On Friday a federal judge rules that the American Airlines-JetBlue partnership violates anti-trust laws, since they go beyond frequent flyer reciprocity and divvy up which airline flies to a given destination and share revenue.
Most of the coverage of the ruling says that the partnership is over as a result of the judge’s ruling. As a matter of law that’s wrong – there’s plenty of avenue to appeal and drag this out for a long time. While the partnership was ordered broken up in 30 days, even as the parties have 20 days to propose language for the judge’s order, and this is nearly impossible – the ruling itself contains plenty of grounds for an appeal.
If American and JetBlue wanted to they could tie this up in the courts for years. And since the ruling focuses largely on theoretical harms and per se violations of law rather than actual harms it seems plausible that the parties could obtain a stay pending additional proceedings. At a minimum it is premature to say that the legal process kills the deal. But maybe what kills the deal will be JetBlue?
JetBlue says they’re disappointed and is studying their options. American says it is “currently considering its next steps in this litigation.”
- American has no Plan B in New York. They’ve considered themselves ‘too small to win, too big to quit.’ They have tried numerous strategies over the years to compensate for their smaller size than Delta and United in the market (focusing on bringing customers to New York rather than New Yorkers, operating a ’boutique’ operation) to no available.
They were going to throw in the towel finally and lease 27 slot pairs to JetBlue before coming up with the Northeast Alliance. In other words, there was going to be one less competitor in the market either way, but with the Northeast Alliance there would be a stronger competitor.
- Since the announcement of the Northeast Alliance, JetBlue made a deal to acquire Spirit. It’s a pretty ill-advised deal, substantially overpaying and planning to invest years and tremendous resources integrating Spirit and retrofitting aircraft, all to convert Spirit’s assets from a higher margin business model to a lower margin one.
- The Justice Department opposed both the Northeast Alliance and JetBlue’s acquisition of Spirit.
I’ve suggested that JetBlue might be willing to horse trade with DOJ. In some ways I was surprised that they didn’t offer up the Northeast Alliance in exchange for a deal to let them acquire Spirit. But it was better to wait for a verdict in the trial over their American Airlines partnership.
- If they won on the merits, they might get both and DOJ might not have been as aggressive on Spirit after suffering a loss. Plus JetBlue was already offering substantial concessions to address all of the competitive issues resulting from the merger.
- If they lost on the AA deal, it would become less costly to deal that away in exchange for approval on Spirit.
If JetBlue walked away from the Northeast Alliance they would owe American a breakup payment. That’s even after American forgave a $173 million payment from JetBlue over capacity issues in New York. Now that a court has ruled against the alliance presumably the cost to JetBlue to walk away (the breakup payment) goes away?
Surely JetBlue is going to want to see what the Justice Department is offering as it maps out its side of the legal strategy going forward.
Meanwhile without a JetBlue partnership, American Airlines simply has no plan for New York. If a final legal disposition, or JetBlue walking away, kills the partnership then the market is left with at least one fewer viable competitor in New York..