Capital woes are no rebuttal to merger foes
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Oct 4 (Reuters Breakingviews) -Picture this: two upstarts have snagged a big piece of a market only to hit a rough patch, and want to merge their way to sustainability. They intone dark warnings about the consequences if competition cops cry foul. Shortly thereafter, one of them considers filing for bankruptcy. That’s what’s happening with ultra-cheap U.S. carrier Spirit Airlines SAVE.N, according to a Wall Street Journal report on Thursday. What this story misses, however, is the link between cause and effect: the problem is the industry, not the nixed deal. Markets have plenty of ways to fix broken businesses.
Spirit was struggling long before a judge blocked its $3.8 billion sale to rival JetBlue Airways JBLU.O in January. Even though the companies account for only about 9% of a U.S. market dominated by the likes of American Airlines AAL.O, they are crucially important in providing rock-bottom fares. At the time, they warned of Spirit’s deteriorating performance, which saw it rack up $1.9 billion of losses between 2020 and 2023. They argued that, by stabilizing the airline, a merger would be pro-competitive.
The term of art for this in antitrust circles is the “failing firm defense.” With Spirit now weighing bankruptcy, according to Thursday’s report, it might seem vindicated. But hitting turbulence is not a legal case. Judges measure this defense with a three-part test. First, failure must be imminent; second, the prospect of a successful reorganization must be “dim or nonexistent;” third, there can be only one possible buyer. Given that JetBlue won a deal for Spirit after a fierce bidding war, that last part seems dubious. If Spirit can reshuffle its debt in bankruptcy or otherwise, it would prove the second part false, too.
This is the key point: markets provide mechanisms for setting bad businesses straight. Look at JetBlue, which has seen its share of problems and drew activist investor Carl Icahn; boss Joanna Geraghty is now pursuing a turnaround plan. By engaging with creditors, Spirit can try to find a way to emerge stronger into a market that should be improving – analysts see EBITDAR turning positive next year, according to Visible Alpha.
Taking this as an indictment of a legal standard that prevents, say, Walmart-sized goliaths to hoover up the competitors they overshadow would be mistaken. True, antitrust enforcers under the Biden administration have occasionally gotten over their skis. Here, though, they’re just trusting the market.
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CONTEXT NEWS
Spirit Airlines, an ultra-low-cost U.S. carrier, is in discussions with creditors about a potential bankruptcy filing, the Wall Street Journal reported on Oct. 3. The company could also look to restructure through an out-of-court transaction, according to the report, which cited unnamed people familiar with the matter.
On Jan. 16, Judge William Young of the U.S. District Court for the District of Massachusetts blocked the $3.8 billion merger of Spirit and rival JetBlue Airways, siding with the Department of Justice, which had sued to stop the deal.
Spirit and JetBlue have underpformed the industry https://reut.rs/3BtRIvL
Editing by Lauren Silva Laughlin and Pranav Kiran
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