The Department of Justice successfully sued in District Court to block American Airlines and JetBlue from continuing to cooperate in their ‘Northeast Alliance’ where they divvied up which carrier flew to which city, and shared revenue.
The judge’s decision cites some pretty interesting coordination over pricing that happens in the airline industry prior to and outside of this alliance. Competitors talking about pricing, and in particular how to raise prices, is forbidden, and yet they seem to do it in plain sight without actually saying “let’s do the crime” so that they can get away with it.
Airlines talk about ‘capacity discipline’ in earnings calls to signal to each other a willingness to reduce capacity. You pull down capacity, we will too. And that’s a form of collusion out in the open.
Airlines also communicate through fare basis codes. I always liked these letter and number codes, such as “OVALZNN3,” when they might include “FU” for a sale fare running out of a competitor’s hub.
And little is more famous than then-American Airlines Chairman Bob Crandall and Braniff’s Howard Putman discussing raising prices over the phone 40 years ago.
Mr. Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here and pound the (expletive) out of each other and neither one of us making a (expletive) dime. I mean, you know, goddamn, what the (expletive) is the point of it?
Mr. Putnam: Nobody asked American to serve Harlingen, nobody asked American to serve Kansas City, and there were low fares in there, you know, before. So. …But if you’re going to overlay every route of American’s on top of, over, on top of every route that Braniff has – I can’t just sit here and allow you to bury us without giving our best effort.
Mr. Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years.
Mr. Putnam: Do you have a suggestion for me?
Mr. Crandall: Yes, I have a suggestion for you. Raise your goddamn fares 20 percent. I’ll raise mine the next morning. You’ll make more money and I will, too.
Mr. Putnam: We can’t talk about pricing.
Mr. Crandall: Oh [expletive], Howard. We can talk about any goddamn thing we want to talk about.
Putman was taping the call and turned it over to the Department of Justice. And though Crandall consented to some restrictions after the investigation that ensued, there really wasn’t much to it because they never actually agreed to raise prices.
In 2010 then-US Airways CEO Doug Parker emailed Delta CEO Richard Anderson in an effort to get him to raise fares. Anderson turned the email over to his general counsel.
In 2010, when Delta rolled out a new discount promotion, Parker complained in an e-mail chain with his executives that the move was “hurting [Delta’s] profitability – and unfortunately everyone else’s” and also urged them to bad-mouth Delta to Wall Street. Parker forwarded the whole e-mail chain to Delta CEO Richard Anderson in an effort to get him to re-consider the discounts. Anderson said that was inappropriate and sent the conversation on to his lawyer.
So none of this should be surprising, but here’s how American and JetBlue communicated over fares before there was even any discussion of an alliance:
A JetBlue pricing summary reported that for the week ending February 22, 2019, walk-up fares in BOSLAX “remained low at $139” because American had maintained a low price rather than follow its rivals’ fare increases. JetBlue responded to this low $139 fare from American, which targeted JetBlue’s focus city of Boston, by filing a $139 tactical fare in five routes to and from American’s hubs. JetBlue intentionally chose a fare of $139 for BOS-DCA, BOS-DFW, FLL-PHL, JAX-DCA, and ORD-FLL, identical to American’s fare for BOS-LAX.
Airlines also “flash” each other in an effort to highlight fare changes to other airlines in ATPCO. For example, on February 10, 2020, Jeremy Blechman, an inventory manager at JetBlue, reported that American was selling a $44 fare between Boston and Philadelphia outside of JetBlue’s timeband, meaning at times of the day when JetBlue wasn’t selling the $44 fare.
In response, Catterina Yanez, a JetBlue pricing analyst wrote that for the 4 p.m. ATPCO submission she was planning to “try to flash American, and if it doesn’t work, then we’ll discuss further actions.” One reason JetBlue would “flash” American could be to try to encourage American to change its fare. This “flashing” action was something Ms. Yanez said she would do after having discussed it with JetBlue’s pricing manager Evan Jarashow.
Despite all of this, of course, the long-run trend is for lower real prices. So airlines must not actually do a very good job of colluding.
The interesting thing about the Northeast Alliance is that it contained procedures to prevent JetBlue and American from coordinating over prices that aren’t in place between other airlines, in the hopes of satisfying regulators. So the alliance probably did a better job at preventing collusion than the absence of the alliance. Go figure.