(Bloomberg) -- No-frills travelers who rely on cheap air fares to cities like Fort Lauderdale, Florida, or Las Vegas will be the key focus of a federal judge deciding the fate of JetBlue Airways Corp.’s $3.8 billion acquisition of Spirit Airlines Inc., after a five-week US antitrust trial.

US District Judge William G. Young in Boston signaled he will need to determine whether the deal eliminating Spirit as the dominant deep-fare discounter will hurt competition on routes favored by bargain-hunting passengers and drive up prices, as the Justice Department claimed in a lawsuit seeking to block the merger. 

“To me, that’s one of the key issues here,” Young told the lawyers in the case during closing arguments Tuesday. “What is my benchmark for balancing the loss to Spirit consumers against the downstream to consumers — perhaps a more affluent or business class — that all airlines compete for? How will I balance that?”

JetBlue has argued it needs the merger to compete with the four major airlines that control 80% of US ticket revenue. And it says smaller carriers like Frontier Airlines Holdings Inc. and Allegiant Travel Co. would step in to replace Spirit’s low-cost offerings, some of which are also being matched by the likes of United Airlines Holdings Inc. and American Airlines Group Inc.

Regulatory Crackdown

The case is part of the Justice Department’s continuing crackdown on consolidation in the airline industry, and the outcome could reshape the competitive landscape for low-cost carriers. On Monday, Alaska Air Group Inc. agreed to buy rival Hawaiian Holdings Inc. for $1.9 billion in a deal likely to get the same scrutiny from regulators as JetBlue-Spirit.

The trial has been closely watched by investors, particularly merger arbitrage traders who bet on deals facing regulatory opposition. The deal spread — the gap between Spirit’s stock price and the $31 payout JetBlue promised investors — has remained wide in a sign of waning confidence that the deal will be approved. The gap was $16.86 Tuesday.

Young, who was nominated to the bench in 1985 by former President Ronald Reagan, has not indicated when he plans to issue a ruling.

First, the judge will need to define which markets he uses to measure the impact of the deal on consumers, said Jennifer Rie, a senior analyst with Bloomberg Intelligence.

The government wants him to focus on specific routes flown by both JetBlue and Spirit, including roughly 51 nonstop flights. But the airlines say Young should consider the national market for fares and how airlines constantly move resources and tweak route offerings.

Market Impact

Even if the judge concludes the merger will harm a specific market, he’ll have to consider the claim by JetBlue and Spirit that combining the airlines will still have a positive impact on the overall industry, Rie said. Witnesses for the airlines testified the combined airline would better compete with legacy carriers and that JetBlue would enhance its ability to drive down fares when it enters new routes. 

“He may have to weigh the two against each other to determine whether the deal will, on balance, substantially lessen competition or enhance it,” Rie said.

That determination could hinge on whether JetBlue convinced the judge that other ultra-low-cost carriers can step in to replace Spirit.

“The court will look critically at the risk that an already concentrated market will become further concentrated and less competitive,” said Carmen Medici, a partner at Scott+Scott in San Diego who specializes in antitrust. “The ultra-low-cost carriers occupy an important competitive space that threatens major airlines’ significant pricing power.”

Fewer Seats

The government argues consumers will be hurt because JetBlue plans to convert Spirit planes, reducing the number of seats and raising fares.

Young will have to determine if JetBlue’s proposed divestitures of Spirit gates and flight slots to Frontier and Allegiant goes far enough to reduce the combined carrier’s dominance in some markets, and whether those deals, which could take years to complete, will bring sufficient benefits to the market long term.

“If the merger goes forward, there will be some disruption, that’s inevitable,” Young said Tuesday. 

Another factor the judge will consider is the viability of each airline — particularly Spirit, after mounting losses helped push it toward the merger with JetBlue. Spirit painted a bleak picture of its outlook. 

Chief Executive Officer Ted Christie testified Spirit is heading for its fourth consecutive annual loss and the company had been exploring mergers for years before the JetBlue deal. Other witnesses described the difficulties smaller airlines face in entering new markets, with larger carriers maintaining a lock on competition in certain key airports where they operate hubs. 

The case is US v. JetBlue, 23-cv-10511, US District Court, District of Massachusetts (Boston). 

--With assistance from Mary Schlangenstein and Yiqin Shen.

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