Thread by @David_Slotnick

Good morning from federal District Court in Boston, where closing arguments in the JetBlue-Spirit merger antitrust trial are set to begin.

With 40 minutes until court is in session, it's already packed in here. I believe they'll have the overflow room open, for anyone planning to be here.

JetBlue CEO Robin Hayes is here. No testimony today, just the closing arguments, but clearly he wants to observe the closing for himself.

Judge Young enters and court is in session.

"Questions do not indicate the inclination of the court in any way," judge reminds us before getting started.

And a reminder: All quotes here are close but may be paraphrased. I'm typing quickly here.

Defense is starting.

Pointing out competitve landscape of US airline industry has shifted in favor of Big 4

That's why JetBlue started looking at merger 6 years ago bc of that. Legacies have used large scales, largely through mergers allowed by the govt, to dominate market.

Future growth for smaller airlines is not possible without profit. Meanwhile, the legacies will continue to pull away. For instance, United has 800 planes on order, more than the combined JetBlue-Spirit would have total, defense says.

Judge: "Who's going to benefit if the merger goes through? Not a matter of JetBlue's standing; it's whether consumers will, and which consumers."

Defense again points to govt comments on JetBlue Effect from NEA trial

"Prices come down for most consumers in this country. We recognize some consumers have chosen ULCC...Frontier, Allegiant, Breeze, Avelo can quickly move in with low barriers to entry."

When should we expect to see the benefits you describe, judge asks defense

Talking about time frame for forward-looking competitive analysis under Clayton Act. Defense argues it looks long-term. Gov't has said 2-3 years.

Defense: "Even if there's short-term anticompetitive effect of merger, that's not barred as long as there's a long-term benefit for consumers. The court has to look to the future beyond the short-term to the long-term."

Judge: "What's my benchmark for considering the loss to Spirit consumers to the benefit downstream for a more affluent, or 'business' class, that all airlines compete for?"

Defense: Clayton Act bars 'substantial' loss of competition. What Congress intended was to say we don't want mergers that are bad in the *long-term* for competition.

Citing ULCC CEOs who testified they would be able to enter relevant profitable markets that would be vacated by Spirit.

Dynamic industry, can't take a snapshot just today. Take Avelo and Breeze; they entered during the pandemic, worst disaster for the industry, and now they're in dozens of cities.

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Defense citing mobile assets, when Spirit exits routes, will be profitable entry from other ULCCs.

What is the relevant market for antitrust purposes? Defense argues that's the judge's decision here. Protecting individual routes, or broader national market?

Some more back and forth on this. Defense argues national market should be the consideration.

If someone flies on one of the impacted routes that loses competition short-term, they'll also likely fly on other routes that now have more competition. Judge counters that some people only fly on one route, between home and where family lives.

Pointing to Ball Memorial Hospital case, argued that when there's an ability for mobile competitors to come in, even if consumer set isn't mobile, must take into consideration that other suppliers can come in and effectively protect consumers.

"JetBlue will continue to be a maverick."

Arguing government's expert witness did not provide route-level analysis and did not factor in divestitures.

Judge citing past cases where court said "this isn't enough, but would pass merger with XYZ additional divestitures. What do you think about that?"

Judge: "Should I analyze that? Should I ask for further hearings on remedy?"

Defense: (paraphrasing heavily here) "Yes, instead of stopping merger, court should seek remedies to make it work."

Defense, re: above: "Our position is that the merger passes muster, but if you disagree."

Judge: "Hypothetical, but if I were to fashion an injunction, what sort of limitations or steps for further consideration or review should I build into it?"

Defense: "Any remedy should be narrowly tailored to specific harm, based on past precedent"

Defense: "Divestitures would promote competition systemwide after the merger." Points to AA/US Airways merger, which helped JetBlue via divestitures, making them more potent competitor.

Frontier has grown rapidly in last several years, CEO Barry Biffle said want to grow 15-20%, has ability to get more planes and redeploy capacity from other routes.

Defense arguing that defense characterization of other ULCCs is a "snapshot in time."

Judge: "With things as they stand today, there seems to be a spectrum of prices. If this merger goes through, there will remain a spectrum that goes down to Basic Economy, but it seems the Spirit model will be lost?"

Defense: Model would still exist, and Basic Economy is growing, United says they attempt to match Spirit on price

2027, at least 8 airlines will offer some type of unbundled model. So the model itself is here to stay.

JetBlue will take time to retrofit Spirit planes, get single operating certificate, defense says. Retrofit will take at least 12-18 months to begin, during which planes will still fly with Spirit model. Another 4-5 years for retrofit to be complete.

That gives time for other ULCCs to come in well before Spirit ends, defense says.

Defense: "Gov't has relied heavily on deal modeling from before merger was signed (the 30% figure that's been cited). This was just an effort to value the company, not a business plan. Didn't account for JetBlue effect, entry of other airlines."

Simply not evidence of what the future will be.

Simple fact is scale matters in this business. Where we sit today, it's very difficult for small airlines to compete. In fact, this weekend, we saw another merger announcement, Alaska-Hawaiian.

Scale and breadth of network needed to compete. Scale will allow JetBlue to compete for years to come.

Spirit's lawyer is going now to add a bit. "How do you do a marketshare analysis on an industry that's this dynamic?"

Gov't's argument is looking at past, while Clayton Act Sec. 7 and past case (US v General Dynamics Corp) show the consideration should be forward facing.

Gov't has argued Spirit has been able to grow rapidly since early 2010s. It's true, but that's not sufficient for Spirit to prosper in this environment. Spirit has been seeking merger since 2016 bc it needs scale and size to compete with Big 4.

Esp given changing biz models of Big 4, meaning Basic Economy.

The year UA and AA added Basic Economy, Spirit net margin peaked and then fell.

Virtually every risk to Spirit's business that they identified in 2022-2023 has come to reality, lawyer says. P&W GTF engine issues, acute reduction in demand driving fares lower. Gov't argues load factors are high, but miss that that's only bc Spirit charging unprofitable fares.

New 5-year plan adopted 6 months ago yet is no longer realistic.

An airline that is not profitable can not continue to grow.

Defense done. 10 minute recess.

Just a reminder, the judge has emphasized not to read too into his questions as indicating which way he's leaning. I think Judge Young's style is more back-and-forth with hypotheticals etc.

And we're back in session.

DOJ: Any merger that can substantially harm competition should be enjoined. Any merger with a reasonable probability of blocking competition in any market.

DOJ: Harm would be felt by 135m passengers who fly hundreds of routes.

Judge: "But we're not going to get anywhere if you win, I enjoin this merger, and Spirit goes belly up. I need to look further out, isn't that right?"

In Q2 earnings call, Ted Christie said to investors "I strongly believe our expected Q3 performance is an anomaly."

Frontier has said the same, nothing wrong with ULCC business model, DOJ says

Argues there's no evidence that Spirit will fold soon, only that growth would slow.

Judge: "You're asking for a permanent injunction here. Shouldn't I build in some future review or way to see if whatever determinations I make here can be rethought if my assumptions are incorrect?"

DOJ: This case is about this deal, another future deal would be another case.

Harm demonstrated by evidence is real, concrete, will happen. Will result in higher fares marketwide, loss of ULCC capacity.

Pointing to the 30% fare increase argument again.

JetBlue themselves do not think enough new entrants by ULCCs, would allow that 30% fare increase indefinitely.

Talking about standards of proof etc.

Re: relevant markets, it's the consumer's options and choices on which the relevant market analysis depends, DOJ says.

Defining markets by O&D pairs, guides course analysis.

Judge: You agree it's appropriate for me to consider the national scale?

DOJ: Yes, to the extent the merger would affect those.

Pointing to loss of head-to-head competiton, Spirit Effect, consumer choice and variety, innovation. On a mix of overlap routes, Spirit-only routes, and future Spirit routes.

Judge: But hasn't Spirit shown the business model has reached its fruition?

DOJ: Spirit is still innovating, like trying to cut costs, with things like self-service bag drop.

Nonstop overlap markets: 73 of them DOJ says, 55 million passengers fly on them, $9.3 billion of revenue on them.

I believe DOJ's point here was that they should look at national market to the degree it would be impacted, arguing impact is to routes around the country that the two airlines fly. I think.

https://twitter.com/David_Slotnick/status/1732060808601903165

DOJ: Divestitures, defense points to that saying other ULCCs would come in, but there's no evidence that they actually would come in.

It's highly unlikely Allegiant would be an effective newcomer. Because Allegiant won't want to compete with majors, their model is flying on routes with no competition.

Judge: Can't competition be preserved even without the exact routes being replicated by the newcomers?

Pointing again to the "harm in any single market" argument. Judge clarifying that they define "market" as any nonstop between points A and B.

Average fares will increase as a result of the deal, DOJ says.

"Spirit doesn't intend to be for everyone, it's for the cost-conscious travelers who wouldn't travel at all otherwise, or want to use their money differently."

Judge: "What if court finds that nationwide, more fares would be lowered and there'd be more competition? At what point does that outweigh the harm you're describing?"

DOJ: Harms can't be outbalanced across markets. It's a separate focus.

DOJ: Defendents have no hope of winning if markets are defined as particular O&Ds

DOJ: Loss of this particular product is independent from the average fares, which court can of course consider.

Concrete evidence there will be 6.1m fewer seats in the market annually, due to JetBlue reconfiguring Spirit jets.

DOJ: Spirit had highest annual growth rate of major carriers, 2018-23.

Judge: But they rebut that by saying those days are gone.

DOJ: Even with neo engine issue, Spirit is growing YoY. And have told investors they expect to be made whole.

Talking legal standards here

Testimony: Aircraft are in short supply. Pointing to testimony from JetBlue's Hayes and Ursula Hurley, Spirit's John Kirby.

Arguing they're looking to merge to grow, not necessarily survive, which doesn't seem to counter defendants' arguments. Going back to burden of proof etc.

DOJ: Defendants bear burden to show entry of new competitors on the affected routes would be timely, likely, and sufficient. Looking at 2-3 year window. And would that entry offset harm?

Basic economy: Telling that jetblue says transaction will help it compete with top 4, but points to top 4 basic economy will be a price check.

Spirit is the one that sets the price that Big 4 set their Basic Economy fares to. Without a similar ULCC in the market, why would Big 4 keep their basic economy fares low?

ULCCs wouldn't be enough to make up for loss of Spirit. Spirit is half of all ULCC capacity. Frontier can't timely replace Spirit.

Frontier's Biffle said the airline did not have enough planes to replace spirit on "all of its routes" and said it could take 7-8 years, possibly within 5 years. DOJ argues that's defendants failing to meet burden.

Frontier doesn't overexpand on routes with Big 4 competition, Biffle said.

On Frontier's stickiness: Frontier exits entire airports.

DOJ: Biffle testified he "wouldn't go on a quest to replace every Spirit route."

DOJ: Allegiant serves unserved, underserved small cities without nonstop competition, they won't come in and fly heavily trafficked routes that Spirit frequents. Different business model.

Dismissing Breeze, Avelo, Sun Country. "Breeze isn't even a true ULCC."

Reminder: "ULCC" refers to the business model's operating costs, not the fares it charges.

Those low operating costs tend to correlate with and allow lower fares, but still, I'm pedantic about this.

On divestitures now.

Judge asking same question as defense: Suppose what I see is insufficient but with more divestitures would work. Should I go down that route?

DOJ: Looking at the nature of the harm, it's difficult to envision what kind of remedies could ever offset it. I don't see any kind of remedy other than a full stop injunction.

The harms are concrete, real and multifaceted. Very practical limitations to what divestitures could accomplish.

A full stop injunction is the only thing that would block harm.

DOJ says defense evidence was insufficient, know harms will be real, try to minimize them, ask court to look past harms done to customers who are least able to bear it.

DOJ: This transaction is a bad deal for consumers. Risks substantially reducing competiton.

And DOJ is done.

Judge gives 8 days for remaining filings etc. So that's Dec 13.

Judge thanks attorneys in the case, says they've all worked hard on a very real trial, should be proud of their work.

"This case is an exemplar of how a case should be handled."

This case will stand as an example of how to handle confidential materials, the judge says. Says it's been well-done and allowed for a very public trial, says he'll follow similar procedures going forward.

And we're done. Thanks all for following along, obviously stay tuned for more as it develops. No word on a timeline for a decision — there are rumors that it will be by the end of December, but I don't know if there's anything substantial there.