The Biden Administration’s anti-trust bunch have put the kibosh on the proposed JetBlue and Spirit Airlines merger. In so doing, the Bidenistas demonstrate again how they’ve hi-jacked any connection to anti-trust.
One phrase refutes every argument the Bidenistas put up: Avelo Airlines.
Ranked 7th by number of flights, JetBlue is a low-cost airline launched in 2000. Spirit, another low-cost carrier, is ranked 8th and began operating in 1992. Overall, U.S. passengers are serviced by five big carriers such as Delta and Southwest, five mid-sized carriers such as JetBlue and Spirit, and a host of smaller, niche carriers.
Therein lies the first clue the anti-trust vigilantes should butt out. If there were only a couple airlines, or if entry and exit into the business were especially difficult, then anti-trust concerns could be appropriate. Instead, there are at least 10 carriers with substantial presence and neither entry nor exit is a problem.
The second clue is that the domestic industry rarely makes a profit. According to the Bureau of Transportations Statistics (BTS), the industry made $1.4 billion in 2022, a paltry return on such a capital-intensive industry, but from 2018 to 2022 it lost about $7 billion.
The essence of monopolistic behavior is having sufficient market power to raise prices above competitive market prices. In turn, higher prices would generate monopolistic profits (technically, quasi-rents) and disadvantage consumers.
The airline industry more often loses money due to fundamental economics. In competitive markets, prices gravitate toward the marginal cost.
What’s the marginal cost to the carrier of your taking an open seat on a flight from LA to Boston? Maybe $10. The plane’s going whether you like clam chowder or not. That means the carrier is better off letting you buy a last-minute ticket for $11 than flying with an empty seat.
A reasonable guess of the average cost the carrier incurs whether you fly or not is about $375, reflecting a portion of the price of the plane, maintenance, overhead, aircrew and fuel costs. According to BTS, the average airfare in 2023 was $380 according to BTS, which with a $375 average cost comports with the airline making a slight profit.
The airline is better off letting you fly to Boston for $11 because it makes $1 net over marginal cost. Whether you fly or not, however, the airline loses big on that seat. It’s a wonder anyone is willing to invest in this industry, but truly astounding the anti-trust vigilantes stick their noses in.
Which brings us to our one-phrase answer. Avelo Airlines sports a fleet of 16 planes making sporadic, regularly scheduled flights to 44 destinations.
Avelo is the epitome of budget flying. Want a bag of peanuts? That will be $2. But Avelo flights are typically on time; the planes are clean; the staff polite and professional; and you can’t beat the price.
Most important of all for present purposes, Avelo took off in April of 2021.
Avelo demonstrates the ease of entry, and Spirit may soon demonstrate another common feature: exit. Lacking a merger partner, many observers expect Spirit to fold its wings as so many have done before, raising the question — what did Biden’s anti-trust mafia accomplish?
All air carriers would like to charge higher fares. They would all like to make a tidy profit.
But every time prices creep up and losses shrink for the established carriers, some pesky start-up like Avelo comes along to undercut their prices. It has been this way ever since Jimmy Carter heeded the advice of the brilliant Alfred Kahn and de-regulated the industry.
The anti-trust mafia should find some other industry to harass.
JD Foster is the former chief economist at the Office of Management and Budget and former chief economist and senior vice president at the U.S. Chamber of Commerce. He now resides in relative freedom in the hills of Idaho.
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