It’s a new — and much tougher — era for dealmaking, particularly for a transportation sector that’s had more than its fair share of meltdowns recently.
The Department of Justice on Tuesday sued to block JetBlue Airways Corp.’s $7.6 billion acquisition of Spirit Airlines Inc., arguing the combination would lead to higher prices and reduced competition. This isn’t surprising; the airline industry is already highly consolidated and has had some high-profile operational blowups despite receiving more than $50 billion in taxpayer-funded payroll support during the pandemic. It frankly would have been a shock if the Justice Department waved through the deal — or any airline merger for that matter. The department is already suing to undo JetBlue’s marketing alliance with American Airlines Group Inc. What’s more interesting is that the Department of Transportation is also getting involved. That regulator is planning to block the transfer of certain operating rights and start its own investigation into whether the JetBlue-Spirit merger is compatible with the public interest, the Transportation Department said in a statement, confirming an earlier report from Bloomberg News.
The Transportation Department isn’t in the habit of moonlighting as an antitrust regulator. The agency hasn’t used its authority over the exchange of operating rights to block a merger since the airline industry was deregulated in 1978, according to Bloomberg News. President Joe Biden called on the Transportation Department to work with the Justice Department to help ensure competition in air transportation as part of a sweeping July 2021 executive order aimed at curbing abuses of power in consolidated industries. Senator Elizabeth Warren of Massachusetts in September more specifically asked the Transportation Department to thwart the JetBlue-Spirit combination by drawing on its authority to block the transfer of operating certificates when such a move would lead to increased prices and reduced competition. But the Biden executive order wasn’t the same thing as firm regulatory policy or congressionally passed law, and Senator Warren writes a lot of letters. And so a sudden assertion of antitrust power from the Transportation Department is a curveball.
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Speaking in an interview at Bloomberg headquarters in New York last month, JetBlue Chief Executive Officer Robin Hayes said the airline’s expectation for the Spirit deal to close in the first half of 2024 includes some buffer time for potential litigation with the Justice Department. But he talked about the logistics around the transfer of Spirit’s operating certificate as more of a formality — something that takes a bit of time and has to factor into a post-merger integration plan, but not the kind of thing that’s a top-of-mind headache. JetBlue will “vigorously pursue” a legal challenge to any deviation from the Transportation Department’s typical approach to takeovers and the transfer of operating certificates, the airline said in an e-mailed statement to Bloomberg News. This will ultimately get settled in the courts. But the Transportation Department’s willingness to take a more active role in antitrust raises a host of questions about other possible, current and past transactions.
The Biden executive order reaffirmed the US right to challenge deals whose previous completion violates antitrust laws and called upon agencies including the Department of Agriculture, the Department of Health and Human Services, the Federal Reserve, the Federal Maritime Commission, the Federal Energy Regulatory Commission and the Surface Transportation Board to use their rule-making authority or the procurement process to promote competition. The STB is responsible for regulating the railroads and is meant to be an independent entity, although the Justice Department has asserted a “statutory right to intervene” in significant merger proceedings and has voiced several complaints along these lines in recent years (albeit rather haphazardly). It just so happens the STB is in the final stages of reviewing the first serious consolidation of the North American railroad industry since the 1990s.
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Canadian Pacific Railway Ltd. has been trying to buy Kansas City Southern for the past two years. As far as the target shareholders are concerned, the deal closed in late 2021 when they received cash and stock worth about $300 a share. Kansas City Southern was then put into a voting trust — essentially an in-between structure that takes the railroad off the public market but keeps its operations separate from the buyer’s while the companies await the STB’s final decision on the merger. The STB ruling is expected any day, and the odds are high that it will favor Canadian Pacific. The regulator already had to approve the voting trust structure and granted the Canadian Pacific-Kansas City Southern tie-up an exemption from tougher merger rules adopted in 2001 that require a buyer to prove a deal both serves the public interest and enhances competition. Canadian Pacific has argued that the Kansas City Southern merger would help improve service and bolster the combined company’s ability to invest in rail infrastructure. But it’s hard to think of a worse moment from a public-relations perspective to announce approval for yet more consolidation in the transportation sector.
For one, it’s a bit awkward to argue that combining the sixth- and seventh-largest US airlines by revenue is problematic but combining the sixth- and seventh-largest North American railroads is fine. And while the airlines have attracted political backlash for a series of travel disruptions — most notably a surge of cancellations at Southwest Airlines Co. over the holiday season — the railroad industry has been dragged into a much harsher national spotlight after a Norfolk Southern Corp. train carrying toxic chemicals derailed in East Palestine, Ohio, on Feb. 3. The National Transportation Safety Board has said the trigger for the derailment was an overheated bearing on a hopper car carrying plastic pellets. There’s no evidence at this point to link the accident to cost cuts or other knock-on effects from consolidation. But the derailment has quickly become a political football, and both Democrats and Republicans are eager to take a tougher stance on rail safety. In a letter last week, Senator Warren called on the STB to block the Canadian Pacific-Kansas City Southern merger. “The recent East Palestine, Ohio train derailment raised significant questions about the nations’ railroad safety, and the extent to which safety concerns have been exacerbated by government deregulation, industry cost-cutting” and efforts to get more work out of fewer laborers, Warren wrote. The review process is nearly completed and included an extended public comment period. It’s not clear what, if anything, other branches of the government could do to stop the railroad merger — nor is it clear that there is a good reason for them to get involved. The STB’s role as an independent overseer likely limits the options here. The Justice Department sent a letter in late January encouraging the STB to play close attention to the merger’s potential impacts on competition. The timing of this 11th-hour missive is odd and appears mostly to have been in reaction to certain comments that implied the Justice Department’s absence from a September 2022 hearing on the deal suggested it had no concerns about the transaction. But it’s interesting that the Justice Department letter specifically mentions the Biden executive order.
The Biden administration’s willingness to get creative about antitrust enforcement suggests every industry needs to revisit what it thinks it knows about merger regulations.
• Who Owns Train Cars? Often Not the Railroad: Brooke Sutherland
• JetBlue Chases Spirit in Last Deal Standing: Brooke Sutherland
• Buttigieg Can’t Help East Palestine, Ohio: Julianna Goldman
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former M&A reporter for Bloomberg News, she writes the Industrial Strength newsletter.
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