Spirit Airlines shows mergers may prevent bankruptcies and bailouts

In 2024, Spirit Airlines, financially troubled since the COVID-19 pandemic and lockdowns, sought a lifeline through a merger with JetBlue Airways.

Although neither Spirit nor JetBlue could be considered major airlines, the Biden administration – in the midst of a “whole-of-government” anti-merger mania led by political appointees such as Federal Trade Commission Chair Lina Khan and Consumer Financial Protection Bureau Director Rohit Chopra – blocked the merger through a Department of Justice lawsuit. A federal court sided with the Biden DOJ in blocking the merger, and the airlines eventually scuttled their merger plan rather than footing the bill for a costly legal fight.

Jessica Melugin, director of CEI’s Center for Technology & Innovation, blasted the blocking of the merger and warned that it could reduce competition in the airline industry. She stated in January 2024:

Blocking a merger of smaller competitors trying to combine resources and scale up to compete with the top four airlines makes little sense. It risks making both Spirit and JetBlue less able to compete with the ‘big guys’ and ultimately leaving the airline industry less competitive, harming consumers.

Two years later, Jessica’s words have been vindicated, as the unfortunate situation she warned about seems to have come to pass. After making two bankruptcy filings since the merger was blocked, Spirit appears to be running out of cash on hand for operations, and the Trump administration is considering a bailout and taking a large ownership stake in the company.

Many conservatives and libertarians are rightly blasting the proposed bailout. They point out – as we have at CEI – that government subsidies or investments in certain corporations encourage companies to take excessive risks, as company executives rationalize that they have a good chance of a taxpayer bailout if anything goes wrong.

They also argue correctly that bailouts are a form of government favoritism that diverts investment from innovative companies that are less politically connected than these subsidy recipients. As Advancing American Freedom’s Joel Griffith and Marc Short write in the Washington Examiner: “Conservatives have never supported state ownership of private companies, and we shouldn’t start now.”

While rightly opposing bailouts, conservatives and others interested in advancing capitalism and freedom should support also recognize the value of mergers and acquisitions (M&A) in preventing bankruptcies and smoothing out volatility as part of a natural market process. Griffith and Short note that “in the airline sector, mergers allow companies to operate more efficiently, maintaining solvency while continuing the trend of lower ticket prices.”

I have pointed out that M&A plays much the same role in the financial sector. As I testified before the House Financial Services Committee last May: “Restricting bank mergers often has the opposite of its intended effects. It harms the ability of community and regional banks to combine and compete with megabanks.”

In that testimony, I quoted former FDIC Chair Sheila Bair and former FDIC Vice Chair Thomas Hoenig, who wrote in a 2023 comment letter: “Encouraging bank M&A has been an important, and essential tool, used by the FDIC and other bank regulators in stabilizing the banking system and reducing the number of bank failures. Acquisitions by strong banks of weaker ones can prevent failures, while protecting communities from the disruption of banking services that inevitably comes with the liquidation of a failed bank.”

As my wise colleague Jessica Melugin – cited at the beginning of this post – puts it in the title of her paper, “M&As Are A-Okay.” And they are certainly much better than bankruptcies and bailouts!