The Spirit Airlines Paradox

Read one way, the decision this week by a federal judge to block JetBlue’s acquisition of Spirit Airlines is a milestone in the effort to revive American antitrust law. President Joe Biden has made competition enforcement a central part of his economic policy, and the JetBlue ruling marks the first time that federal regulators have ever won a lawsuit to stop a major U.S. airline merger. In his opinion, William G. Young—who was appointed by Ronald Reagan in 1985—explains in admirably plain language that absorbing Spirit would allow JetBlue to raise prices and reduce service on the routes where the two airlines currently compete. This would violate the federal Clayton Act—“a statute,” Young wrote, “that continues to deliver for the American people.”

Yet Young’s decision also inadvertently struck an odd note—one that hints at the limits of what antitrust enforcement alone can do to improve air travel. “Spirit is a small airline,” he wrote. “But there are those who love it. To those dedicated customers of Spirit, this one’s for you.”

Really? No doubt Spirit has its admirers. And by offering super-low fares, it has expanded access to air travel for many customers. But it has also long been seen as the epitome of everything that’s gone wrong with flying, a leader in an industry-wide race to the bottom. Always on the brink of insolvency, the airline’s never-ending search for cost savings has made it notorious for pioneering unpopular practices such as restricting refunds, shrinking seats, and, most controversially, charging for even the most basic amenities. It tends to show up near the bottom of on-time-arrival rates and near the top of the consumer-complaint rankings, according to the U.S. Department of Transportation. Maybe, as Young reasoned, competition from Spirit keeps other airlines’ nominal ticket prices lower than they otherwise would be. But it has also helped normalize loss of quality throughout the industry, which must be factored into the true cost of flying.

Ganesh Sitaraman: Airlines are just banks now

After years of lax antitrust enforcement and major mergers, the U.S. airline industry is indeed dangerously consolidated. But the fundamental problem in air travel today is not lack of competition; it’s the lack of sensible regulation to channel competition to public purposes. For people who know their business history, this should not come as a surprise. Airlines are networks. That means they can offer better service when they’re big enough to provide seamless connectivity to lots of different people going to lots of different places. Because of these “economies of scale,” airlines, like other networked industries, tend toward monopolization in the absence of competition enforcement. But lack of regulation can also work in the opposite direction when it leaves these businesses facing too much competition.

During the mid-19th century, this dynamic was at the core of what was once known as “the railroad problem.” Successive rounds of investors would finance the construction of redundant rail lines across the continent, setting off what some characterized as “ruinous competition.” Stuck with high fixed costs, railroads responded to their financial losses by neglecting maintenance and degrading service. They also waged rate wars wherever they faced competition and price-gouged wherever they managed to hold on to or create a local monopoly, which was usually in smaller, far-flung towns. The fate of local economies could depend on whether they were served by competing railroads or by only a single carrier. “Place to place, or man to man, they might compete; but where the weight of the railroad was flung into one scale, it was strange indeed if the other did not kick the beam,” the historian and reformer Charles Francis Adams Jr. wrote in his 1878 book, Railroads: Their Origin and Problems.

The lack of regulation allowed railroads to damage the public interest even as they drove one another into mass insolvency. In the 1870s, roughly one-third of the industry, measured by mileage, went bust or ended up in court-ordered receivership. Congress responded to the crisis by creating the Interstate Commerce Commission in 1887, the first federal regulatory agency. The ICC required railroads to charge all of their customers the same, publicly posted prices for the same levels of service. This—along with the Sherman Antitrust Act of 1890—helped eliminate ruinous price wars. It also equalized standards of service among different competing businesses, cities, and regions, so that success and failure in American life no longer depended so much on who happened to get the best deal from the railroads. The regulatory process was bureaucratic and far from perfect, but it worked much better than the anything-goes alternative.

In 1938, the U.S. adopted the same approach for the newly forming airline industry. Before the creation of the Civil Aeronautics Board, airlines faced ruinous competition from new “fly by night” carriers and depended financially on large airmail subsidies from the government. The CAB attacked this problem by enforcing new market rules that required airlines to charge roughly the same price per mile on all routes, thereby preventing price-gouging on routes where they faced little competition and destructive price wars on routes where competition remained strong. Airlines were effectively required to use some of the profits they earned on high-volume, high-margin, long-haul routes to maintain government-mandated service on low-volume, low-margin, short-haul routes, just as the ICC had long required railroads to do. The CAB also limited new entrants so that the airline industry remained modestly profitable and able to finance its technological progress, notably through the expensive conversion to jets in the 1960s and ’70s. In 1962, only 33 percent of Americans over 18 had ever taken a trip on an airplane. By 1977, the number was up to 63 percent.

Yet by the end of the ’70s, Congress and the Carter administration had begun to dismantle both the ICC and the CAB. Many liberal Democrats, including Ted Kennedy and his then-staffer Stephen Breyer, the future Supreme Court justice, reasoned that deregulation would lead to more competition and thus to lower consumer prices—a high priority at a time of galloping inflation. The consumer advocate Ralph Nader joined in, arguing that by creating regulatory barriers to new airlines, the CAB had allowed both airline management and unions to become bloated and inefficient. And so, on the basis of these and other critiques, Congress passed a bill in 1978 doing away with the CAB and the regulatory regime it had enforced.

Read: Why the economic fates of America’s cities diverged

The early years of airline deregulation indeed saw a flood of new carriers, along with steep price declines on many routes. But this came at the expense of other communities, including major cities in what is now known as “flyover country,” which saw air service become prohibitively expensive or disappear altogether, fueling a trend toward regional inequality that has been building ever since. Meanwhile, multiple studies have concluded that, after adjusting for changes in energy prices, overall airline fares fell more slowly after the elimination of the CAB than before.

In the decades since, the effects of deregulation have only gotten uglier. (I first wrote about these issues in a 2012 Washington Monthly article. My co-author, Lina Khan, is now the chair of the Federal Trade Commission.) According to the industry’s trade group, airlines operated at a loss for all but three years from 2000 to 2010. Major airlines such as United and US Airways declared bankruptcy and defaulted on their pension debts, requiring expensive public bailouts (as they would again during the coronavirus pandemic). Faced with the same ruinous competition that had driven railroads into insolvency in the 1870s, airlines frantically tried to cut costs by eliminating routes and degrading service while also engaging in defensive mergers. Deregulation was supposed to lead to a flowering of competition; instead, today, there are only four major carriers, which together account for about 80 percent of the domestic market, by some estimates. By buying up their competitors, today’s remaining super airlines gained enough concentrated power to become modestly profitable even as they make the passenger experience progressively more miserable.

Charles Francis Adams Jr. and the other reformers of the late 19th and early 20th centuries could have predicted this result. They knew that, without regulation, networked industries—including not only railroads and airlines but also the telegraph, telephones, and electrical power—would go through painful cycles of expansion and collapse until settling into eventual oligopoly. And they would have recognized what should now be obvious: that although antitrust has a crucial role to play, it isn’t sufficient on its own. Networked industries require a broad regulatory regime that protects them from ruinous competition even as it shields the public from abuses of their power.