JetBlue Airways wants to buy Spirit Airlines. Alaska Airlines wants to buy Hawaiian Airlines. Both deals must be approved by the Justice Department, which is always concerned that fewer firms in the market will reduce competition. That leads to higher prices and poorer service. In this case, just the opposite will happen if the mergers are allowed to go through.
Generally, the greater the number of firms in a market, the more competition there is. The increased competition always results in lower prices and higher quality as each firm tries to gain market share by offering a greater value to consumers. That’s especially true in newer markets.
However, in mature markets, the market often decides that it is best served by having a few very efficient firms rather than many relatively inefficient firms. This market maturity seems to occur in most industries. Look at the automobile market.
This market is clearly mature and has been for decades. In 1896, bicycle mechanics Charles Duryea and J. Frank designed and sold the first American-made gas-powered car. By 1908 some 485 companies had entered the market. In a new market there are almost always a large number of relatively inefficient producers.
Over time the least efficient producers are forced out of the market or gobbled up by the more efficient producers. This was especially true in the automobile market once Henry Ford developed the assembly line. That greatly improved efficiency but required a large capital investment, meaning smaller firms simply could not compete.
The market continued to mature over the next 100 years. Most recently, Stellantis was formed by merging Chrysler, Fiat and Peugeot. Stellantis actually owns a total of 14 different brands.
When markets determine that increased efficiency is needed, the government should not stand in the way by refusing to allow relatively inefficient firms to merge to form one efficient firm.
It is true that the Justice Department must apply the laws that make it illegal to monopolize an industry. In the airline markets, the new firms will neither monopolize the industry, nor will they reduce competition.
In the US, there are four firms that control about two thirds of the market. American, Delta United and Southwest are large enough that they can offer broader schedules serving more destinations. The other airlines are simply too small to compete, although some have found a niche serving smaller markets.
If JetBlue and Spirit do merge, their market share will be just over 10%. That compares to an average market share of about 17% for each of the big four. If Alaska and Hawaiian Airlines merge, their market share will be 8%.
That means the US market will now have six larger airlines who can offer services and schedules that will better suit the consumers.
Christopher Raite who is a senior analyst at Third Bridge research firm recently said, “The power of size in this industry is tremendous. There are just these inherent advantages that size gives you.” That means, it is certainly better for the market to have six firms with the cost and service advantages rather than four. That actually increases competition.
Justice Department lawyer Edward Duffy counters the efficiency argument by saying that the merger of low-cost airlines would reduce competition and lead to higher prices. But with improved efficiency and lower costs brought about by reducing overhead costs, exactly the opposite is likely to happen.
The Justice Department often has questionable logic. In 2008, they approved the merger of XM Satellite Radio with Sirius Satellite Radio. They were the only two firms in the market. That meant the new company would be a monopoly and it’s supposed to be illegal to even attempt to monopolize a market.
According to the Department of Justice website, “After a careful and thorough review of the proposed transaction, the Division concluded that the evidence does not demonstrate that the proposed merger of XM and Sirius is likely to substantially lessen competition, and that the transaction therefore is not likely to harm consumers.”
What? That merger eliminated competition. Monthly fees have more than doubled since the merger.
The American public should hope these two airline mergers are approved. The result of the increased efficiency will be airlines that better serve the needs of the public, and at a lower price.
Agree/Disagree with the author(s)? Let them know in the comments below and be heard by 10’s of thousands of CDN readers each day!