Spirit and its slightly smaller rival, Frontier, announced their intention to merge. Will that be good or bad for us?Every airline merger, ever, has always been accompanied by two extremely dubious claims:
(a) The merger will improve passenger experiences, give them more choices, and lower fares
(b) No jobs will be lost, no hubs will be closed
The reality is invariably different in both cases. The most regrettable aspect to these claims is they are used to justify the application for the merger, and are enthusiastically accepted by the Department of Transportation and used to explain their approval, but – and it is a big but…. The DoT acknowledges they don’t check up on the merged airline, subsequently, to make sure their claims end up being true.
That would seem to encourage the airlines to make ever more extravagant claims, because they’ll probably not be held accountable.
The announcement this week that two “no frills” carriers – Spirit Airlines and Frontier Airlines – plan to merge and become one larger carrier was rapidly greeted by excited praise in the press echoing the usual claims of billions of dollars in savings for passengers. We don’t yet know what the new merged airline will be called, nor do we know where it would be based, but the claims of “customer benefits” were made with a great deal of certainty.
Interestingly, the early claims seem to have now disappeared, for example, Google hints in its short snippet of such a statement being made here
But when I go to the article, that phrase no longer appears.
Other articles more cautiously report rather than endorse, and say the airlines claim the merger will save passengers money, for example, this article quotes Spirit CEO Ted Christie as saying
This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests even better, expand career opportunities for our team members and increase competitive pressure, resulting in more consumer-friendly fares for the flying public,” Spirit CEO Ted Christie said in a statement.
A bit like the mystery of anti-gravity, somehow we are supposed to believe that merging two airlines will increase competition. Then, through some equally puzzling process, the merger will generate “more consumer-friendly” fares – an interesting phrase which shies away from actually saying “lower”, and is notable for coming from the lips of the CEO of the airline with some of the most unfriendly fares (in terms of extra-costs and fees) in the entire country.
Let’s consider this rationally.
First, both airlines have been doing well, prior to a merger. We really have to ignore 2020 and 2021 as being anomalous years, but for 2019 compared to 2018, Spirit and Frontier were both growing at massive rates well in excess of industry averages. This merger is not a response to a desperate need, but rather an attempt to enhance the two airlines and their respective (mutual) profitability.
It is also interesting to note, in this table, the astonishing gap between the “Big Four” carriers and all the others. Clearly, combining Spirit and Frontier would move them to the top of the “other” carriers, significantly ahead of JetBlue, but still perhaps only one half the size of United.
Note these are passenger counts, not revenue counts – if revenue was tracked instead of passenger numbers, the gap would be larger between the “Big Four” and a combined Spirit/Frontier due to the generally lower fares charged by Spirit/Frontier.
Let’s look at some of the claims and promises.
The Merger Will Create Efficiencies (and Save the Airlines Money)?
Probably, yes, this will happen, but not always in as great a manner as claimed. Many airline costs scale up and down fairly directly with their size and operations, there are not as many economies of scale as you might expect, and indeed both airlines are already operating on a much lower cost (per seat mile flown) basis than the Big Four carriers.
If profitability was simply a matter of size, the largest airlines would also be the most profitable, but that is seldom/never the case.
Some operational efficiencies will be created. But the main efficiencies can only come when a merged airline starts to do things it invariably promises it won’t do – reduce total staffing, or consolidate flights that were previously competing against each other into merged flights, or raise fares because they are no longer competing against each other for passengers.
The Merger Will Give Travelers More Choices?
This statement makes no obvious sense, no matter how you struggle to interpret it, other than to guess that what is meant might be the new combined airline will find it easier to add more flights to new destinations.
Even that is an uncertain claim.
For new routes, how is it any easier for a merged carrier to start a new route than it was for an unmerged carrier to do the same thing? If you are a traditional “network carrier” then it is easier to add more “spokes” to your hubs, because you’ve more people going in and out of your hubs. But if you are two airlines like Spirit and Frontier, with a weak rather than strong approach to hubbing, that benefit is less clear, and furthermore, if you don’t rationalize and concentrate (ie reduce) your hubs, the merger only benefits shared hubs, not unshared ones.
In terms of the routes currently served by the combined airlines, there’s no way that if (for example) Spirit operates three flights a day and Frontier operates two flights a day between two cities, when the two airlines merge, they’ll start operating six or more flights a day. The more likely outcome is a drop from five to four flights, or perhaps staying steady at five.
At a more obvious level, in the past, you might have had a choice of two or three of the Big Four carriers, and maybe two or three of the smaller carriers when planning to fly somewhere. Of course, you still have the same number of choices of major carriers. But, if, previously, you had a choice of both Spirit and Frontier, now you no longer do.
Most of us describe that as a reduction in choices, not an increase.
The Merger Will Add Competitive Pressure?
Prior to the merger, there was competition among the Big Four (really, among AA/DL/UA – Southwest has always been a bit of an outlier) for one type of travel, with some extra competition from the other two “full fare/full service” carriers (Jet Blue and Alaska Airlines). Then, largely independent from that, there was different competition between Spirit and Frontier and Allegiant at the other end of the market.
People that typically fly on the Big Four rarely if ever consider flying on the low tier of carriers, and vice versa.
The merger of Spirit and Frontier makes no difference to competition among the Big Four. But it does reduce the number of no-frills/low-fare carriers from two major and one minor to now one major and one minor. That’s not an increase in competitive pressure, it is quite the opposite.
The Merger Will Cause Air Fares to Drop?
How and why would this happen? Although this is the most common “headline” claim in all merger situations, it has never, ever, made any logical sense.
Airlines are for-profit entities. They exist to make as much money as they can for their shareholders. While they generate profits (at least in theory) as an outcome of providing air travel services for passengers (and cargo), the concept of flying people and packages to places is purely a secondary goal – the key goal is and rationally must always be to make money for the shareholders.
Prior to deregulation (1979) the airlines worked on a strange regulated “cost plus” basis. Each year the Civil Aeronautics Board would tell the airlines what they were allowed to charge for tickets, based on submissions from the airlines showing what it cost them to operate flights, and agreed “fair rates of return”. Conceivably, reduced costs could then have translated to lower fares.
But now there is no need for approval for airfares, and airlines set their fares at the scientifically most exact numbers that they believe will generate the greatest profits for them. Those prices are set without any consideration for underlying costs. Costs might go up and prices might stay the same or even go down, and of course, costs might go down and prices might go up, too. That is why sometimes you’ll see it is cheaper to travel to a destination that is further away than another destination, or cheaper to fly on a multi-stop itinerary than a nonstop itinerary, even though in both cases, the lower fare is on flights that cost the airlines more to operate.
The “logic” that intuitively supports the claim of a merged carrier lowering prices is the belief that the new merged carrier will have lower costs and so, of course, will reduce its fares to match. But real life doesn’t work that way.
It doesn’t matter what happens to the cost structures and efficiencies of the merged airline. Their fares have been, until now, and will remain, subsequently, at the highest possible level they can be to bring about the best possible shareholder return. Air fares will not drop.
The Merger Won’t Result in Job Losses and Hub Closures?
This claim is usually offered by merging airlines to their unions. But invariably, quite the opposite occurs. Of course, the concept of “no job losses” can be interpreted as meaning “We’re not going to fire anyone on Day One of the new merged airline”, but that promise doesn’t prevent the new airline from simply not replacing people as they leave. A few years of attrition and the total manpower numbers will be much lower, even though ostensibly there were no job losses.
Similarly, merged carriers seldom close down hubs immediately. But, invariably, after waiting a “polite” interval, the merged airline will announce a revision to their route network (to give their passengers more choices and better fares, of course…..) that involves hubs being downgraded – perhaps to a “strategic city” (whatever that means), or perhaps not even that.
Why Do Airlines Merge?
Remember the statement that airlines, like all other companies, exist for one purpose only – to make money for their shareholders. Everything they do has to further that objective, even if it might seem to the contrary. If it helps, a company will of course give charitable donations and support worthy causes, because that is simply another form of public relations and advertising. If not doing something wasteful/unnecessary means the company will be vilified in public and will lose business, then it will do that thing, and pretend it is doing so for the most altruistic of reasons, but it is all about making the most money.
So, the answer to why airlines merge is obvious, isn’t it. To make more money. Not to give passengers more choice (airlines hate it when passengers have choices). Not to lower airfares. Not to give unnecessary jobs to people who aren’t needed. All those factors take away from the motivation to merge. The airlines are only doing this so they can make more money, either through lower costs and/or through the ability to now charge more (not less) for fares due to less competition between them.
Will There be Any Benefits to Passengers From the Merger?
Surprisingly, yes, there might be. As a merged single carrier, if something goes wrong on your journey, you’ll have easier access to all their flights in an attempt to get things right again. Of course, that could be achieved by the two airlines simply agreeing to “help each other out” – as used to be the mandated case, decades ago (the famous “Rule 240” concept), so that is only partially a benefit, created artificially by the airlines first refusing to play by the former rules, and then using their own arbitrary refusal as justification for merging.
It also means you’ll have the ability to earn frequent flier miles on one consolidated frequent flier program from flights on both airlines, and possibly have more places to fly to when you wish to redeem those miles. But, please, these days, give very little or no consideration to frequent flier issues when choosing your flights.
And that’s about all. Neither airline will suddenly start giving things away for free, or answer their phones any quicker, or in any other way become “nicer” or “better”.
Oh – and if they do compete in a bigger stronger form to force a larger carrier off a route (unlikely, but you never know), what do you think will happen as soon as they’ve succeeded in doing so? Yes, their fares will shoot up. You’ll end up worse off than before.
