Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Less Competition Means Higher Fares

The blocked merger of JetBlue and Spirit is likely to result in higher airfares for many budget-conscious travelers. The main reason is simple economics - less competition in the airline industry typically translates to higher prices.

With one less low-cost carrier in the mix, the remaining airlines have less incentive to keep fares ultra-low to lure customers away from competitors. While the Big Three legacy carriers of American, Delta, and United will still battle amongst themselves, the absence of an emerging threat like a combined JetBlue-Spirit leaves them with a stronger standing.
And data shows this isn’t just theoretical. An analysis by Torsten Jacobi shows fares increased by 15-20% on routes where low-cost carriers pulled out and competition decreased. Likewise, a Government Accountability Office study found that airline mergers over the past decade have led to price hikes of 5-7% in overlapping markets.

With JetBlue and Spirit continuing as separate entities, their networks have considerable overlap, especially in major cities and leisure destinations. That prevents either from wanting to engage in a full-on fare war that could hurt profit margins. It also reduces the urgency to expand into new markets where competition is fierce.
Additionally, the merged airline would have had increased leverage with suppliers to get lower fuel and maintenance costs it could pass onto consumers through cheaper base fares. That opportunity is now gone, allowing vendors to play hardball in negotiations since they face one less potential customer.
While JetBlue and Spirit individually have strong reputations for low fares, together they offered the scale, network breadth, and cost advantages to aggressively challenge rivals. Now the Big Three have the luxury of setting fares based more on demand trends and optimization models rather than fending off an ultra-low-cost threat.

What else is in this post?

1. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Less Competition Means Higher Fares
2. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Will New Airlines Emerge to Fill the Void?
3. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - What Happens to All Those Overlapping Routes?
4. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Regional Carriers May See More Growth
5. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Could This Spur More Low-Cost Transatlantic Flights?
6. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Travelers Lose With Less Flight Options
7. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Airport Hubs Could Look Very Different
8. Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - More Scrutiny on Future Airline Mergers

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Will New Airlines Emerge to Fill the Void?

With the blocked JetBlue/Spirit merger leaving a gap in the ultra-low-cost carrier space, many wonder if new airlines could emerge to fill this void. However, the reality is that launching a successful new airline is an extremely difficult undertaking requiring massive capital investments, regulatory approvals, operational infrastructure, brand awareness and route network development.

Despite the challenges, some entrepreneurs may see opportunities to replicate the low-cost models pioneered by Spirit and Frontier. Several analysts believe the best bet for a new ultra-low cost carrier (ULCC) entrant would be focusing on the underserved middle of the country. Leveraging secondary airports in cities like Cleveland, Cincinnati, Milwaukee and St. Louis could allow avoidance of crowded coastal hubs dominated by the Big Three.

Past startups have also tried using widebody aircraft on transcontinental and Hawaii routes where they can differentiate from legacy carriers focused on connections. However, access to gates and slots at capacity-constrained airports like New York JFK remains a major barrier.
Likewise, international expansion is difficult without established feed traffic and partnerships, but a ULCC could potentially stimulate new point-to-point leisure demand similar to Norwegian's discounted transatlantic flights. Still,regexulatory hurdles, long-haul aircraft acquisition costs and uncertainties around Brexit and Open Skies deals deter most prospective intercontinental disrupters.

Some investors believe there are still largely untapped opportunities in Latin America's growing middle class travel market. But past failures like Venezuela's Santa Barbara Airlines demonstrate how political and macroeconomic instability can sink ventures before they get off the ground.
What history has shown is that to compete with established carriers, any new ULCC needs patient private equity backing, an experienced airline executive team, close attention to operational efficiency and a disruptive technological edge.

Aircraft leasing innovations and digital optimization of pricing and distribution may level the playing field a bit. But even with these advantages, new airlines face daunting odds, with over 80% of U.S. startups since 1978 eventually going bust according to Airline Weekly data.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - What Happens to All Those Overlapping Routes?

The blocked merger leaves JetBlue and Spirit continuing to battle each other in many of the same markets, begging the question of what happens to all those overlapping routes. Industry experts expect diverging strategies as each airline maneuvers to gain an edge without destructive fare wars eroding profits.

JetBlue may leverage its superior service reputation to court higher-paying business travelers put off by Spirit's no-frills experience. For example, JetBlue offers amenities like free Wi-Fi, seatback TV and more legroom on many flights. It could promote these differentiators in overlapping cities like Los Angeles, Las Vegas and Orlando to convince some leisure flyers to pay a modest fare premium.

At the same time, JetBlue is accelerating deployment of its new Mint business class and could compete for more corporate accounts in overlapping East Coast markets like New York, Boston and Fort Lauderdale. However, legacy carriers have the advantage on corporate contracts, and JetBlue risks brand dilution if it tries matching fares with Spirit's barebones model.
Meanwhile, Spirit may double down on ultra-low fares and minimal servicing to stimulate demand from highly price-sensitive vacationers. It has considerable overlap with JetBlue throughout the Caribbean and in tourist magnets like Vegas. Look for Spirit to ramp up promotional discounts in these leisure markets, while moderating growth in major business destinations like Chicago where its low-cost value proposition has less appeal.

To lower costs even further, Spirit is densifying its new aircraft orders with more seats. For overlapping routes it will likely strip out any remaining service frills and bombard customers with fees for options like checked bags and seat assignments. The goal is making base fares low enough to stimulate demand from bargain-seeking holiday travelers. JetBlue will have difficulty matching Spirit's barebones costs, so it may eventually pull out of select overlapping markets where low fares generate insufficient returns.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Regional Carriers May See More Growth

Regional airlines could be poised for expansion in the wake of the blocked JetBlue-Spirit merger. These smaller carriers operating shorter-haul flights on behalf of the major airlines have faced headwinds in recent years. However, the latest industry dynamics may provide new opportunities.
Many aviation analysts expect consolidation between the Big Three and dismantling of regional airline service agreements. But the halting of further consolidation among low-cost carriers could spur majors to lean more heavily on regional partners to better compete on price with ultra-low-cost rivals.

Regionals like SkyWest, Republic Airways, Endeavor Air and GoJet offer key connectivity to smaller markets the majors cannot serve profitably with mainline jets. Their economics benefit from flying smaller planes with lower ownership costs. Regionals also have lower labor costs due to more flexible pilot contracts.
By leveraging regionals in overlapping markets with Spirit and Frontier, majors can reduce fares on connecting itineraries without diluting their own brands. For example, American can use regional feed from Phoenix to enable matching Spirit's low fares in Las Vegas. Endeavor Air tails connecting to Delta hubs like Atlanta and Salt Lake City could challenge Frontier on Denver routes.
Many Wall Street analysts expect majors to expand codesharing with regionals to enter new leisure markets their current networks cannot cover. For example, Republic Airways sees opportunities flying Embraer E175s on behalf of United from its Chicago and Houston hubs to underserved vacation spots like Jackson Hole, Wyoming.
Regionals will likely receive growth incentives like fee waivers, revenue guarantees and bonuses for launching competitive routes. For example, SkyWest is already benefiting from a United agreement paying above-market rates for flying CRJ-700s from hubs to competing leisure markets.

While pandemic-related pilot shortages have constrained regional capacity, creative staffing solutions are emerging. Endeavor Air announced a program to recruit and train new aviators from nontraditional backgrounds. GoJet's use of self-schedule flexibility and premium pay has reduced attrition. Signing bonuses of $20k+ are also luring pilots to regionals.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Could This Spur More Low-Cost Transatlantic Flights?

The blocked JetBlue-Spirit merger could have some surprising ripple effects, including potentially spurring more low-cost transatlantic flight options. Whileultra-low-cost-carriers have made limited inroads across the Pond so far, this combination of industry events could lead more to take the plunge.
Legacy airline joint ventures immunize carriers like British Airways and American from competition on U.S.-Europe routes. Budget flyers relying on discounters have fairly limited choices. Norwegian pioneered low-cost long-haul flights with an innovative fleet of fuel-efficient 787 Dreamliners. But unsustainably rapid expansion led Norwegian to retrench and exit many transatlantic markets.
Level has found a profitable niche on a handful of leisure routes like Barcelona to Los Angeles. French Bee links Paris with Newark and San Francisco.Yet major growth barriers remain for other hopefuls eyeing the blue ocean potential of discounted transatlantic travel.

Regulatory hurdles are one challenge, especially Brexit complications around U.K. traffic rights and Europe's reluctance to fully embrace Open Skies agreements. IAG's Level has hinted its growth is on hold due to the uncertain operating environment post-Brexit.
Access to scarce airport slots at capacity-constrained hubs also poses a barrier for new entrants. And major European carriers hold sway to block rivals from codeshares needed to provide onward connections.
But the halted JetBlue-Spirit merger could shake things up by accelerating unbundling trends in legacy transatlantic offerings. Expect cost-cutting pressure on majors to strip out amenities and charge for once-free perks like checked bags, seat assignments, and meals.
As the value proposition of their premium cabins erodes, mass-market leisure flyers seeking comfort yet turned off by barebones ULCCs may find discounted niche offerings like French Bee more appealing. This demand-side shift cracking open the transatlantic market,along with Boeing 787 efficiencies, may entice more low-cost operators to take the plunge.

One likely contender is AirAsia X, which has the scale and desire for intercontinental growth oncemalaysia relaxes Covid travel restrictions. Its low fares and casual ambiance could resonatewith millennials eager for affordable European escapes. Canada's Enerjet also aims to leverage the 787's efficiency for cheap Canada-Europe routes. Qantas sees white space with its Zip budget brand targetingGeneration Z.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Travelers Lose With Less Flight Options

The blocked JetBlue-Spirit merger didn't just kill a potential budget travel behemoth, it killed options for flyers. And options mean everything in air travel. Savvy travelers lament the loss of a combined entity that could have shaken up the status quo, stimulated new demand with ultra-low fares and injected badly needed competition into the market.
Sure, on the surface JetBlue and Spirit seem like strange bedfellows - one a hybrid carrier with superior service, the other an unapologetic purveyor of the no-frills flying experience. But by joining forces, they offered the scale, branding power and route networks to challenge the entrenched Big Three of American, Delta and United.

The merged airline could have leveraged its broader reach to stimulate new demand from leisure travelers scared off by the high fares and extra fees of flying today. The lack of real competition on many routes enables legacy carriers to hike base prices unchecked. Budget flyers desperately need a champion.
Just look at the example of Europe's Ryanair. As the continent's largest low-cost airline, it forced stodgy national flag carriers to reduce fares dramatically or cede untapped markets. Ryanair's combination of absurdly cheap promotional fares and barebones service expanded the pie for air travel. Many only took their first flight thanks to prices finally becoming affordable.
A combined JetBlue-Spirit had the potential to play that stimulating role in North America. Sure, base fares may have been no-frills, but once on board travelers could pay a la carte for the amenities they value most. Savvy packers could still fly for pennies by avoiding bag fees and brown bagging snacks.

This "buffet approach" would have democratized air travel. Sadly, the merger's defeat leaves a duopoly on many routes, with majors free to charge what their black box pricing algorithms maximize - not what budget flyers can necessarily afford.
And with the Big Three dominating key hubs like Atlanta, Dallas and Chicago, getting competitive fares often means long, inconvenient connections. A combined JetBlue-Spirit could have offered more convenient nonstop options with pricing rivaling driving or the bus. But that network breadth and leverage is now lost.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - Airport Hubs Could Look Very Different

The blocked merger may have longer-term implications for airport hubs, as carriers reevaluate bases that once held competitive advantages. Industry analysts expect repositioning that could dramatically alter the landscape, especially for second-tier hubs that lose their strategic rationale.

Just look at Cincinnati after Delta scaled back in the wake of its merger with Northwest. Massive cuts left CVG a shell of its former self, devastating the local economy. Pittsburgh suffered a similar fate post-USAirways consolidation, along with hubs like St. Louis on American and Cleveland on United. Mergers create redundancies ripe for downsizing.
Spirit airline's key hubs in South Florida, Chicago, Dallas and Las Vegas now seem safe havens for growth rather than on the chopping block following a JetBlue merger. But JetBlue may still reduce focus cities like Long Beach that would have supplemented a larger combined network.

American and United's hubs in Phoenix and Denver now face stiffer competition with Spirit and Frontier HQ'd there. But the majors boast broad loyalty programs to preserve share. Delta seems firm on Salt Lake City due to its geographical advantage, despite Southwest and Frontier encroaching.
Leisure markets centered around Orlando, Fort Lauderdale and Palm Beach face uncertainty depending on how aggressively Spirit and JetBlue square off. Overlap on bread-and-butter Caribbean routes out of South Florida will likely see the biggest fare war turbulence.
The greatest impacts could be at congested Northeast airports like LGA. A merged JetBlue with Spirit's ample slots could have concentrated capacity in New York over diluting it across Boston and D.C. too. Instead, JetBlue may pivot toward higher-margin business markets served from Boston where it dominates.
While legacy megahubs seem safe, experts warn that continued consolidation may one day make even fortress hubs like Delta's Atlanta vulnerable. Airlines are increasingly nimble at redeploying assets, so no hub is 100% guaranteed in the perpetual chess match for competitive advantage.

Wings Clipped: How the Blocked Mega-Merger Could Reshape Budget Air Travel - More Scrutiny on Future Airline Mergers

The blocked merger of Spirit and JetBlue may have a chilling effect on future attempts at consolidation in the airline industry. Regulators sent a clear message that rampant reduction of competition will not be tolerated. Expect much more scrutiny going forward.

This will force carriers to think twice before announcing deals. Megamergers like a Delta-American or United-Southwest are likely off the table for the foreseeable future. Even smaller combinations face tough sledding.

Alaska Air's acquisition of Virgin America slipped through between the Obama and Trump administrations. But trying that again today would raise anti-trust alarm bells. Frontier and Sun Country have similarly abandoned talks, at least for now.

International joint ventures face fresh skepticism. The "metal neutral" cooperation between Delta and Aeromexico now faces Justice Department lawsuits alleging reduced consumer choice. American's pact with Qantas also faces challenges. These quasi-mergers were once viewed as pro-consumer. But tide is turning.
Even more discreet operational agreements like codesharing face hurdles. Witness the recent American-JetBlue Northeast Alliance struggling through lengthy regulatory review. Expect carriers touting job creation or consumer benefits from cooperation to meet heavier burden of proof.
This also reduces incentives for maverick airlines like Breeze and Avelo to be acquired. Their appeal previously was gaining critical mass for eventual absorption by a major. Now the road ahead as independents looks longer. But scrappy entrepreneurs like David Neeleman thrive on underdog disruption.
Cincinnati saw fares spike 40% after Delta's pullout post-merger. Cleveland Hopkins Airport lost a third of traffic after United abandoned its former hub there. Studies show prices increase 6% when mergers remove a competitor from a market.

With fewer players, majors also cut service to smaller cities and regional airports. Nearly 200 communities have lost all commercial flights in the past 15 years as consolidation intensified. Airlines counter that mergers allow broader networks, but evidence shows hub redundancy eventually gets streamlined.
What's clear is the cycle of merger mania has concentrated power into too few hands. The bold stand of regulators today offers hope of reversing the trend towards an airline oligopoly. Travelers and local economies have suffered from wave after wave of consolidation. Fewer competitors does not foster innovation.

Unwinding the industry's hyper-consolidation won't be easy. But a future with revitalized competition can help redistribute flight options and affordability to underserved heartland regions. Building a new airline to compete with entrenched giants is extremely difficult. Policymakers must therefore prevent further entrenchment.