In a recent guest essay in The New York Times, Columbia law professor Tim Wu argues that the history of modern airline mergers demonstrates one thing: The bigger airlines get, the worse they become—from higher prices to snarkier service. Wu is not an aviation expert, but as a special assistant to President Biden during the first two years of this administration, he was an architect of the president’s more aggressive antitrust policy. The Department of Justice’s (DOJ’s) suit to block JetBlue Airways’ purchase of Spirit Airlines, which Wu’s essay strongly defends, is a reflection of that new policy.

By way of background, from 2008 to 2014, DOJ approved mergers that reduced eight U.S. airlines to four, as Delta Air Lines acquired Northwest Airlines, United Airlines merged with Continental Airlines, American Airlines combined with US Airways, and Southwest Airlines acquired AirTran Airways. Collectively, the “Big Three” legacy network (hub-and-spoke) carriers (Delta, United, and American), along with Southwest, a point-to-point low-cost carrier (LCC), now account for about 75 percent of U.S. domestic passengers.

Wu is not alone in asserting that consolidation of the airline industry has been bad for competition and consumers. Other prominent critics of airline consolidation include Stuart Eizenstat, who oversaw President Carter’s deregulation of the airline industry and has warned that longstanding lax antitrust enforcement, together with recent airline “megamergers,” would reduce the benefits to consumers of that historic achievement.

Common Critique of Airline Consolidation Is Wrong

However popular, this critique of airline consolidation is not borne out by economic data. Three economic indicators portray an industry in which competition has remained strong following the mergers:

▪ The number of competitors on individual routes has gone up, not down.

▪ Low-cost and ultra-low-cost carriers have grown at rates far exceeding those of the legacy network carriers.

▪ Airfares have continued to fall.

Competition on Individual Routes Has Gone Up, Not Down

The fact that the “Big Four” carriers have a 75-percent market share nationwide says little about the state of competition in the airline industry because airlines compete on individual routes. (The preoccupation with nationwide market share is the single biggest source of confusion and misunderstanding of airline competition.) Thus, to understand the effect of recent mergers, one has to look at data at the individual route level—or what the Department of Transportation (DOT) refers to as city-pair markets.

An analysis of DOT data conducted by Compass Lexecon, an economic consulting firm, shows that the average number of competitors in U.S. domestic city-pair markets has increased over the last two decades: from 3.3 carriers in 2000 to 3.39 in 2010 to 3.47 in 2022. (Although Compass Lexecon works for airline clients, its analysis is used in litigation and must withstand rigorous scrutiny. Compass Lexecon economists routinely publish their analysis in academic journals.) These figures include carriers with a market share of at least 5 percent, which is the DOT standard for an effective competitor. If one limits the analysis to carriers with at least 10 percent of the local market, the number of competitors per route is somewhat smaller but the trend is the same.

One impact of the mergers, which occurred during and after the financial crisis, was the elimination of secondary hubs. Delta eliminated Cincinnati and Memphis as hubs following its 2008 merger with Northwest, and United eliminated Cleveland as a hub several years after its 2010 merger with Continental. Although these actions resulted in significant cuts in service, as Brookings Institution economist Clifford Winston noted in recent testimony, discount carriers added new service in response. For example, Southwest, along with ultra-low-cost carriers (ULCCs) Allegiant Airlines and Frontier Airlines, backfilled empty gates at Cincinnati. Other former hubs (Pittsburgh, Cleveland, Memphis, and St. Louis) saw a similar response.

At the same time, Delta strengthened its presence at Salt Lake City and priority cities like Raleigh-Durham, and it built a new hub at Seattle, competing squarely with Alaska Airlines. During the post-merger period, American, Delta, and United all expanded aggressively in one another’s hub cities.

Small communities, which are served largely by regional airlines on behalf of the Big Three, fared reasonably well because they contribute traffic that supports the carriers’ hub-and-spoke networks. According to Compass Lexecon, the legacy carriers’ improved financial stability as a result of the mergers has allowed them to offer competitive connecting service on more city pairs and introduce nonstop service into markets they previously did not serve.

Low-Cost Carriers Have Grown Far Faster Than the Big Three

Of course, not all competitors are equal when it comes to consumer benefits. Since the airline industry was deregulated in 1978, low-cost carriers have been the major driver of competition because their presence in a market—or even the threat of entry—leads legacy carriers to reduce their fares. Brookings’ Winston estimates that Southwest’s presence led to a 30 percent reduction in fares, on average (“the Southwest Effect”), during the sample period of 1994–2014, which is equivalent to $68 billion (2000 dollars) in savings to air travelers.

In the last 20 years, LCCs and ULCCs have grown at rates several times those of the Big Three and Southwest. According to Compass Lexecon, JetBlue, Alaska Airlines, and Hawaiian Airlines—network carriers that offer lower fares than the legacy carriers along with amenities such as Internet service—have gone from 4 percent of the market in 2000 to 12 percent in 2022. ULCCs such as Allegiant, Frontier, and Spirit have grown even faster—from 2 percent of the market in 2000 to 13 percent last year. Notably, 2021 saw the launch of two new ULCCs: Breeze Airways, owned by JetBlue founder David Neeleman, and Avelo Airlines, managed by former Allegiant chief executive Andrew Levy. In just two years, Breeze and Avelo have grown to serve 35 and 37 U.S. airports, respectively, according to published schedule data from Cirium.

As a result of this growth, discount carriers (including Southwest) now carry nearly half of all U.S. domestic passengers—up from 24 percent in 2000. Conversely, the legacy network carriers have seen their collective market share drop from 73 percent in 2000 to 52 percent in the first half of 2023. Moreover, according to Winston, 80 percent of U.S. domestic passengers now fly on routes that are served by at least one LCC or ULCC. Because “the Southwest Effect” extends to other discount carriers (DOJ’s suit refers to “the Spirit Effect”), these passengers enjoy lower fares even if they choose to fly on a nondiscount carrier.

Winston estimated what the impact would be if a European LCC were to enter all of the U.S. domestic routes that were not served by a U.S. LCC. The effect of introducing this hypothetical service (“cabotage”), which U.S. international aviation agreements currently prohibit, was surprisingly modest because so much of the U.S. market already enjoys low-cost service.

Airfares Have Continued to Decline

Air fares are the ultimate measure of competition. In the decades following deregulation, demand for air travel grew by 4 percent a year (compared to a 2.4-percent average annual growth in the economy overall) and fares dropped steadily. Air fares today are 30–50 percent lower in real terms than they were in 1978. As a result, commercial air travel, which was an elite activity prior to deregulation, is now commonplace among adult Americans.

A 2015 analysis by the Wall Street Journal found that, from 2007 to 2014, legacy carriers raised fares at many smaller and medium-sized airports, typically in conjunction with service cuts such as those described above. However, these actions reflected the impact of the financial crisis and fuel prices, not just consolidation. Moreover, in no small part due to the rapid expansion of discount carriers, air fares overall continued their downward trajectory. According to Airlines for America’s analysis of DOT data, taking into account inflation and ancillary fees, average domestic ticket prices fell 15 percent from 2014 to 2019 and 22 percent from 2000 to 2019. Inflation-adjusted fares dropped another 7 percent from 2019 to 2022.

Predictably, the quality of airline service has declined since deregulation in large part because planes now operate 80–85 percent full on average (prior to 1978, planes often flew half empty, as Cornell economist Alfred Kahn, the charismatic “father” of airline deregulation, liked to recount). As carriers have reduced the width of seats and imposed fees on amenities that used to be “free,” the airline industry has become a popular target of late-night comedians among others. Overall, however, airlines are giving passengers what they consistently show a preference for: lower fares at the expense of service.

Summary: Airline Consolidation Has Been a Plus, Not a Minus

Contrary to the assertions of Tim Wu and other consolidation skeptics, there is little evidence that recent airline mergers have harmed competition or consumers. Perhaps most telling, the average number of competitors on individual routes has gone up, not down. And with the dramatic growth of discount carriers, on most routes, at least one of those competitors is now a low-cost or ultra-low-cost carrier. The disciplining effect of discount carriers also helps explain the continued decline in air fares, a 45-year trend that consolidation did nothing to disturb.

Consolidation allowed legacy carriers to improve their performance at many levels. U.S. carriers argued at the time—and DOJ ultimately agreed—that the mergers would combine route networks that were largely complementary and thus would not reduce competition. By integrating complementary networks and fleets, carriers were able to return to profitability following the one-two punch of 9/11 and the 2008 financial crisis. (Note that since 1978, the U.S. airline industry as a whole has never made money in a recession.) Among other things, this has enabled them to challenge rival legacy carriers in the other’s hub cities and to better serve the small communities that depend on hub-and-spoke service.

Wu and others argue that consolidation has contributed to declining airline service. Properly defined, airline service has improved in many ways, including network breadth, service frequency, nonstop offerings, and safety performance. But even by a narrow definition, service decline has little to do with consolidation. Deregulation gave passengers choices, and passengers have consistently shown that they want lower fares at the expense of amenities.

Airline consolidation, like airline deregulation, is a success story. In the words of Robert D. Atkinson, co-author of the MIT Press book Big is Beautiful, “airline monopoly fears are bunk.” While vigorous antitrust enforcement is critical, with respect to the mergers that DOJ approved from 2008 to 2014, we should all declare victory.

JetBlue-Spirit

DOJ’s effort to block the JetBlue-Spirit merger is a test case for the Biden administration’s new, more aggressive antitrust policy. DOJ has sued to block the merger because regulators believe it would give the combined entity too much market power on certain routes, leading to higher fares. Spirit is the largest U.S. ULCC, and it has been a disruptive pioneer in many respects, including the introduction of ancillary fees in exchange for a lower base fare. According to DOJ’s March complaint, “JetBlue plans to abandon Spirit’s business model, remove seats from Spirit’s planes, and charge Spirit’s customers higher prices.”

Although JetBlue would not necessarily object to that characterization, its goal is to create a stronger competitor to the Big Four, with their combined 75-percent market share. JetBlue views the merger as acquisition of assets, according to industry experts. The New York-based carrier’s expansion plans have been frustrated by the long lead times needed to procure new aircraft and hire crew to operate them. Spirit has aircraft and crew that it would take JetBlue years to acquire organically.

The DOJ-JetBlue case is before a federal judge in Boston who has said he hopes to issue an opinion this month. While a thorough analysis of the merits of the case is beyond the scope of this commentary, several points in the above discussion of airline consolidation are relevant. On the one hand, discount carriers are critical to maintaining robust competition in the airline industry. On the other, the discount sector of the industry—particularly the ULCCs segment—is growing rapidly (from 2 percent in 2000 to 13 percent in 2022). The obvious question is why Frontier and Allegiant, not to mention newcomers Breeze and Avelo, could not fill the void that Spirit leaves, at least over time.

According to Reuters, the judge told both sides he was having “trouble” with DOJ’s request for a permanent injunction to block a deal in a “dynamic industry facing unique opportunities and challenges in the post-COVID environment.” He reportedly raised the prospect of further divestitures by JetBlue, which has already agreed to sell off gates and slots in a handful of airports to address DOJ concerns. That makes sense. This ought not be a choice between preserving Spirit’s role as a “disruptor” and allowing JetBlue to become more competitive with the Big Four national carriers.

Among many of those following the DOJ suit, there seems to be a perception that JetBlue can simply take out seats on Spirit planes and jack up prices if the merger goes forward. However, if Spirit could raise its prices profitably, it would already be doing so. Spirit passengers are “at the bottom of the demand curve.” That is, they are exceedingly price sensitive. If Spirit’s fares go up, many of these passengers will simply not fly. And if that happens, it is a matter of time before another ULCC enters the same route with a fare that the highly price sensitive passenger will accept.

In short, a JetBlue-Spirit merger would be both more and less transformative than it might appear. Over time, it will make it easier for JetBlue to become a fifth national carrier, and the potential benefits from that are huge. But the merger will not take Spirit out of the competitive equation in the short or medium term. The key is the dynamism of the airline industry and potential for the rapidly growing ULCC sector to pick up any slack.

Reason Foundation’s Robert Poole, a highly respected aviation and transportation policy analyst, argues that DOJ’s case is flawed because it is based on a static, zero-sum view of the airline passenger market:

Poole’s view seems right—and far more consistent with the history of airline competition and consolidation than that of Professor Wu.

~ ~ ~

Editor’s note: Further to her commentary here, Dorothy Robyn later appeared on the podcast Airlines Confidential to discuss industry consolidation with former Spirit Airlines CEO Ben Baldanza and former Wall Street Journal aviation editor and columnist Scott McCartney.