While air travel is returning to pre-pandemic levels this summer, budget airlines Spirit and Frontier have been looking towards a horizontal merger to increase their combined competitive advantage in the oligopolistic airline industry since February 2022. According to EvenMoreUltraLowFare.com, the key benefits to passengers from this merger include 1,000-plus daily flights over 145 destinations in 19 countries, latest and fuel efficient fleet expansion with more than 350 aircraft on order, and a combination of frequent flyer and membership offerings with a creation of 10,000 new jobs by 2026.
The expected closing is in the second half of 2022 subject to the completion of the antitrust regulator review process and approval by the Spirit stockholders. If this merger succeeds, the Spirit-Frontier alliance will become the fifth largest airline in the country after American, Southwest, Delta and United carriers. However, in April 2022, JetBlue offered to merge with Spirit to expands its own foothold in Florida especially the Fort Lauderdale and Orlando airports. It also aspires to increase its own competitive edge by becoming the fifth combined carrier with Spirit rather than allow the Spirit-Frontier merger to succeed. While the Spirit board of directors have antitrust concerns with JetBlue, they are currently negotiating with both Frontier and JetBlue.
Discussion Questions:
- Review the “Domestic market share of leading U.S. airlines from January to December 2021” and complete the table below:
- Based on the completed market share column in the table above,
- which merger do you think will have a higher chance of becoming the fifth largest air carrier? Do explain.
- calculate the concentration ratio of the top 4 airlines and determine if the airline industry belongs to the oligopoly market or monopoly market?
- Calculate the Herfindahl-Hirschman Index (HHI) to determine the market competitiveness
- of the current airlines without any merger
- of the airlines industry with Merger Proposal 1
- of the airlines industry with Merger Proposal 2
- How is the market competitiveness affected with the proposed mergers? Do explain.
- To ensure fair business practices, antitrust laws are enacted to also protect consumers. Which merger proposal do you think will be a cause for concern for the antitrust regulators? Do explain.
- Self-reflection: If you are a frequent flyer (or were planning to travel by air), which airline merger will you support as a consumer? Do use the explain.
Sources| EvenMoreUltraLowFare: Everyone wins with even more ultra-low fares; Investopedia: Horizontal merger, Understanding antitrust law, Concentration ratio; Quartz: Why JetBlue is so despite to buy Spirit; Unsplash: Spirit Airplane