At first blush it seems like United got the better deal in its partnership with JetBlue. JetBlue’s flights really don’t get United that much, and the airlines aren’t codesharing. United gets back into JFK – by gaining 7 takeoff and landing slots from JetBlue, and the carriers are exchanging a handful of flight times at Newark.
It might be hard to see why JetBlue chose United as a partner, and indeed JetBlue’s stock fell 3% on the day of the news while United’s shares were up. However, the deal makes sense when you read between the lines to what hasn’t been said about the partnership.
Brian Sumers interviewed JetBlue President Marty St. George and learned,
- JetBlue ran a beauty contest. They talked to everyone.
Over time, St. George called at least one executive from nearly every U.S. airline, reading from a script for each call, presumably to ensure he would not botch a talking point or run afoul of regulators. Amazingly, even Delta’s Glen Hauenstein — who probably has done more than anyone to thwart JetBlue’s ambitions in New York and Boston — was on St. George’s list. It even included low-cost airline executives, though an agreement with Spirit or Frontier was very unlikely.
- And they selected the best financial deal.
St. George said he had been agnostic about JetBlue’s counterparty. It all came down to money, he told me, or more specifically the net present value of each airline’s offer. He said Hauenstein was cordial (“I had a very nice conversation”), but ultimately the two finalists were American and United.
Interestingly, St. George also reveals to Sumers that they aren’t doing a codeshare because JetBlue doesn’t have the tech chops for it (!) and because United is running out of flight numbers.
[C]odeshares require a lot of back-end systems. “Codeshare also requires us to add some pretty significant infrastructure internally for things like pricing and inventory management, so that we can price all the United flights and make sure that the prices are competitive. We looked at this and said, ‘we’re going to get 90 percent of the benefit without all the brain damage.'”
The most important thing to understand about the deal is that all of the details haven’t been released, and many won’t be. They aren’t talking about contract terms. When JetBlue and American partnered, the plan was for JetBlue to join oneworld. This didn’t come out publicly until the antitrust trial. There were also financial formulas for revenue-sharing that weren’t public.
Similarly, we don’t know what cash may be changing hands for those JFK slots. At Newark they are trading flight times to ones that JetBlue says they like better. Maybe there’s not even cash directly being paid for JFK slots, but the deal includes several other components like JetBlue’s vacations package supporting United’s vacation sales. And JetBlue is signing onto United’s new digital ad platform. Perhaps United is offering revenue guarantees for access to advertising on JetBlue’s seat back screens?
The bottom-line is that United CEO Scott Kirby wound up the most motivated bidder.
- He had an opportunity to get his back into JFK airport. United walked away from it under disgraced former CEO Jeff Smisek, who thought JFK was a money-loser and customers would fly to Newark instead. That turned out to be wrong, but also JFK matters for the New York market and for its share of co-brand credit card spend in the most important spend market in the country.
- He also had an opportunity to stick it to his former employer, American, who fired him as President and CEO heir apparent. American needed the partnership to grow in New York, now they are shut out.
Put another way, Scott Kirby almost certainly overpaid. It was a classic winner’s curse scenario. All bidders here know what JetBlue’s assets are, but make different bets on what those will be worth in a partnership. The winner of JetBlue’s auction, then, was the bidder with the rosiest bet on that value, overestimating and overpaying. By winning the beauty contest JetBlue ran, United is ‘cursed’ either because they paid more in the partnership than the value of what they’re getting or because the partnership is worth less than they expected.
The only alternative is that Scott Kirby has a fundamentally different bet on the value than the rest of the industry, he’s right and everyone else is wrong.
@1990 for what it is worth my kids prefer the dated Admirals Club at T8 versus Greenwich. I suppose those elementary schoolers just don’t appreciate a nice champagne bar. Admirals Club does have some nice views though! Better views than Chelsea (of course Chelsea has no views…)
All in all AA has some really nice lounges and T8 is a pleasure to fly through – never too crowded and they make it easy for elites. Soho is very nice (made to order food needs to be improved though), Greenwich is everything it needs to be, and parking is very easy right across the street from the terminal.
Tend to agree with your ranking for transcon where you don’t really need to sleep in a D1 seat, although AA takes the edge for me over UA simply because of JFK T8 versus, well, EWR. For London, much harder to justify the D1 seat. I personally prefer BA out of T8 (so long as I don’t have to interact with their customer service) although the DL/VS/Airfrance ecosystem is pretty fantastic as well. Much less interested in Lufthansa, etc., which is another knock against UA for me.
GKK,
I realize you are part of the crowd that thinks that UA can do no wrong and is the greatest thing since sliced bread but a few reality checks are in order:
1. Of course EWR is a very profitable hub for UA, perhaps in total profits second only to DL’s ATL hub. That is why this all stings so much. But UA has been living on borrowed time at EWR and Scott Kirby’s blaming the FAA for all of the operational problems that UA experienced for a scheduled runway reconstruction project set in motion a process that will mean that EWR will never operate at the same number of flights as UA has been operating.
You are simply dreaming if you think that UA will return to the same number of flights it once operated.
and every airline can upgauge and esp. DL which operates a higher percentage of RJs at LGA than UA does at EWR. and DL has A220s which are for more efficient and comfortable than any UA mainline aircraft.
2. Feel free to show your work on hub margins but a) UA has underpaid most of its non-pilot workforce for 5 years; of course its margins have been higher and b) DL has never needed to make NYC or IAD the focus of its east coast network. DL moves massive numbers of passengers through ATL and DTW across the Atlantic on top of what it does at JFK. LGA is predominantly a hub for local, domestic east of the Mississippi flights and DL dominates that segment of the NYC market. Yes, dominates.
3. Given that UA has long been fixated on size, yes, they are panicking because DL is now #1 in NYC. and panicking because there is nothing that will stop DL from continuing to grow while the DOT is going to make sure that EWR doesn’t return to being as large as it once was.
4. I am sure UA is doing everything it can to amass a pool of slots at JFK but you best need remember that B6 will cut UA off as soon as they sense that UA will take from B6 – and any growth at JFK WILL encroach on B6.
It will come as a real shock to you but B6 is not going to be played by UA. They will cut UA off at the knees at the first sign that UA is going to take B6′ business. B6 is not for sale, has a plan to reorganize itself, and they are not going to subject themselves to another DOJ rejection that will be far easier to deliver now than it ever was for the NEA or B6/NK. You and others are living in a dream world if you think that the DOJ is going to allow UA to acquire a significant amount of JFK slots given the size UA is in the NYC market.
5. AA and DL can and will expand at EWR because EWR is not and will not be slot controlled. When UA drops below 50% of flights at EWR, then you can talk about why EWR is not slot controlled and why UA should be allowed to acquire JFK assets but UA will never acquire any meaningful amount of JFK slots on the open market. It will remain a runt of a competitor to AA, B6 and DL east of the Hudson.
Don’t touch that channel.. There are lots of reputations on the line as to how this will play out over the next several years. Like most stuff, we will find out that UA is far more bark than bite.
UA will be a smaller competitor in NYC in part because of their own actions and there really isn’t much they can do to stop the market share shift back to LGA and JFK and specifically DL, regardless of what you think.
Does anyone actually read the Timmy drivel?
you keep coming back and you have argued against points I have made, so, yes, lots of people do, including you.
and DL and Indigo just announced an AF/DL/KL/VS partnership with Indigo that will expand service between Europe and India with DL returning to the India market in the near future.
DL’s A350s are doing things that AA and UA’s 787s cannot do and do it with more passengers and more efficiency and capability.
DL has only gotten started on its international growth including from NYC; the title for total revenue and not just passengers carried will soon be passing from UA to DL and DL will do it with just its own aircraft, not via a domestic partnership that B6 could yank away from UA
btw, has it occurred to you that the fastest way for UA to increase its presence east of the river to the west coast would be to join DL in arguing for the elimination of the LGA perimeter? UA has plenty of slots at LGA that they could convert to fly west coast routes