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The Second Wave of Airline Concentration

After the biggest companies used mergers a decade ago to dominate, now
the lower-tier competitors are getting into the game. But they face
headwinds from federal regulators.

Mergers beget mergers.

That's been the vicious cycle of many industries over the past several
decades, a phenomenon known as "concentration creep." If a company
grows, its rivals want to grow to compete for market share.

In certain sectors, countervailing powers make that trend even more
pronounced. If a company on one side of a transaction grows, the company
on the other side wants to grow to regain leverage. (Think health
insurers and hospitals.)

This dynamic is most visible in the airline industry at the moment. In a
short period under the Bush and Obama administrations, United Airlines
bought Continental, American merged with US Airways, Delta gobbled up
Northwest, and Southwest took over American Trans Air. The budding power
of those four giants has triggered a fight-or-flight instinct among the
lower-tier competitors, which are petrified of getting locked out of the
oligopolistic club at the top.

Last week saw the continuation of this second wave of concentration
creep, which has played out so often now that airline insiders refer to
it as "Groundhog Day."

Last week, Alaska Airlines, the fifth-largest U.S. carrier, announced a
proposed deal to purchase Hawaiian Airlines.

Analysts suspect the deal came together in response to JetBlue's
proposed acquisition of Spirit Airlines, which would lead to the
sixth-largest airline absorbing the seventh-largest. And JetBlue mainly
sought

**that** purchase to protect itself after reports emerged that Frontier
was in talks to buy Spirit.

The difference this time around is that federal regulators who'd
previously rubber-stamped these deals are now on the prowl to enforce
antitrust laws. This spring, the Justice Department filed to block the
JetBlue merger and concluded its court case before a federal judge last
week, a day before the Alaska announcement.

The Department of Transportation joined the lawsuit, in a surprising
move that indicated a newfound resolve by Secretary Pete Buttigieg to
embrace his department's authority to challenge mergers.

These actions don't yet seem to have deterred Alaska from pursuing its
deal, or at least offset the market risks of getting left behind from
the pack.

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THESE FEVERISH MERGERS ARE A REFLECTION of the failed deregulation
project of the 1970s, when the Jimmy Carter administration passed
legislation to dismantle the Civil Aeronautics Board.

"Those policies plus the lack of merger enforcement took us away from
the Goldilocks of regulated competition we had in place, similar to
public utilities, and we're living with the disastrous consequences
today," said Ganesh Sitaraman, a law professor at Vanderbilt University
and the author of the newly released book

**Why Flying Is Miserable: And How to Fix It**. (Sitaraman is also a

**Prospect** board member.)

As he explains, the architects of deregulation actually intended to
deliver more competition but ended up creating just the opposite, in
large part because of the lack of merger enforcement. The U.S. airline
industry is the most consolidated it's ever been in its 100-year
history, with the Big Four of American, Delta, Southwest, and United
combining for 80 percent of all domestic routes.

Even national market share statistics can fail to illustrate just how
concentrated the regional market really is. In 40 of the largest 100
airports, just one airline commands a majority of air travel, according
to data

from 2015.

Without competition, major airlines have been able to increase airfares
on captive travelers and worsen the consumer experience. Late arrivals,
cancellations, and delays have become a common feature of the traveling
experience especially since the end of the pandemic.

Perhaps most egregiously, the deregulation era also led to the hollowing
out of critical transportation infrastructure for large sections of the
country. Airlines prefer to fly the highest-demand routes from major
cities, where they can make the most money without empty seats. Carriers
have cut routes to many towns in the middle of the country, depriving
them of business opportunities, a practice the Civil Aeronautics Board
previously blocked carriers from engaging in. Cutting flights is another
way to justify raising prices. It's gotten so bad that numerous
heartland cities now provide

taxpayer funds to airlines just to keep them flying consistently from
their airports.

Labor has suffered as well. Airlines routinely understaff their planes,
which overburdens employees, leads to high turnover, and drives many of
the cancellations and flight delays.

The JetBlue deal threatens to reinforce these trends that make flying
increasingly miserable for consumers. As William McGee, airline expert
at the American Economic Liberties Project, puts it, the deal represents
an identity crisis for the airline. Since its founding in the early
2000s, JetBlue has been a disrupter in the industry, with lower fares
and a focus on quality; even today, the airline talks up offering free
Wi-Fi

and the best legroom

in the air. But those days have long passed, and now it's saddling up
next to the giants.

JetBlue is defending the deal in court by arguing that other mergers
were allowed through, so why not theirs. "It's the kind of argument I
would use with my parents as a kid because I'm the youngest, but
that's not exactly a strong legal case," said McGee.

As the largest carrier at JFK and in Boston, JetBlue also claims that
the deal will enhance competition against the Big Four. The DOJ counters
that the deal would deliver windfalls to the giants by neutralizing
Spirit, one of the few remaining ultra-low-cost carriers. While Spirit
runs an exceptionally no-frills service and makes up for its low fares
with ancillary fees for just about everything, for most of its routes
Spirit acts like a price discipliner, forcing major airlines to drop
their fares in order to compete.

>> Read the full story at prospect.org

~ LUKE GOLDSTEIN, WRITING FELLOW

Follow Luke Goldstein on Twitter

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