After weeks in which it appeared likely that the Trump administration would bail out Spirit Airlines—and potentially even other ultra-low cost carriers, including Frontier, Breeze and Avelo—Spirit will shut down operations, joining a long list of airlines that have disappeared from the U.S. market in the last half-century. For Spirit’s employees and customers and for the communities in which it operates, the failure is a tragedy. Commentators on the left and right are busy casting political blame—on the Biden administration for blocking a Spirit-JetBlue merger a few years back, and on the Trump administration, for the War in Iran jacking up oil prices.
But I think most people are thinking about the turbulence in the airline industry wrong.
A common misconception is that Spirit failed (or needed a bailout) because the U.S. Department of Justice under the Biden Administration blocked a proposed merger between the airline and JetBlue. When JetBlue proposed the merger with Spirit, JetBlue had already developed a so-called “partnership” with American Airlines that the Justice Department had challenged and was awaiting trial in federal court. Spirit’s board, wisely, rejected the merger with JetBlue because they thought it was anticompetitive and would violate antitrust laws. This was not rocket science given JetBlue’s plans to raise ticket prices between 24 and 40 percent after a Spirit merger and the incoherence of JetBlue attempting a merger to compete with the bigger airlines while simultaneously trying to partner with one of them.
But JetBlue went ahead anyway. They made a hostile tender offer directly to Spirit’s shareholders, who got greedy and accepted it, even though Spirit’s board advised them against it due to its illegality. There is a way around an otherwise illegal merger, called the “failing firm” defense, which allows a company to say it needs to merge because it will collapse otherwise. But Spirit never made this argument, perhaps because at the time it was not yet failing. The reality of this situation is that JetBlue and Spirit’s shareholders proceeded to attempt a merger, even when they were told it was illegal. It’s not the fault of prosecutors following the law when people do things they know are illegal.
The bigger, more important, question is this: Why do these airlines keep needing to merge and consolidate? And why, every time there’s a crisis, do they need bailouts or go bankrupt? Framing the question that way, this is no longer just about Spirit. The head of United recently proposed buying up American Airlines. And it isn’t like the airline industry has only seen a few mergers in the last half-century. There have been mergers after mergers, decade after decade, leaving fliers with only a handful of airlines today.
So why all the mergers? As I argue in my book, Why Flying is Miserable, the answer is that the airline industry has inherent dynamics that create tendencies toward concentration. Airlines benefit from economies of scale and network effects, which basically means bigger and more consolidated is better. That’s why airlines have moved to hub-and spoke models, with giant fortress hubs like Atlanta or Dallas.
There are also barriers to entry in this sector: airplanes can’t just take off and land wherever they want. The U.S. has a limited number of airports and runways, and slots for takeoff and landing, and gates to park. These constraints are also difficult to get around. While we could more evenly distribute slots or gates, it’s physically impossible for two planes to land or take off on the same runway at the same time. There’s also the problem of destructive competition: when faced with an upstart competitor, big airlines can match their prices, routes, and times of takeoff, and then crush the competition because people will prefer the bigger network to a small airline with a limited route structure.
It’s a fantasy that competition will work in a market with these dynamics. Absent some policy change, we will end up with an unregulated monopoly or duopoly. But this fantasy is just the story that policymakers and the general public were sold in the 1970s, when Congress deregulated the airline industry. Deregulation advocates claimed that competition would work great in airlines. They claimed that there weren’t economies of scale and ignored barriers to entry. One source, cited in an influential Senate report, even claimed there would be upwards of 200 airlines operating competitively in a deregulated market. How wrong they were.
And what about the bailouts? There’s a similar story to be told here about why the airline industry is special. Bigger airlines will be better able to weather crises than small ones. They have lots of resources (including from other business deals, like credit card partnerships) and can make expensive, forward-looking investments. Delta, for example, owns a refinery, specifically so that it would be more resilient against volatile and spiking jet fuel prices. Smaller airlines can’t do that.
There’s a second piece to the bailout story that is just as critical. Air transportation is not a normal business. While it’s sad when the neighborhood coffee shop or restaurant closes and jobs are lost, that one closure doesn’t threaten huge chunks of the American economy. An airline collapse potentially does: in a geographically huge country like the United States, airlines are basic transportation infrastructure. They are essential for commerce, tourism, and connectivity – and their failure can have second and third order effects on businesses and communities writ large. A seasonal tourist town without access to air service could face a local recession or depression if people can’t travel there easily.
When an industry is too-important-to-fail, politicians are going to try to find a way to bail it out, even if the long-term consequence is to create a perverse incentive for the private sector. This is exactly what has happened in banking, most recently in 2008 and in 2023, and it is what has happened with airlines too. The answer to this problem is not more mergers and more bailouts; the answer is to shape the market structure of the industry to deliver a reliable, stable industry that works in the national interest.
There are four ways to solve the problem of tendencies towards concentration in infrastructural services:
(1) Nationalization. A single national air carrier would serve the whole country. That would be highly efficient from the perspective of scale and costs, but it would also mean no competition, and competition can spur innovation and dynamism.
(2) A public option. We could have a one national, public carrier co-exist with the private market. Only the public option carrier would get subsidies, and it would serve the whole country. Other airlines would merge, over time, likely into a monopoly or duopoly. There would still be a measure of competition from the public option. But the public option would need to be heavily subsidized because it would have a duty to serve the whole country (unlike unregulated private carriers), but those places – small cities, mid-sized cities – often have routes that are not profitable, and the big carriers won’t serve them sufficiently well.
(3) Regulated competition. This was the strategy from the 1930s to the 1970s. We had a dozen or so big airlines and regulators managed the network to achieve a kind of Goldilocks approach, with not too much competition or too little, and in a way that all the airlines were consistently profitable and offered reliable, stable service.
(4) Partial regulation. We could impose some market-structure regulations on airlines, but not all of them. For example, we could impose a duty to serve on the biggest airlines, so they have to fly to smaller communities, and we could require a rainy day or bailout fund, so that some of their profits are held for when they will inevitably need a bailout.
Whichever one you prefer, the bottom line is this: If the only way for airlines to survive is to constantly merge or get bailed out by the government—neither of which protects the public interest—then it’s time to admit that the industry is more like a public utility than a competitive market. We will not have a stable, reliable airline industry without either taking over the airlines or regulating them like public utilities.
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