Airline Mergers & the DOJ
The Events:
Just recently it was announced a new airline merger has been proposed between Hawaiian Airlines and Alaska Airways.
Hawaiian Airlines recently faced financial troubles because of a variety of reasons. The Maui wildfires hurt the flight business in Hawaii, and Southwest is introducing itself to the Hawaiian flight industry.
Just about a year ago, Jetblue won the bid to buy out Spirit Airlines for $3.8 Billion dollars after facing fierce competition from Frontier Airlines.
DOJ:
The Department of Justice (DOJ) has been cracking down on large companies. Now it has filed a lawsuit against the Jetblue-Spirit Deal with concerns about the greater influence the merged company will have on the market.
Before Jetblue finalized a buyout proposal for Spirit, it was Frontier Airlines at the front, no pun intended, of buying out Spirit. However, this airline also faced heavy scrutiny from the DOJ over concerns about the size of a merger. In fact, the DOJ successfully prevented a Northeastern partnership between Jetblue and United. However, the question is, why are mergers bad?
Why Are Such Mergers Dangerous:
Companies start small and grow. Once large enough, they often find themselves merging with other companies. The growth of companies is particularly concerning because of its role in people’s lives. As companies in an industry grow and start buying out competitors, consumers are left with fewer and fewer options for a product. In some cases, the consumers are only left with one company to consume a product from. This company is often called a monopoly. A monopoly scenario is great for a company as it can set prices to whatever level it wants, and consumers will have no choice but to pay that price because of the limited options available.
With so much power in monopoly scenarios, this sets a dangerous precedent around mergers. Large companies will only continue to gain a wider control of their industry’s market share and will have a greater influence on the price, potentially at the expense of consumers. With healthy competition, a variety of competing firms forces companies to cut prices in order to stay ahead of their competitors.
The Role of the DOJ:
To maintain healthy competition, the DOJ carefully monitors the growth of companies in an industry. If a company grows too big, they are often called a trust. The lawsuits that the DOJ files are hence called anti-trust lawsuits, with the goal of breaking up these trusts into much smaller companies.
The DOJ has been successful beyond just blocking business deals, in the 1980s, the DOJ filed the famous AT&T anti-trust lawsuit. Over concerns about its monopolistic size, the DOJ won and forced the company to break up into seven “Baby Bell” regional companies to stimulate more competition.
What will happen to the Hawaiian-Alaska Airlines Deal?
Currently, four airlines: American Airlines, Delta Airlines, Southwest Airlines, and United Airlines, have an 80% market share in the U.S. airline industry. While the Jetblue-Spirit deal may be a bit more controversial, it is not likely for the DOJ to file an anti-trust lawsuit for the Hawaiian-Alaska Airlines Deal. The market shares for Hawaiian Airlines and Alaskan Airlines are 5% and 2% respectively. So the combined market share may not be so big to draw scrutiny from the DOJ. However, only time will tell whether this deal between the flagship airlines for the 2 distant states of America will actually come to fruition or crash like the Jetblue-Spirit deal.
