Spirit/Jet Blue Merger News (Advice From SCF)

In 2015, when Delta first unveiled cheaper “basic economy” tickets, they described them succinctly to investors: “Spirit-match fares.” This moment kicked off the Golden Age of Cheap Flights, and made previously unthinkable fares like $350 roundtrip to Paris or $200 roundtrip to Hawaii possible. But last week’s announcement that JetBlue plans to acquire Spirit threatens to cast a cloud over what’s been a golden run for cheap flights. You don’t need to fly Spirit to benefit from their existence The single largest determinant of cheap flights isn’t how far you fly or how large the destination is; it’s how much competition there is between airlines. At the time of writing, it costs $98 roundtrip to fly 1,085 miles NYC to Miami but $216 roundtrip to fly 425 miles NYC to Cleveland. There’s a ton of competition for NYC-Miami and relatively little for NYC-Cleveland. And which airlines offer the cheapest fares on any given route? Budget airlines like Spirit. Consider this 2016 study by researchers at MIT. They found that when low-cost carriers like JetBlue start flying a new route, it drives down competitors’ fares by 7.7%. But when ultra low-cost carriers like Spirit enter a market, it drives down fares 20.5%. What’s the timeline? Spirit will still be around for years. Airline mergers don’t happen quickly. They first need approval from federal regulators, and then the airlines need to do all the minutiae involved in combining two carriers into one. Considering that JetBlue is already being sued by the federal government over its partnership with American Airlines, it’s expected that regulators won’t be fond of the Spirit transaction either. Perhaps JetBlue will trade their AA partnership for approval on Spirit, or perhaps they’ll gamble and hope to win both cases in court. Either way, expect it to take months or years for resolution. And even if they do get regulatory approval, it takes years for two airlines to become one. It’s not just slapping a fresh coat of paint on the planes. A small list of big items that need to be merged: IT systems, airplane interiors, scheduling and reservation systems, labor contracts, and thousands of others. Will there still be cheap flights going forward? Yes. We don’t like this merger because with one fewer competitor—especially one like Spirit that anchors the airfare market—the outcome will be less competition. But that doesn’t mean the death of cheap flights. Far from it. Fifty years ago, airlines relied almost entirely on economy airfare to fund their business. Nowadays, many airlines make the majority of their revenue on things other than economy airfare. They make it selling business class and other premium seats. They make it selling credit cards and frequent flyer miles. They make it on corporate contracts and cargo and bag fees and commissions when you book a hotel or rental car through an airline. In other words, economy fares aren’t nearly as important for airlines today as they used to be. The money is elsewhere. Even if Spirit does ultimately get folded into JetBlue, the result will be slightly fewer cheap flights, not their demise. Airlines will continue selling flights to Paris for $350 roundtrip and Hawaii for $200 roundtrip because today’s airline business model allows them to still do so profitably.