Turbulence Ahead: Court Rejects JetBlue/Spirit Merger

By Lee Berger and Travis West

On January 16, 2024, the District of Massachusetts District Court enjoined the proposed merger of JetBlue and Spirit Airlines, a merger that would have created an entity with 10.2% of the domestic market. The trial, which lasted 17 days, included a trip by the court to view the seat configurations for the defendants. The trial pitted two narratives against each other: a combined company that would be able to apply stronger pressure to the larger airlines versus harmed consumers who would lose an ultra-low-cost carrier.?

JetBlue is a low-cost carrier, in contrast to the Big Three legacy carriers: American Airlines, Delta, and United. Spirit is an ultra-low-cost carrier that removes many traditional amenities on flights or charges for them to provide the cheapest seat. Ultra-low-cost carriers are the fastest growing market in the airline industry and the low-cost and legacy carriers have all introduced new products to compete with them. The industry, though, is facing growth constraints ranging from slow plane production to lack of air traffic controllers. JetBlue, who had sought a merger partner for many years, targeted Spirit, who initially opposed due to antitrust concerns. To alleviate those concerns, JetBlue agreed to a series of divestitures in multiple markets to other ultra-low-cost carriers.?

The Department of Justice raised several concerns. First, the merger would lead to decreased airline seats as JetBlue would retrofit Spirit’s planes, which had more seats than average, to adopt configurations with fewer seats. Second, the increased concentration would trigger the “presumptively anticompetitive” threshold of merger guidelines in 183 passenger routes. Third, the government argued that the transaction could leader to higher prices for consumers due to both the elimination of Spirit’s low prices and the elimination of Spirit’s downward pressure on prices. As an example, for the second reason, JetBlue had found that when Spirit entered a market in which JetBlue operates, JetBlue’s fares and revenue decreased by more than 10%.

The court’s analysis began by focusing on the tripartite structure under a Clayton Act Section 7 challenge: 1) the plaintiff must establish a prima facie case that the transaction will significantly increase market concentration, thereby triggering a presumption that the transaction is likely to substantially lessen competition; 2) the defendant must rebut by producing evidence to counter the plaintiff’s evidence; and 3) if the prima facie case is rebutted, the burden of production shifts back to the plaintiff and merges with the ultimate burden of persuasion. The court decided that the relevant geographic market would be the “origin-and-destination” pairs, also known as the routes, on which the defendants currently compete.

Moving into the analysis, the court noted that there were 183 routes where the “highly-concentrated” presumption would be triggered post-transaction but did not find the presumption itself established a prima facie case. Instead, the court found that the direct evidence of head-to-head competition between Spirit and JetBlue, along with the elimination of Spirit’s competition with other airlines, coupled with the elimination of Spirit as a choice for consumers, established a prima facie case.

In considering the defendants’ rebuttal, the court noted that the burden is low for them in rebutting the prima facie case. The court agreed with the defendants that entry by other ultra-low-cost competitors was likely to be timely and likely but leaned toward finding it would not be sufficient to replace the competition, especially given Spirit’s disruptive nature. The court also disagreed with the DOJ’s market data, finding that it ignored potential entrants. For the pro-competitive arguments, the court rejected both the failing and flailing firm defenses, noting that Spirit had plans to turn around its financial performance and that it was not in a dire financial situation. It did, though, credit the efficiency defense, as it found reasonable that the expansion of routes, the fleet, and loyalty program would all enable better competition from JetBlue against the largest airlines.?

With the prima facie case rebutted, the court was faced with the final decision: did the DOJ carry both its burden of production and persuasion? It held that it had because the merger was likely to substantially lessen competition in at least some of the relevant markets. The court focused on the typical Spirit consumer: someone who must rely on Spirit. For that consumer, the Defendant Airlines could not demonstrate that she would avoid harm. It found that other ultra-low-cost carriers were unlikely to enter the market at a pace rapid enough to prevent the harm to those consumers.?

As a result, the court entered a permanent injunction prohibiting the merger between JetBlue and Spirit as it currently stands.?

While this decision is a real victory for the Department of Justice, there are a few points that may make governmental merger challenges a bit more difficult going forward. First, the Court refused to accept the presumptions of the Merger Guidelines (then, still the 2010 Horizontal Merger Guidelines). While the DOJ had argued that exceeding the thresholds in the Merger Guidelines was sufficient to create a presumption that met its initial prima facia burden, the court did not agree. With no analysis besides “presumptions are not self-executing,” the court rejected reliance on the Merger Guidelines’ presumption.?

Second, the court rejected most of the testimony of Dr. Chipty, an expert on whom the DOJ frequently relies, as not credible. The DOJ often faces a problem at trial about who will tell the government’s affirmative story. While defendants can rely on their well-prepared executives to explain defendants’ narrative on direct examination, the government has no in-house percipient witnesses of its own. Sometimes, the government can turn to especially cooperative third-party customers or competitors, but often the government must rely on an expert economist to lay out its version of the case. It is that narrative testimony that the court appears to have rejected as not credible. This decision gives defendants another weapon to strike at the government’s use of experts to tell its affirmative story.

Third, the court appears to credit out-of-market efficiencies, contrary to the DOJ’s typical position. The Merger Guidelines § 3.3 states that the Agencies will not “credit benefits outside the relevant market that would not prevent a lessening of competition in the relevant market.” Here, the court agreed with defendants’ assertion that the combined JetBlue-Spirit would be a more robust competitor to Big Four airlines, thereby putting more pressure on those airlines and benefiting consumers. But the court did not find that this effect would occur for all routes or any of the relevant markets. Therefore, it appears the court was not only considering in-market efficiencies, but out-of-market efficiencies as well.

For these reasons, defendants in future merger litigations may find some support for their positions in this win for the government.