When US Airways management took over American Airlines 8 years ago, they had a conundrum in New York. New York is a competitive market, and they’d generally shied away from direct competition while running US Airways. And they weren’t big enough in New York to be the biggest competitor, either.
So they came up with a strategy of not competing for New York business but instead to become the airline that brought people to New York. They timed their flights, often from smaller cities, to let people travel to New York and back in a day or at least fly up in the morning and leave after the business day.
That strategy didn’t make them money flying, so they pulled down their New York operation. They stopped serving as many destinations. They flew to hubs, they served LA (which gave them an advantage pitching corporate contracts there after United pulled out of JFK), and they served London Heathrow where joint venture partner British Airways is based. They had a few other destinations that amounted to what the airline described as a ’boutique operation’.
Then they squatted on slots with inexpensive short distance regional flights, and took advantage of slot waivers wherever they could such as reducing their flying while New York JFK did runway work.
This wasn’t a great strategy either. They weren’t poised to win New York corporate business with a smaller operation. They weren’t poised to attract New York loyalty. And perhaps worst of all, a smaller New York footprint meant ceding the credit card market in one of the most important financial centers in the world.
Finally two years ago they came out with a brand new strategy and it seemed brilliant: they would tie up with JetBlue. Together they were the number 3 and 4 carriers in the New York market and would be big enough to compete with Delta. Far from being anti-competitive,
- This would allow them to compete with the biggest players, and make the corporate market competitive
- They even agreed to give up some slots, and to give up more if they didn’t grow the number of seats offered out of New York (more supply and likely lower prices, the opposite of anti-competitive behavior).
The federal government approved the deal, and then set out to sue to overturn it, all within a matter of months and with no new information.
But all of this work to finally give American Airlines a viable New York strategy may be about to get undone. JetBlue announced a deal at a huge premium to take over Spirit Airlines. And it may not be possible for JetBlue to have both Spirit and an alliance with American.
- The Spirit acquisition is a bad deal. Paying oen-third to forty percent more than Frontier Airlines for Spirit is clearly overbidding, especially when JetBlue is buying the airline for parts (planes, pilots and gates), will drive up costs at the former Spirit Airlines, and won’t be adopting its business model which has been higher margin than JetBlue’s.
In other words, JetBlue is paying a huge premium to take Spirit’s assets and put them to work in a less profitable model, not a more profitable one. And they’re outbidding a company in Frontier that could likely earn more with those assets.
- But it gives the Justice Department new ammunition and life to their case opposing the American Airlines alliance. Certainly JetBlue+Spirit+American would never have been approved, and it leads to greater concentration in the Northeast in addition to greater concentration in South Florida. JetBlue has anti-trust problems with the Spirit merger, and even bigger anti-trust problems than before with the American Airlines Northeast alliance.
- But the Justice Department’s case against American-JetBlue was weak. A Spirit acquisition could make it stronger. But it’s still not a slam dunk. The Justice Department might say to JetBlue ‘drop the American Airlines alliance as a condition of our approval of the Spirit acquisition.’
JetBlue needs American somewhat less once they have Spirit’s planes, gates, slots, and pilots. But American Airlines is left out in the cold. This scenario would put them back to going it alone in New York, where they believe they’re too big to walk away from their assets yet too small to succeed.
Hopefully the Department of Justice wouldn’t force the choice between JetBlue buying Spirit and JetBlue partnering with American, in response to which JetBlue goes forward with their acquisition. Such a move by DOJ would run counter to their anti-trust mandate to maximize consumer welfare.
New Yorkers are clearly better off with JetBlue and American partnering against United and Delta. JetBlue and Spirit together aren’t big enough in New York to matter, and JetBlue and American separate aren’t viable competitors either as we’ve seen.