A Federal Judge Didn’t Kill The American Airlines-JetBlue Partnershp, But JetBlue Might

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..

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Standby for Tim Dumb’s rant shaking his fist yelling at the clouds! In 3-2-1

  2. JetBlue should have acquired Hawaiian and Alaska or formed an extensive partnership with those airlines.

  3. My understanding is that there has never been a successful appeal to an antitrust ruling so it’s highly unlikely one would proceed, let alone succeed.

  4. American has no plan for NYC because it doesn’t want to have a plan. It has two new terminals at JFK and LGA. It underutilizes JFK severely. If it wanted to compete in NYC, it could bring bigger and better planes to JFK, upgrade its Admirals Club at JFK, and add international capacity from JFK.

    But it doesn’t want to compete, so it flees.

  5. @ Anthony — Totally agree, and I just don’t understand why AA refuses to compete in NYC. After all, look at all the big credit card spenders AA has said it has in NYC. Won’t all of these high status (via LPs) people needs flights to redeem with all of their newly minted miles?

  6. first
    it isn’t entirely certain that AA has no plan B. At the time the NEA was hatched, one option was to have an AA/AS type relationship with B6 and AA could do that again – but the primary objective of the NEA was for AA to be able to swap slots with B6 in a closed relationship and w/o DOJ oversight. They could still swap small enough batches of slots to not trigger a DOJ review but that doesn’t confirm that AA could make money on a smaller NYC network
    second,
    AA was subsidizing the NEA as evidenced by their wiping out part of the debt B6 owed AA, likely indicating that AA was getting more feed from B6 than the other way around. If the point of the NEA was to cut AA’s losses in NYC and BOS, we don’t have any evidence they succeeded because we don’t know the total costs to AA of supporting the relationship.
    third,
    companies don’t negotiate a deal w/ the DOJ based on a failure in another case. The NEA died on its own tested and applied legal merits as much as some still think it was all theoretical. B6 can fix what the DOJ finds objectionable w/ the NK merger but they can’t negotiate their way out of compliance on the merger because of a loss on the NEA.
    As much as some want to believe otherwise, there are structural differences in the NK-B6 merger proposal than any other legacy merger and those are the basis for the DOJ’s objections, not total US market share

  7. @Daniel – I don’t think that’s accurate. My memory on this is fuzzy and this is not my area, but in U.S. vs. Microsoft a federal appeals court overturned a decision against microsoft and then microsoft entered a settlement.

    Anti-trust rulings involving mergers aren’t usually appealed because of the length of time involved, and the extended uncertainty. That’s a strategic calculation on the part of the companies involved rather than a function of the law itself somehow making appeals unlikely to be successful.

  8. AA’s biggest problem was (or still is) is its bloated cost structure. It simply couldn’t compete against the competition which had a lower cost structure.

    With the Big 3 pilots making a lot more money, maybe AA’s cost structure now is competitive enough to make a profit in the New York area.

  9. UA needs to recreate some service at JFK. At least transcon and maybe some hubs. There is a catchment area, Long Island and maybe parts of Westchester and Connecticut for whom EWR is a non-starter, and if UA is to be relevant, it needs service to LGA/JFK. It has LGA from its primary hubs, but SAN SNA LAX SFO SEA are missing. That would also strengthen Star Alliance.

    If AA pulls back, UA should step in at JFK.

  10. Carl,
    Problem is that UA is not a disadvantaged carrier in NYC; they are the largest carrier at EWR. The DOJ is not likely to let UA run to the head of the line for slots at JFK. If AA fails to use slots, they will make sure that any carrier OTHER THAN B6, DL or UA get a chance to first add service and then and only then will they allow any or all of the other 3 to grab slots.
    The DOJ could also either just eliminate slots (less likely) or reduce slot controls to peak periods – but UA can’t mount a decent schedule w/o having slots at peak periods which will not be any easier to get now than they have ever been

  11. If they don’t appeal, it’ll 1000% be at the whims of JetBlue. And as an American Executive Platinum based in NYC… I can’t blame them.

  12. @Luke

    Perhaps that was part of the discussion while a certain Executive was up on Capitol Hill today!

  13. Carl: UA is missing those destinations because of the perimeter rule for LGA. They have shuttle service to their two hubs within the perimeter (ORD and IAD). Their service to LGA is sufficient. Of course, I fly from ORD, so I’d think that. As for JFK, Kirby’s made it clear that he’ll return to JFK on his terms. Those aren’t coming.

  14. @Gary and @Daniel: Yes, in U.S. v. Microsoft, the D.C.Circuit overturned Judge Thomas Jackson’s ruling, due to his discussing the matter with the media before his final ruling on the case. The Court of Appeals ordered him to recuse himself. However, his factual findings were sustained, and Judge Colleen Kollar-Kotelly was picked to determine a remedy. DOJ and Microsoft reached a settlement after that.

    But it is highly unlikely that any given case will be overturned on appeal after a final verdict. The odds are normally about 85% upheld/15% overturned.

    As far as overturning the factual findings in the matter — it is an incredibly heavy lift for the losing party. The standard of review is that held by the U.S. Supreme Court in Amadeo v. Zant, 486 U.S. 214, 223 (1988):

    “It is well settled, however, that a federal appellate court may set aside a trial court’s findings of fact only if they are “clearly erroneous,” and that it must give “due regard . . . to the opportunity of the trial court to judge of the credibility of the witnesses.” Fed.Rule Civ.Proc. 52(a); see Anderson v. Bessemer City, 470 U.S. 564, 573-576, 105 S.Ct. 1504, 1511-1512, 84 L.Ed.2d 518 (1985) (describing clearly-erroneous review generally); Wade v. Mayo, 334 U.S. 672, 683-684, 68 S.Ct. 1270, 1276, 92 L.Ed. 1647 (1948) (applying clearly-erroneous review in federal habeas proceeding). We have stressed that the clearly-erroneous standard of review is a deferential one, explaining that “[i]f the district court’s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Anderson v. Bessemer City, supra, 470 U.S., at 573-574, 105 S.Ct., at 1511.

    You can see why this is so. None of us, and none of the appellate judges were in the room for trial, and federal trials are not videotaped. And no federal appellate judge will read through (or put his/her clerks through reading) 17-20 volumes of transcript and thousands of pages of documents.

    I have no clue what you refer to when you say “there is plenty of avenue for appeal.” That’s not how appellate courts work. Appellate courts are “error correcting courts” (as I and my opposing counsel in them have been told numerous times). The burden is this: Show us the particular error you are complaining of, how you preserved the error in the record and showed the trial judge how he/she was wrong, and how the outcome would have been different had the trial judge ruled the other way. If you are complaining about the findings of fact, tell how they are clearly erroneous, where the contrary evidence is in the record, and how no judge in his/her right mind could find against you. Complaints as to the weight and credibility accorded to witness testimony will not be heard unless actual bias or prejudice is apparent from the face of the record, or the judge committed a violation of ethics rules (i.e., Judge Jackson in Microsoft). Yes, you can argue that the law applied was applied wrong to the facts as found. Good luck.

    @Gary: When you say, “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”, it shows you fundamentally misunderstand antitrust law. Per se violations of law are those that have been judged so pernicious that no business justification will be heard to explain why they occurred. Per se violations are often those prosecuted criminally under the Sherman Act, such are horizontal price-fixing, bid-rigging, territorial or customer allocation, or division of markets or customers.

    The fact that Judge Sorokin focused on per se violations of antitrust law means that he did not need to hear any evidence as to business justification in order to find the NEA anticompetitive. The fact that he found the NEA to be a market allocation scheme among horizontal competitors means that school should be out and class dismissed, without more.

    But Judge Sorokin covered his bases, and analyzed the case under established principles of the rule of reason, which requires a balancing between competitive harms and business justification. Because the harms are per se (or close to per se) the defendants have an incredibly high burden to show that, not only is the scheme otherwise justified, but that there is no possible less restrictive way to accomplish the task.

    As to “theoretical”, Judge Sorokin stated that this is so in all antitrust matters. But, this is a civil trial, so the standard of proof for the Government is a “preponderance of the evidence” (51%/49%) It isn’t the “beyond a reasonable doubt” standard that attaches to criminal proceediings. All he needed to find is that something is more likely than not to have occurred or will occur.

    That an agreement like American’s deal with Alaska is a less restrictive alternative to the NEA seems to me to be intuitively obvious. Your friends at American (whom it seems you have been listening to) apparently can’t get their heads around this point, which is enough to sustain Judge Sorokin’s order without more.

    That Dr. Lee and Dr. Israel were completely flummoxed on the stand seems obvious to me as well. Dr. Lee lost all credibility when he said the Northeast market for passenger aviation was marked by “low barriers to entry”. I suspect Judge Sorokin and his clerks were scratching their heads in chambers after that exchange. And it seems to me that Dr. Israel did not prepare his substantive testimony himself, but relied on his client to set the parameters of his opinion (and I suspect this came out on cross-examination by DOJ) was seriously damaging to the credibility of Dr. Israel.

    In any event, I don’t think Judge Sorokin will grant a stay pending appeal, which means that it will be up to the First Circuit. My view is that it will be a coin-flip, but I suspect a stay will be unlikely.

    In this case, I think @Tim Dunn is correct – it is highly unlikely that DOJ will hear offers to horse trade the two cases. There are different divisions handling the two matters. Further, Judge Sorokin has been assigned the Spirit/JetBlue merger, and trial is set for October. And, I doubt if DOJ will make any offer – that is up to the airlines. When I was at FTC, it was alwaly up to the respondent to make a settlement offer.

    At this point, American needs to pull its goalie and put six attackers on the ice (they are in a hole deeper than the Dallas Stars) — by renegotiating the NEA to look like the Alaska deal. If they do so — and do it in good faith — they might get some more time from Judge Sorokin, although some parts of the NEA would need to be unwound immediately.

    And remember, old lawyers never die, but they do lose their appeal.

  15. Retiredlawyer – good evening. Just a correction in your reply, sorokin isn’t presiding over the spirit JetBlue merger.

  16. Hard to successfully appeal a judgment where the parties and their “experts” have been caught lying, mostly by themselves, multiple times and all the way up to and including Congress (anyone who sees American’s CEO testimony that he doesn’t know whether JetBlue has lie-flat seats in businesses class for anything other than a blatant lie needs to be examined).

    This is 100% dead on law and order merits. Of course they will make it look like the separation is voluntary, and shills like this author — no expert — will parrot this (remember when this expert was sure the tarmac rule would for sure backfire, parroting the airlines whose only motive was not to spend money to run humane operations? Some expertise!)

  17. – The only strategy AA has right now is to sell Loyalty Points to the banks. First, the old AA gave up on Boston and now New York.

  18. @Jake,

    The appeal will be filed if only to produce an immediate stay…pushing the 30 day unraveling back a bit regardless of any validity in the appeal itself.

  19. All American is focusing on is DFW and CLT. Not only are the NYC airports dwindling, but check out ORD and LAX! American has always been a thorn in United’s side in Chicago! They used to have the most flights to Europe, with ann amazing domestic network. And they had their transpacific flights. They pretty much got rid of everything, except for a few European flights in the summer, and London year-round. Los Angeles is a whole other story. Delta over took them and United is close to overtaking them in market share as well. I feel like they definitely need to get rid of the US Airways regime that’s running the company, along with Vasu Rasa, who started with AA in 2006, and completely gutted the entire Chicago in Los Angeles hubs, to what they are now. Hey AA, you have hubs in NYC, DCA, PHL, ORD, PHX, and LAX…let’s not forget those. I’ve never seen an airline that only cares about two of their Hubs.

  20. Filing an appeal in federal court does not stay enforcement of the District Court order.

    A stay has to be separately applied for to the trial judge or the appellate court.

    It is not automatic.

  21. Jet Blue and Alaska will have difficulties – Jet Blue is all Airbus and Alaska is “Proudly All Boeing” and will do everything under its power to stay that way.

  22. American also built Terminal 8 in JFK with the potential to expand it — in fact, I think the expansion was part of the plan, but then dropped. That is why one side of the main terminal building is windowless and janky-looking. Unfortunately its the side that that you see when you approach. The back side (if you turn around as you pull away from T8) has a nice looking glass wall.

    AA could use its slot allotment to make JFK a fully fledged hub.

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