980s. So last year, during a bidding war over Spirit Airlines, a lot of analysts assumed consolidation would continue. JetBlue CEO Robin Hayes ignored the skepticism from enforcers, perhaps finding it unimaginable the government would block such a merger. I mean, it’s just one more merger piled on top of so many others. And as it would be the sixth biggest airline buying the seventh biggest, it seemed so small.
But Hayes misread the situation, and did not seem to care that the Biden administration has made competition part of its policy agenda. So on Tuesday, Hayes was faced with a complaint from the Antitrust Division, along with the state attorneys general of New York, Massachusetts, and D.C., calling the merger unlawful. A lot of people thought the Antitrust Division would challenge, and presumably JetBlue thought they could win a case. But what was not expected was that Department of Transportation Secretary Pete Buttigieg announced that his department would also use its authority to oppose the merger. The DOT, as I noted last week in my piece on Buttigieg’s “moment of truth,” has a much easier time stopping such combinations, but hasn’t even tried since the 1980s. Upon this set of announcements, Spirit’s stock dropped 8%.
And I have to say, I understand why the stock fell. I’ve read a lot of merger complaints at this point, and this is probably the closest I’ve ever seen to a slam-dunk case. So what is the argument against this merger and why is it so strong? The gist is that Spirit Airlines is an ultra low-cost carrier that tends to engage in price wars to take market share, so removing it from the market will raise prices and cut capacity.
The reason this complaint is so devastating is because it uses Spirit’s own analysis. Last year, there was a bidding war between Frontier and JetBlue over who would get to buy Spirit. At the the time, Spirit wanted to merge with Frontier, and JetBlue’s offer was unsolicited. So Spirit’s Board of Directors commissioned “top-tier aviation and economics consultants” to analyze JetBlue’s offer. What they found is that it would be almost impossible to win an antitrust case if the government chose to challenge, because Jetblue’s “stated plans” would result in higher prices and less capacity. "Spirit estimates,” so goes the complaint, “that when it starts flying a route, average fares fall by 17%; JetBlue estimates that when Spirit stops flying a route, average fares go up by 30%."
Here’s a slide Spirit showed shareholders urging them to reject the deal.
|
Spirit’s CEO Ted Christie publicly called JetBlue’s acquisition “cynical” and argued the deal was obviously unlawful.
Last year, Spirit was calling this deal illegal. Today, of course, Spirit’s CEO is supporting the deal, but you can’t flip 180 degrees like this and be taken seriously. Indeed, there’s no mystery at all as to what would happen if the deal goes through. JetBlue’s plan upon buying Spirit is to combine fleets, paint Spirit’s airplanes a new color, rip 10-15% of seats from every Spirit plane, and raise prices.
Spirit and JetBlue are direct rivals on hundreds of routes, and the DOJ notes that flights in 150 markets would become much less competitive if the merger went through. The biggest price hikes will happen in Boston, Hartford, NYC, Fort Myers, Miami, Orlando, Tampa, Las Vegas, and Los Angeles.
Spirit is also growing extremely quickly, and as an independent competitor, will bring down prices across the industry for years.
 |
Honestly, reading this complaint makes me wonder, what could JetBlue’s CEO be thinking? DOJ has a quote from a JetBlue manager raising prices after Spirit stopped flying a route, saying “I don’t think we should be selling the [Spirit] fare if [Spirit] is not serving the market." And a JetBlue executive noted that the ‘efficiencies’ from combining the two firms come from raising prices and removing seats. I just can’t see a reasonable way to make the case for this merger.
Now, even though I think it’s highly likely the government wins, there are some elements here to take into account. Florida Governor Ron DeSantis essentially cut a deal to back the merger through the attorney general’s office, and Florida is a big player since it will suffer the most if the deal goes through. Also, Jetblue says it will divest a few airport slots, and will argue the route overlaps are not as severe as presented. Finally, the airlines caught a lucky break by having the case assigned to Judge William Young, an 82 year-old Reagan-appointee named to the bench in 1985.
Still, I can’t see the Antitrust Division losing this one. But even if they do, the Department of Transportation has an even easier time stopping it, since their standard to refuse the transfer of international routes is even lower. So this merger strikes me as the end of airline consolidation, at least until the end of the Biden administration.
Silicon Valley Bank Collapse
There’s a lot of news about the collapse of Silicon Valley Bank (SVB) on Friday. I tend to stay away from banking, but this collapse does have implications for competition policy because a lot of small firms that might one day compete with big tech use its services and are on the hook. Lots of bigwig Silicon Valley types are panicking and demanding a bailout - my suggestion is don’t listen to them. This situation is not a crisis.
Here’s my understanding of what happened and what it means. SBV is a moderately large bank with roughly $200 billion of assets. It lends to rich people, private equity and Silicon Valley firms, and is pretty weird as banks go, with a $1B+ loan book outstanding on premium wineries alone. 95% of its deposits are above the Federal Deposit Insurance Corporation limit of $250,000, which means many accounts with funds exceeding that amount are uninsured. That’s highly atypical, and makes SVB vulnerable to a bank run.
In 2018 banks under $700 billion of assets succeeded in lobbying Trump and a Republican Congress to get out from bank rules, like needing to have enough cash on hand to pay back depositors easily, known as a liquidity requirement. The Fed then implemented those rules in a bank-friendly way, contra the wishes of then-Vice Chair Lael Brainard, who warned of potential bank problems like SVB in 2019. That’s likely one reason SVB got into trouble, because it used its political power to eliminate the regulations that would have forced it to have enough cash on hand to stop a bank run. (SVB CEO Greg Becker sold his bank stock just before the collapse, so the sleaziness hasn’t stopped.)
Anyway, in 2019, SVB started piling into bonds, accumulating a portfolio of $100 billion such securities. These bonds go down in value when interest rates go up suddenly, so this was essentially a giant bet on interest rates, made with depositor cash. In 2022, the Fed jacked up interest rates, and ultimately, SVB lost a lot of money. Uninsured depositors started to panic, and the FDIC shut the bank down and is beginning liquidation. Thousands of small firms were locked out of their accounts, and couldn’t meet payroll.
Because nearly all deposits are uninsured, and the FDIC has to resolve the bank in a manner that is least costly to the FDIC insurance fund, it doesn’t make sense to sell SVB to another bank. It will be wound down. That said, the FDIC knows what it is doing, this isn’t 2008 and this is more a temporary inconvenience than anything else. These assets are solid if slightly lower in value, and the losses probably aren’t going to wipe out very much of the depositor money. I could be wrong about that, there might be some fraud, but so far I haven’t seen indications of it.
What’s going to happen is that on Monday, depositors will have access to $250,000 of cash. Over the next few days, depending on how bad the losses are, the FDIC will give customers access to most of their uninsured deposits. The rest will be available, minus losses, over the next two to six months. And there are indications that even among firms holding funds at SVB far in excess of the $250k limit, the situation is annoying but manageable.
The lesson here is that banks should face more stringent regulations, and that we need a central bank digital currency so small businesses, nonprofits, and municipalities can keep cash risk-free at the Fed if they want to do that. There’s no reason to force them to give their cash for safekeeping to gamblers.
No comments:
Post a Comment