A federal court sided with the Biden Administration’s Department of Justice, ruling that the American Airlines-JetBlue partnership should be broken up on anti-trust grounds. It’s an odd conclusion, but the ruling itself is fascinating reading. It contains great details about how the deal evolved between the two airlines.
There’s little question that consumers benefit from the American Airlines-JetBlue partnership. Both airlines are smaller than Delta and United in the New York market. And, because JFK and LaGuardia airports are slot-controlled, neither one could grow. American has lost money in New York for years, despite trying a number of different strategies to make up for their smaller size. This deal:
- Increased the number of strong competitors in the market from 2 to 3 which is good for consumers
- Required American and JetBlue to increase the number of seats flown in the market, which they couldn’t legally do by adding flights so they had to fly bigger planes. That’s good for consumers on its own.
- And the requirement to offer more seats (increase supply) means a downward pressure on prices.
- So far from giving American and JetBlue some kind of monopoly, breaking up the deal protects the effective United-Delta duopoly in New York. This ruling undermines competition, rather than protecting it.
The judge’s discussion of the backstory that came out during the trial supports this position, but I want to highlight it merely because it’s interesting for outside observers to see how the alliance came to pass.
- American Airlines had been underutilizing its slots in New York. By 2019 they were afraid that they would have those slots taken away (I wrote about their underutilization and slot squatting extensively in early 2019).
- So they first worked out a deal to lease slots to JetBlue. They initially negotiated American sending 27 slot pairs to JetBlue, but then they began talking about more.
- American’s new partnership with Alaska became the model as talks progressed. American had no viable option to grow and was losing money in New York, so it was either walk away from New York (slot leases) or partner up with JetBlue. Meanwhile JetBlue couldn’t grow either and doing a deal of some kind with American was its only path.
Here’s what they did next:
Negotiations between American and JetBlue continued despite the COVID-19 pandemic.
In April 2020, on the advice of their legal departments, American and JetBlue each designated representatives to a “Clean Team”—a group of individuals with knowledge of scheduling and network planning, but whose daily responsibilities did not involve such work.
The Clean Team built a theoretical joint network schedule that would allow American and JetBlue to evaluate what the carriers could achieve via a partnership. This process lasted through May 2020. Ultimately, the Clean Team produced a hypothetical schedule for 2023, which pooled the resources of both carriers —including aircraft they did not yet possess but, per their respective order books, they expected to receive by 2023 — and “optimized” them to create one cohesive NEA schedule.
The Clean Team then ran the schedule through a proprietary tool American uses to estimate passenger traffic and revenue.
The agreement that was ultimately announced in July 2020 was for successive, auto-renewing 5 year terms though could be terminated with a two year period at the end of a term or in certain other circumstances with payment of breakup fees.
The two airlines then began swapping slots at New York JFK and LaGuardia airports.
Later in 2021, American and JetBlue executed a pair of slot lease agreements. American leased to JetBlue ten slots at JFK and thirty-seven at LaGuardia for approximately one year, ending October 29, 2022. PX 0001-h. JetBlue leased to American eight slots at JFK for essentially the same term. PX 0001-i. In March 2022, American leased to JetBlue thirty-two more slots at LaGuardia and twenty more at JFK for terms beginning on different dates in 2022 and ending in March or October of 2023.
The NEA was considered 80% complete by fall 2022. The court acknowledges growth in New York as a result of the NEA, but – because of delays in aircraft deliveries (and, I’d note, a pilot shortage at regionals) – that growth has come at the expense of flying elsewhere. The court also acknowledges that “American’s slots at JFK and LaGuardia have been used more heavily and efficiently” as a result of the NEA. Both are good for customers in the covered areas.
The court dismisses benefits of the alliance by noting that some routes have seen a reduction in capacity, even if capacity has increased overall. Even Delta has to agree that this is shoddy reasoning, because they’re currently petitioning the DOT to allow them to move their Portland – Haneda flight somewhere else where it will better serve passengers.
Here’s how revenue gets split between the two airlines within the Northeast Alliance:
The NEA’s revenue-sharing mechanism is established by the Mutual Growth Incentive Agreement (“MGIA”), which was executed concurrently with the NEA Agreement. Modeled after the profit- or revenue-sharing features of American’s other joint ventures and alliances, the MGIA’s purpose is to align the partners’ incentives and achieve something the parties call “metal neutrality.” Metal neutrality means American and JetBlue are indifferent to whether a passenger flies a particular NEA route on an American plane or a JetBlue plane. Metal neutrality within the NEA region—that is, on flights to or from the four NEA airports—is a cornerstone of the NEA. The sharing of revenues generated by both partners in the alliance renders each agnostic about which partner’s aircraft a customer chooses, and also furthers both partners’ shared objective of attracting passengers away from other competitors (here, Delta and United).
The MGIA establishes a complex process for splitting the revenue pool annually. The pool itself, or Net Revenue, is composed of defined categories of passenger-related revenue, less certain selling expenses.28 Doc. No. 324 ¶ 189. The Net Revenue is then divided between the partners in two stages. First, each carrier recovers a Base Revenue, calculated by multiplying a defined measure of that carrier’s performance during 2019 by “an agreed upon measure of seats and distance flown by [that] carrier during the most recent year.”29 Id. ¶ 191. After subtracting each carrier’s Base Revenue from the Net Revenue, the remaining Incremental Revenue is divided based on each partner’s proportion of the total NEA capacity for the relevant year. Id. ¶ 195.
Because there is no literal “pool” of money awaiting division according to these formulas—each carrier having collected revenues from sales made to its respective customers throughout the year—the revenue-sharing process is settled via an annual “transfer payment” due from the partner that collected more than its designated share to the partner that came up short.
The defendants urge that the MGIA is designed to incentivize growth by both of them, and to spur continued competition between them. E.g., id. ¶¶ 196-97. Certain features do appear to reward growth. For example, by calculating the Base Revenues using a factor tied to each partner’s present-year flying, rather than sharing in a fixed proportion based entirely on performance in the base year, the MGIA makes it possible for a carrier to increase its share by adding capacity (in the form of seats or miles). And, of course, splitting Incremental Revenue based on capacity might reward one partner for growing more than the other.
The judge though dismisses the manner in which growth is encouraged, arguing that the two airlines won’t be destructive towards each other, and therefore the agreement doesn’t protect ‘competition’. The judge also rejects growth because the two carriers are resource constrained (but doesn’t seem to realize those same constraints exist even without the partnership).
The decision notes that American’s long haul flights didn’t perform as well as hoped in 2021 and the revenue-sharing formula wasn’t applied strictly:
At the end of 2021, the parties applied the MGIA’s revenue-sharing process for the first time, determining how revenues generated by the NEA that year should be divided between them. Under the terms of the MGIA—terms which the parties designed, and which numerous witnesses described as necessary to appropriately align their incentives—JetBlue owed American a transfer payment upwards of $200 million. The hefty sum resulted from American “adding a great deal of long-haul capacity into JFK that didn’t perform as well as . . . expected.” Trial Tr. vol. 5 at 219-20. Nevertheless, American forgave the lion’s share of the amount due, agreeing to accept from JetBlue only a fraction of the total due and cap the transfer payment at $27 million.
American, which has recently let go a substantial portion of its sales team, had not made any joint bids with JetBlue for corporate customers. Although, in fairness, corporate business travel in the New York market is down substantially (as is in-office occupancy). And existing corporate deals for both JetBlue and American extended those deals to the other carrier within the Northeast Alliance in order to grow business.
The judge’s decision notes that frequent flyers (which include corporate customers) gain the most from loyalty program reciprocity – but dismisses this because such consumers are reportedly around 15% of passengers making up less than half of revenue (this conflates elites with people flying two or more times a year).
Where the decision makes its strongest argument is in noting that American and JetBlue could have partnered less extensively, along the lines of American and Alaska on the West Coast. I don’t ultimately find it persuasive that the consumer benefits would have been as great, and the nature of slots in the New York market make them fundamentally different, but the airlines could have worked together less while achieving some benefit.
In reaching a decision, there’s very little discussion of passengers or consumers, or how they are actually harmed, as opposed to a take that reducing the number of airlines in the market is per se illegal.
- The decision more or less says American and JetBlue no longer compete in these markets, so there’s less competition, Q.E.D.
- And it goes on to argue that regulators now consider JetBlue no longer independent or a maverick, and so no longer benefits from regulatory largesse in matters like slot allocations. Since regulators think the NEA is anti-competitive, that makes it so. And the major focus here is on London slots, though the market is entirely outside of this agreement.
- Finally it talks about exiting markets and allocating which airline flies where as illegal, not whether it… benefits or harms consumers.
The decision made for a very interesting read. It’s one judge’s take on the situation, which remains… developing. For over 40 years, anti-trust jurisprudence has focused on a consumer welfare standard, and it seems likely that the extent to which this decision hews to that standard will be a fertile ground for litigation.
There are other ways in which the judge may have erred, such as in handling of expert testimony and reasoning for being so dismissive of the defense in this regard, but that’s outside my area and would be interested in hearing opinions from specialists who have read that section of the decision.
(HT: @RossFeinstein)
@Retired Lawyer
“Gary makes four points above in favor of the NEA. All of them are wrong legally and factually:
1.”The NEA increased the number of strong competitors in the market from 2 to 3 which is good for consumers.” This isn’t true. All four of the existing competitors had the financial wherewithal and resources to be strong in both Boston and New York. American chose not to do so.”
The smaller JetBlue, based in New York, has lagged financially. American lacked the resources – slots – to “be strong” in New York. They could not grow, and were losing money year after year trying a number of different strategies to stop the bleeding. The Court observes that American was going to *stop competing* in New York before hitting on the NEA as a competition strategy, by discussing its plans to lease out a substantial portion of the slots it does have.
Saying that my analysis “chooses to ignore that competitors can grow internally” is not true in a market where government caps the number of flights that can be offered.
“2. “The NEA required American and JetBlue to increase the number of seats flown in the market, which they couldn’t legally do by adding flights so they had to fly bigger planes. That’s good for consumers on its own.” Again, factually wrong. As Judge Sorokin found, “Capacity growth that comes from American’s upgauging of its own regional jets is growth the evidence suggests American could have pursued, and planned to pursue, with or without the partnership.”
Again, the decision notes that American (1) wasn’t utilizing its slots because they were money-losers, and was afraid that the FAA would take them away, so (2) was going to lease the slots rather than operate them until they hit on the NEA agreement with JetBlue which allowed them to grow capacity. This agreement increased supply, which is the opposite of the kind of behavior that anti-trust is supposed to fight.
As a technical matter were they legally allowed to upgauge? Sure, but they were already losing money and were not going to do so.
“3. “And the requirement to offer more seats (increase supply) means a downward pressure on prices.” Agaiin, such a conclusion is belied by the facts. The evidence adduced by the Court showed that the NEA actually precipitated a decrease in seats on BOS-LGA:”
This notes a single route, which has historically been a business travel-focused route that naturally would be slowest to recover when managed corporate travel hasn’t returned to pre-Covid levels.
It is a complete non-sequitur to talk about capacity drops on BOS-LGA when total capacity out of New York was growing under the NEA>
“JetBlue has been famous as a disruptor.” JetBlue was a disruptor years ago. And without more slots couldn’t be one. I discussed in a separate post the judge’s analysis of regulators no longer seeing JetBlue as a disruptor (catching up with the times), so no longer handing out largesse to the airline. But this is circular logic from an anti-trust perspective.
the court specifically noted that AA and B6 THEMSELVES failed to show the growth of their networks more than their reduction of service in other markets. BOS-LGA isn’t the only market where either AA or B6 removed service on behalf of the NEA.
And the court also noted that AA and B6 diverted resources from elsewhere on their systems in order to fund required increased slot usage at LGA and JFK, so effectively limited competition elsewhere on their networks.,
While not specifically noted in the court’s finding, that is exactly what happened in S. Florida – which allowed NK to become the largest carrier at FLL. B6 now wants to merge w/ NK while AA and B6 (pre-ruling) cooperated on a number of routes from NYC and BOS to S. Florida which are covered under the NEA.
To the extent that killing the NEA removes overlap routes between AA and B6, then helping ensure the merger gets approved makes sense.
and let’s not forget that Port Authority boarding data shows that B6 and DL are very close to the same size in the JFK domestic market; DL’s larger slot portfolio is used to support a larger international operation. B6 is not a weak party at JFK just as AA was a solid #2 at LGA even before the NEA.
Looks like Tim Dumb is also a “Retired Lawyer” now!
@Tim Dunn – “the court specifically noted that AA and B6 THEMSELVES failed to show the growth of their networks more than their reduction of service in other markets.”
They grew seats on net, but was that limited… by slots (by law).. absolutely.
Gary,
read the court decision. CF links to it.
The judge did not believe – using the evidence the DOJ and witnesses presented to him – that AA/B6 grew new markets MORE than they consolidated their own presence in markets where they both previously competed but now only one does.
In other words, all of the “new growth” that AA and B6 touted came from cuts in markets where they consolidated their market share.
THAT is not growth.
@Tim Dunn – I literally linked to the court decision *in this post* which I read on Friday.
What *the judge believed* isn’t the point here. Seems to me like there’s plenty of reversible error, but I’ll leave that to anti-trust experts. I’m simply suggesting that the New York market becomes less competition without American and JetBlue (smaller players) teaming up against Delta and United.
Delta is the big winner here, the largest player at LGA/JFK. That’s market concentration. But since you’re a fan of anything good for Delta I get why you like that outcome.
Leaving aside legal merits, anti-trust law that’s used to reduce competition is problematic at best… whether this judge understands what he’s done or not.
Gary,
nobody including me doubts or said anything that contradicts DL’s strength in BOS and NYC or that the wouldn’t gain even more – I said specifically they will.
But you don’t want to let go of:
– that the judge made it clear that there is no basis in law for two companies to collude just because another competitor is larger.
– AA and B6 both have the resources to compete at a sufficient chose but chose not to do so.
On both of these points, the airlines THEMSELVES provided ample evidence that they knew what they were doing but moved ahead w/ the NEA anyway.
You are free to call it the judge’s thoughts just an opinion but it is a legally binding order – something you can only wish you had and AA and B6 wish he didn’t have.
But he is in a position w/ power to end the NEA and that is what he did.
There are ample reasons why an appeal won’t work even if tried and AA and B6 simply need to move on.
@Tim Dunn – you continue to argue something that is inapposite of what I’ve written. The judge says the B6/AA combination is impermissible. That is blindingly obvious and uninteresting. What’s relevant is what effect this will have on the market.
“There are ample reasons why an appeal won’t work even if tried”
Maybe… but most anti-trust cases don’t wind up appealing because of the time and uncertainty involved being just too high a cost for a business to go through.
As I write here, JetBlue’s heart may not be in it at this point!
But it’s not at all implausible that AA and B6 together could get an appeal granted, with a stay pending appeal, while the already in-effect partnership continues while this winds through the courts for years. And it’s not at all implausible to think that they’d win on appeal, eventually. I’m not predicting that’s the path this takes! But it’s one lower court judge coming to a conclusion you like. That is all. And that’s not in any way inconsistent with what I’ve written above.
Good lord Tim stop arguing with Gary for the sake of arguing !
Gary and I will stop when we are through talking w/ each other. I enjoy interacting w/ him and I don’t for the life of me understand why some people come on here expecting that they should be able to control the dialogue.
It seems that saying that JBLU wants out and then saying that there is probably the basis for an appeal seem like nothing more than trying to keep a conversation alive based on possibilities than anything remotely likely to happen.
As for the changed competitive environment, of course, NYC will become more concentrated. There is no scenario under which any carrier including B6 will end up w/ the majority of slots if AA fails to use them. Lots of carriers would like more LGA slots but I doubt if there is much interest in JFK slots other than UA and they won’t get proportionately more than B6 or DL which are both certain to grow their slot portfolios if given a chance.
AA will likely reduce JFK to a large spoke with LHR and GRU and EZE and maybe a few more longhaul routes, will use B6 to feed those flights under a simple codeshare agreement, but will walk away from far more slots at both JFK and LGA than they restart service. It isn’t at all a guess to think that, even w/ a limited lease of slots to B6, the total number of flights from LGA and JFK will fall by more than 50 flights/day within a few years
@Tim Dumb,
Hahaha Gary looks like he’s exhausted too, doesn’t look like he “enjoys interacting” with you anymore than the rest of us!
why don’t you let Gary speak for himself? He is quite competent which is more than can be said about you
if you were exhausted, you wouldn’t keep coming back to read and post.
You are just a troll and everyone except you knows it.
What I do know is that the legacy airlines need to be broken up if the government does not allow other airlines to get larger. You can’t have it both ways. JetBlue deserves a shot at taking them on not only as a smaller maverick airline but a bigger one as well. Gary makes a good moral and ethical point about Delta and UA having too much power in the NYC
/Newark market. In fact reasonably no airline including Spirit should have more or even near 50% of any market anywhere…any place in the USA. If JetBlue can’t merge with Spirit someone needs to sue the big 3..4. For UA and Delta let alone American to have over 70 to 80% of certain major markets is totally anticompetitive. The ruling only strengthens Delta in NYC and UA in Newark. I don’t understand how anyone can see their dominance as good for US travelers. Just because In the past the legacy carriers all were allowed to merge, the governments change of heart should not simply be about preventing other mergers presently, but breaking up the big 3 ( SW let alone Alaska or JetBlue do not have near the dominance that they do in most major markets). As well, Spirit should never be able to have 50% of the ULCC market long term. The airline industry is anti-competitive in general. As well, Spirit ticket prices may be clearly less than them all, but after all the nickel & dining their business model engages in, do they really cost travelers much less. Data should be scrutinized on this. One must consider the total value for the US traveler, and does Spirit really offer true value when you consider how most folks know that Spirit is the butt of jokes in the industry to begin with. I believe if JetBlue was willing to change it’s business model to offer more of the best of both worlds of the two (B6;+ NK) the merger would be much harder to shoot down. Perhaps JetBlue could do what Breeze is doing more so, and offer more seats on its planes that would match Spirits pricing. It would take changing configuration plans and be highly challenging, but JetBlue has the creativity and resources let alone internal talent to pull off a revolutionary approach to flying the friendly skies. Arguably no other airline in the last 20 years has been more innovative than JetBlue. Time and time again JetBlue beats out even Delta when it comes to it’s best service option(s). I love Delta, but I want JetBlue let alone smaller carriers like Breeze and such to have more of a chance to prove themselves in a market that is in general anitcompetative through out! The retired lawyer Mr. Dunn makes good legal sense, but seems to gloat in the legal decisions of the case without much heart nor deference to the market effect the decision has on the US traveler. How does less options help the average Joe. Delta really wins here, and while AA and JetBlue get slapped down they can continue to dominate a major market as business as usual. It doesn’t take much heart let alone reason (as good and gold standard Delta in general is) to see such dominance is ethically and morally unjust. I wish JetBlue the best, and hope Spirit figures out how to fly folks in the skies without just being a seemingly cheaper airline. The ole saying like them all is still true… you get what you pay for. Spirit gets you in the door cheaper, but dare I say not in the end does it truly create value let alone prove less costly to the average traveller. Just take a look at customer satisfaction in general to see the proof in the pudding!
just a few points:
– Mr Dunn and the retired lawyer are two different people.
– there are mechanisms including airport access requirements and prohibitions against capacity dumping that ensure that smaller carriers in markets have an equal shot. In hubs – which are highly concentrated, the proposal is for the legacy carrier to have superior service but leisure/price sensitive passengers DO have choices as long as there are competitors and that is true – including by Spirit which flies in many hub to hub legacy carrier markets
– slot controls are inherently anti-competitive but it is socialism and prevents the development of markets to not allow incumbent slot holders to be able to know they can use those slots into the future
– the biggest hindrance to airport access right now is air traffic control Note that even Denver airport is regularly seeing staffing related ATC delays; ATC is simply not keeping up w/ the changes in airline demand. Mayor Pete just got on the news recently castigating airlines for not planning to staff their operations while acknowledging that ATC is not staffed – but that is ok. I agree w/ Gary that government has completely failed in managing the staffing aspect of ATC.
– Spirit does provide value for passengers that buy in advance and use minimal services. I just compared AA to NK on a specific route and NK was about 20% lower for basic transportation. that was just one example and the price for me went up because I did not stick w/ their basic transportation model. A last minute NK ticket cost more than an economy (not basic economy) AA ticket.
There are different models and they all work. NK/B6 should be approved in my opinion but B6 needs to do a far better job of offering concessions that address the real problems the DOJ sees. For too long, B6 mgmt has had a mindset that they are special so shouldn’t have to comply with the rules for every other airline. The strategic failures from that mindset are clearly obvious
My apologies on confusing Dunn and retired lawyer. Not my point to argue to argue. You did rebuke many of my points; tacitly at least. The dominance that Delta has in Atlanta, or AA in Dallas, or United in San Francisco is my point. It’s not by any means a true competitive landscape. With the big 4 having control of over 70% of the market, it simply defies good reason let alone ethically and morally, especially given one who understands change within large systems. One could easily spend that price differential (20%) on luggage let alone extra services, which Spirits business model is built on making certain most travelers do. Im Jewish by blood ( on mother’s side, not by religion) and cannot tell you how many times I have priced out a Spirit ticket and ended up going with a legacy carrier because it was either minimally less expensive and/or simply not worth the possible dreaded service and legroom experience compared to more comfortable and comparable airline offerings. It’s a joke to believe Spirit is actually that much cheaper, it’s business model would not work if that was true. As you well know Mr. Dunn ALL airlines operate on razor thin margins within a highly volatile and precarious business sector; airline industry. You yourself make some smart and keen observations and comments. I agree with you, B6 will need to sweat blood more for the DOJ to get merger approved. I just think a mixture of the JetBlue and Spirit business model will do more to add value to the average travelling consumer than either could do alone. We all know that B6 is Concentrated in the East where tardiness and cancellations are far worse statistically ( especially NYC area) speaking than most any other market(s)in the USA. The one big stain on JetBlue is tardiness and especially cancelling. Again, JetBlue even beats out Delta when it comes to it’s best service offerings. Spirit is the Kmart of the skies, and we all know how well Kmart did in the 70’s and 80’s, but where is Kmart now? Price cannot be the only standard of value, unless one is too privileged to understand this. Customer service and the flying experience has to enter the equation lest we consider less is more only where price is concerned. Thank you for sharing your thoughts and shrewd commentary. Speaking of value, we have to do better to find common ground, an argument in of itself ( hope your reading retired lawyer) is far less valuable than a consensus built upon keen listening and understanding of others point of view. See you in the FRIENDLY skies!
@ Tim Dumb
Nope, looks like Gary DID get exhausted and finds you obnoxious…..he spoke for himself alright, by not responding to you! Amazing how much time you spend responding to a troll like me! You’d think you’d take the high road and not respond ;).
Judges have too much power. Most of their reasoning is opinion not necessarily fact. The consumer would definitely benefit from more competition in the NY market. Wasn’t that the initial reason for airline deregulation?
It would seem that compromises could be made to make the NEA more feasible for customers. For example, B6/AA could extend the lowest fares across all routings instead of just the B6 nonstop. For example, the O&D pair ATL-LGA should price the same whether it is flown nonstop or ATL-CLT-LGA, but the connection using AA metal is usually more expensive. That makes the NEA less of a metal-neutral deal for customers and more of a way for the carriers to keep the lowest fares away from connections with displacement costs. Metal neutrality in many alliances blows up as soon as you talk to revenue management. That makes the intentions of an alliance hypocritical in the eyes of consumers, and it is something the big egos at B6/AA should resolve to appease the authorities.