Tilting at Windsocks
Companies enjoy coupling. Mergers give the boss a chance to look like they’re doing something, put a corporate feather in their hat and, importantly, increase their pay. They also sometimes let companies throw their weight around in the real marketplace.
Bigger companies might push higher prices or fewer choices onto consumers. If this happens, it harms regular people. Authorities should weigh that harm against the potential benefits of a merger and the cost of action. They should intervene when their cure is reasonable compared to the cost.
That’s one framework for regulating mergers. Here's another:
Big is bad.
Between us, we'll call this second theory of M&A intervention "The Quixote School," it has other names too. The hero of Cervantes' story thought windmills to be giants, so fought them.
The Biden administration has delegated it's approach to regulating corporate M&A to a Quixotic band of federal knights, whose philosophy can be summed up as "big is bad."
It's along these lines that the DOJ lowered its lance at JetBlue's proposed merger with Spirit and sued.
On the surface, the airline marriage would combine the US' fifth and sixth largest carriers — ultra-low-cost Spirit would fold into somewhat-less-low-cost-but-still-value-leaning JetBlue. Together, they’d carry about 9% of US air passengers.
You might say "that seems like just a few airlines controlling a big chunk of US air travel. I see why the DOJ is going to court."
So, how does the DOJ do in court?
The 30,000ft View
Since 2000, 21 airlines have tried to buy other airlines. The JetBlue-Spirit mash-up just makes it into the top five. After the top five, there are one or two others of similar size.
The DOJ challenged three of those 21 mergers.
It successfully prevented just one — the engagement of United Airlines and US Airways in 2001. This would have paired the number three and number seven airlines in the US, 18% of the passenger market. It makes the 9% entangled in the JetBlue-Spirit affair seem regional.
Psychologist and economic Nobel laureate Daniel Kahneman champions this approach — taking “the outside view.” When facing uncertainty, like a DOJ antitrust case, it asks “how has the DOJ faired in similar cases?”
The case record shows the DOJ: 1, Airlines: 2. The DOJ has blocked mergers just a third of the time. It won concessions through settlements in its other crusades, but didn’t block them. If we look at the larger field of similar mergers, the DOJ record drops to one merger blocked in six.
Other deals, just as large as the scuttled United-US Airways tie-up, ground through the antitrust mill. The successful pairing of American-US Airways touched 18% of US air travel. The Southwest-AirTran bundle packaged 20% of the market. The Delta-Northwest deal carried 15% of US air travelers.
Knowing nothing about the specifics of the JetBlue-Spirit merger, you might expect the odds of a DOJ win to be between one-in-three and one-in-six that it will block the deal.
What does the market actually say?
The market gives the DOJ a chance closer to four-in-five to win! The market is pricing the deal as an 80% likelihood the DOJ blocks the merger..
Check Under Your Seats
Well, is there something about this deal that makes it particularly tough?
In its complaint, back in March, the DOJ pointed to JetBlue's alliance with American Airlines — “The Northeast Alliance” — as a "de facto merger" that would harm competition. It also rallied for specific markets, like Boston, New York and Florida that would be harmed by a JetBlue-Spirit combination. The complaint relied heavily on both of these points to support shooting down the merger. Writer Lionel Hutz does a thorough take-down of many of the complaint points here. The short version is that the betrothed jettisoned the two major pillars of the DOJ case.
In September 2022, in a separate case, the DOJ went to court against JetBlue's and American Airlines' "Northeast Alliance." It won that case in May 2023, after the DOJ filed its complaint against the JetBlue-Spirit merger. That “de facto merger” featured in the complaint never was. JetBlue and American will continue to fly head-to-head in the Northeast.
Also since the complaint, JetBlue has been busily selling-off gates and slots in the specific airports that worry the DOJ. It agreed to sell Spirit's Boston and Miami/Ft. Lauderdale presence to Allegiant and its New York presence to Frontier. Spirit doesn’t have much presence yet in most of the other cities mentioned by the DOJ as hypothetically harmed by the merger like Los Angeles, and Orlando. By shedding airport real estate, JetBlue has followed the same playbook as other challenged airline mergers that made it across the finish line.
Safe Travels
So, the DOJ’s overall record is one and two. While it’s zeal for anti-trust action might be new, the legal precedent for M&A is not. That is well-established, vast and regularly supported in court. The new, reborn DOJ still has to meet the same legal standards as the old, more reserved one.
Zooming out slightly, the DOJ record probably lies closer to one and six in similar airline merger cases. JetBlue-Spirit shed much of the competitive baggage from the DOJ's original complaint. Its moves tip the deal further in favor of the engaged. But, the market is still pricing the deal at around 4/5 to get cancelled.
It's not a slam dunk — or whatever the jousting equivalent is — to close, but if you can put together a portfolio of things that are priced at 1/5 to win when the actual probability of winning is closer to 4/5, that’s good value and can make you a good return.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk.