Documents revealed in the federal government’s anti-trust trial against JetBlue’s acquisition of Spirit Airlines show that they considered what a merger with Alaska Airlines would look like. Some observers will see that as a better play – JetBlue strong on the East Coast, Alaska strong on the West, and potentially fewer anti-trust issues – but I actually disagree.

A JetBlue document from 2021 assessing different industry combinations shown, including assessments of a Frontier/Spirit combination, and an Alaska/JetBlue combination.

— Christine (@PlaneDame) November 6, 2023

Alaska Airlines had been on JetBlue’s shopping list for some time as revealed during he anti-trust trial.

So to underscore, before the pandemic, JetBlue was interested in eventually acquiring Alaska Airlines.

— David Slotnick (@David_Slotnick) November 6, 2023

This administration doesn’t like mergers, period. If there’s any that pass muster on traditional grounds, it’s JetBlue-Spirit (as much as I don’t like it, and prefer to see Spirit as an ultra low cost carrier driving down fares so I can enjoy cheap travel on airlines not named Spirit).

There’s zero fleet commonality between JetBlue and Alaska. Alaska has worked to rid itself of the Airbus narrowbodies it inherited from Virgin America, that JetBlue also flies. JetBlue would have been a better fit fleet-wise with Virgin America, and also had an easier time swallowing that smaller carrier, but Alaska Airlines overpaid to acquire them in a bidding war against JetBlue.

And ‘strong on the West Coast + strong on the East Coast’ drives fewer synergies than you’d expect.

• It opens a lot of two-stop connections, for instance flying into Seattle and on to Boston or New York and then a final destination. But enabling two-stops isn’t a big benefit.

• Being able to serve all of a corporate customer’s needs can help win corporate deals, e.g. a strong New York presence may be needed to win LA contracts (as United learned, losing LA deals when they pulled out of JFK) but those corporate deals have been a smaller contributor to travel since the pandemic than they were previously.

Between union contracts, complex computer systems, and different cultures airline mergers are even harder to pull off than most corporate combinations – and most corporate combinations rarely bear the promised fruit.

JetBlue doing and overpriced deal for Alaska after it did an overpriced deal for Virgin America and then failing to make use of the gates and slots in congested airports that it had acquired doesn’t seem better than doing an overpriced deal for Spirit and then making capital investments not just in a merger but to retrofit all of Spirit’s fleets to take out seats and sell fewer tickets.

In February 2022 Frontier announced a deal to acquire Spirit Airlines, which JetBlue’s analysis suggested would be bad for them, pushing down fares. Frontier had friendly board members, dating back to the days when Frontier’s chairman was Spirit’s board chairman. The synergies that JetBlue saw were clear to both sides, and Spirit fought off JetBlue’s subsequent offer for the airline. After a six month fight, Spirit shareholders clearly considered JetBlue to have a superior offer.

Since the beginning of the year JetBlue has been making payments to Spirit shareholders. Even if the deal doesn’t happen, shareholders keep that cash (and still own the airline).

Spirit’s fortunes have fallen markedly over the past year, with some analysts calling for JetBlue to try to re-negotiate the deal. JetBlue was massively overpaying to begin with, victim of the ‘winner’s curse’. They outbid Frontier which was a better fit for Spirit to begin with and would have made better use of its assets. And if the deal closes, JetBlue will be distracted from its own need to improve its operations.

Yet the federal government’s case against the merger is bizarre. Delta and United are where most of the growth and profits are coming from in the industry. It’s almost as if the Biden DOJ wants to ensure it stays that way.

• They successfully dismantled the American Airlines-JetBlue partnership, which created sufficient scale to compete against Delta (and United) in New York.

• They’re trying to block JetBlue from acquiring Spirit which would still leave them as the fifth largest U.S. airline.

JetBlue has already agreed to divest slots and gates at congested airports so that it doesn’t grow in the toughest to grow places by acquiring Spirit. They’ll get pilots and planes that are currently losing money, take seats out, and put in a better product. That means fewer seats operating under an ultra low cost model but not in places where another one would be unable to expend.

The Department of Justice hasn’t blocked an airline merger in decades. They did fight United’s acquisition of US Airways prior to 9/11. Since then each airline acquisition has been permitted, extracting concessions like slots and gates at congested airports.

The best arguments against DOJ seem to be that,

• They went to court to claim JetBlue is a disrupter in stopping the American Airlines merger, and if that’s true a larger JetBlue vis-a-vis legacy carriers in a benefit. (I don’t actually buy the truth of that argument, since JetBlue hasn’t seemed much of a disrupter since Dave Neeleman left, even less so since Dave Barger left.

• Spirit without JetBlue will slow its growth. They’ve ceased pilot hiring and they’re pulling out of several cities. Their financials lag the rest of the industry. So even though JetBlue will remove seats from Spirit’s planes, they plan to fly more than Spirit would – increasing seat supply overall which will drive down prices rather than raising them.

Nonetheless the best thing for JetBlue and for JetBlue shareholders may be losing this case, not buying Spirit (since they were overpaying, and the airline is worth less than when they agreed to do so), and taking the cash and either returning it to shareholders or investing it outside of the airline industry.

The U.S. airline industry is capital-intensive, heavily unionized, and heavily regulated. It’s a mature industry without significant long-term growth potential. It’s not a place you double down on to make money especially compared to other sectors.

Investing in a broad-based mutual fund, over a long time horizon, seems likely to generate better returns than betting on an airline, especially one with operational issues on the ground like JetBlue.