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.