Spirit Airlines, Inc. v. Northwest Airlines, Inc.

• Citation: 431 F.3d 917
• Decision Date: 15 December 2005
• Docket Number: No. 03-1521.,03-1521.
• Parties: SPIRIT AIRLINES, INC., Plaintiff-Appellant, v. NORTHWEST AIRLINES, INC., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

431 F.3d 917

SPIRIT AIRLINES, INC., Plaintiff-Appellant, v. NORTHWEST AIRLINES, INC., Defendant-Appellee.

No. 03-1521.

United States Court of Appeals, Sixth Circuit.

Argued: September 14, 2004.

Decided and Filed: December 15, 2005.

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ARGUED: Richard Alan Arnold, Kenny, Nachwalter, Seymour, Arnold, Critchlow & Spector, Miami, Florida, for Appellant. James P. Denvir, Boies, Schiller & Flexner, Washington, D.C., for Appellee. ON BRIEF: Richard Alan Arnold, William J. Blechman, Kevin J. Murray, Kenny Nachwalter, Seymour, Arnold, Critchlow & Spector, Miami, Florida, for Appellant. James P. Denvir, Alfred P. Levitt, Boies, Schiller & Flexner, Washington, D.C., Lawrence G. Campbell, L. Pahl Zinn, Dickinson Wright, Detroit, Michigan, for Appellee.

Before: MOORE and CLAY, Circuit Judges; HAYNES, District Judge.^*

HAYNES, D. J., delivered the opinion of the court, in which CLAY, J., joined.

MOORE, J. (pp. 953-59), delivered a separate opinion concurring in the judgment.

AMENDED OPINION

HAYNES, District Judge.

Plaintiff Spirit Airlines, Inc. appeals from the district court's final order granting summary judgment to the Defendant Northwest Airlines, Inc. on Plaintiff's claims of monopolization and attempted monopolization under Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2.¹ Spirit alleged that Northwest engaged in predatory pricing and other predatory tactics in the leisure passenger airline markets for the Detroit-Boston and Detroit-Philadelphia routes. In sum, the district court found that Spirit's proof had not established predatory pricing by Northwest in these markets. Specifically, the district court rejected Spirit's definition of the relevant market as limited to low fare or leisure passengers and adopted Northwest's market definition of all passengers on these routes. With this conclusion, the district court found that Northwest's total revenues exceeded its total costs for these routes. Moreover, the district court opined that even if the low fare or leisure passenger market were the appropriate market, Northwest's expert proof demonstrated that Northwest's total revenues still exceeded its relevant costs. The district court deemed Spirit's expert proof and analysis of Northwest's costs and revenue to be implausible. Given these conclusions, the district court deemed it unnecessary to decide Spirit's other predatory practices claims.

From our review of the record, when the evidence is considered in a light most favorable to Spirit, as is required in this context, we conclude that a reasonable trier of fact could find that a separate and distinct low-fare or leisure-passenger market existed. The evidence presented by Spirit in support of such a market includes Northwest's own marketing data, the testimony of its marketing officials, the findings of government regulators and Spirit's experts. Moreover, based on the evidence presented, a reasonable trier of fact could find that at the time of predation, the market in the two relevant geographic routes was highly concentrated, Northwest possessed overwhelming market share, and the barriers to entry were high. Accordingly, a reasonable trier of fact could conclude that Northwest engaged in predatory pricing in the leisure passenger markets on these two geographic routes in order to force Spirit out of the business. Finally, based on the evidence presented by Spirit's experts, a reasonable trier of fact could find that once Spirit exited the market, Northwest raised its prices to recoup the losses it incurred during the predation period. Accordingly, we reverse the grant of summary judgment in favor of Northwest and remand the case to the district court for further proceedings consistent with this opinion.

A. FACTUAL BACKGROUND²

1. The Parties

Spirit obtained its certificate for a scheduled passenger service in Michigan in 1990 as Charter One. In 1992, Charter One changed its name to Spirit, a low fare carrier with its base of operations in Detroit. In 1992, Spirit had four airplanes servicing four cities with 140,931 passengers, approximately 125 employees and annual revenues of approximately $60 million. Spirit's primary routes were point to point flights between Detroit-Atlantic City and, for a time, Detroit-Boston. By the end of 1993, Spirit had added service to cities in Florida and in 1995, Spirit expanded to other cities. Spirit targeted local leisure or price-sensitive passengers whose travel is generally discretionary, such as passengers visiting friends and relatives, and tourists or vacationers who might not otherwise fly. Spirit's pricing strategy provided a price incentive to such leisure travelers with unrestricted, but non-refundable fares. Spirit's services lacked first class service, frequent flyer benefits, and connecting service. Leisure or low price-sensitive passengers purchase tickets with restrictions on their use, e.g., an advance purchase or stay-over requirement, in exchange for low prices for a particular route.

In 1992, Spirit approached the Detroit Metropolitan airport's management about access to additional ticket counters and gates. Because "Northwest had a stranglehold on the gates at Detroit Metro," Spirit's efforts "were futile." (J.A. 1336). Northwest controlled the majority of the gates at the Detroit airport either by lease or secondary rights from other airlines. Spirit cited an internal Northwest memorandum advocating that when Detroit built its new airport, the existing Detroit concourses should be destroyed, so that other carriers would not "benefit from the vacuum which is created once [Northwest] vacates its existing gates" at the old Detroit airport. (J.A. 41).

Spirit was allowed to use gates formerly used by Trump Shuttle and Charter, but could not secure a permanent gate arrangement. Spirit was unsuccessful in its negotiations with U.S. Airways to use two gates that Northwest subsequently acquired. The district court found that Spirit did secure short term leases from United Airlines and Continental Airlines, but that Spirit expended $100,000 to add its Detroit-Philadelphia flight. Spirit also paid a 25% higher landing fee than airlines that had leases with the Detroit airport authority.

In 1995, Spirit explored expansion of its service between Detroit and other cities, including Boston and Philadelphia. Mark Kahan, Spirit's general counsel, explained that these two major cities have business and leisure travelers. With this model, Spirit expected to attract primarily the price conscious or leisure traveler. Spirit's management considered the Detroit-Philadelphia route a particularly attractive market given its other flights from the Philadelphia airport and the route's potential base of price-sensitive and leisure travelers.

On December 15, 1995, Spirit commenced a single daily non-stop round trip flight between Detroit-Philadelphia on an 87-seat DC-9 airplane at a $49 fare with a load factor of 74.3 percent. Spirit soon experienced a higher load factor on the Detroit-Philadelphia route in June, 1996, rising to 88.5 percent from 64.1 percent in January, 1996. On June 28, 1996, Spirit added a second non-stop round trip flight for the Detroit-Philadelphia route. On April 15, 1996, Spirit started its Detroit-Boston route with one daily non-stop round trip, initially at fares of $69, $89 and $109.

By 1995, Spirit operated 10 aircraft and serviced 13 travel routes carrying 583,969 passengers and employing approximately 450 people. By 1996, Spirit increased its capacity to 11 aircraft, with 15 routes. In June 1996, Spirit had 71,364,828 seat miles with annual revenues of $62.9 million and approximately 455 employees.

Northwest was founded in 1926 as an air mail carrier for the Minneapolis to Chicago route. The firm's operations at Minneapolis grew and Northwest developed a hub there. By 1986, Northwest merged with Republic Airlines, which had hubs at Detroit and Memphis. In 1995, Northwest was the fourth largest air passenger carrier in the United States with annual revenues of $9.1 billion from its domestic and international operations. At the Detroit Metro airport, Northwest "controlled" 64 of the airport's 86 gates and had 78 percent of all passenger travel from the Detroit-Metro airport.

Northwest operates a hub-and-spoke network with hubs at Detroit, Minneapolis-St. Paul and Memphis. In the hub system, the hub serves as the connecting point for flights between other cities that serve as the "spokes." (J.A. 13). In a word, in this system passengers do not begin or end their journey on a single flight. The initial flight is from a spoke airport to the hub and after deplaning, the passenger boards a second flight to the passenger's ultimate destination, another spoke airport. Northwest offers restricted and unrestricted tickets, airport clubs, frequent flyer benefits, advanced seat selection, first and other classes of service, and on-board meals. Northwest utilizes the yield management policy, which, in essence, seeks "to maximize the revenue that we earn for our domestic network... and ... try to sell every seat at its highest possible fare." (J.A 1573).

Prior to Spirit's entry, Northwest offered non-stop service on the Detroit-Boston and Detroit-Philadelphia routes. For the Detroit-Philadelphia route, Northwest had a 72% market share. For the Detroit-Boston route, Northwest had an 89% market share. Northwest's only competitor for the service to Philadelphia was U.S. Airways. (J.A. 779 and 780). US Airways was the highest cost service provider in the market, (J.A3 479), and Spirit's expert characterized U.S. Airways as a "compliant" competitor of Northwest. (J.A. 3796). Northwest had six daily non-stop round trip flights on the Detroit-Philadelphia route and U.S. Airways had four.

2. Northwest Response to Spirit's Entry

Northwest adopted its "New Competitive Equilibrium Analysis" for its response to any new competitor on its routes. (J.A....