Justice Dept To Sue Over American-JetBlue Partnership, Helping Competitors Not Customers

American Airlines and JetBlue are now partners, including codesharing on routes in and out of Boston and New York. So far this includes reciprocal mileage and elite status earning and will soon include recognizing each others elite members with status benefits.

Naturally other airlines do not like this,

  • It creates a strong third competitor in New York to United and Delta, so those carriers don’t want to see the partnership.

  • The airlines had to give up 7 slot pairs at New York JFk and 6 at Washington National, but competitors would like the government to tax them more – competitors would like more of their slots if they can get them.

The American Airlines-JetBlue partnership is good for consumers however lobbyists for other airlines may get a new pound of flesh. The Wall Street Journal reports that the Department of Justice is going to sue American Airlines and JetBlue over their Northeast Alliance which the government already approved.

According to those familiar with the matter, the Department of Justice will argue that the two airlines might compete less against each other leading to higher prices.

The Justice Department is preparing to file a lawsuit challenging American Airlines Group Inc.’s AAL -1.52% partnership with JetBlue Airways Corp. JBLU -2.51% on antitrust grounds, according to people familiar with the matter.

The lawsuit, which could come as soon as Tuesday, is expected to argue that the recently forged alliance threatens competition and higher fares, the people said.

This theory makes little sense.

  1. American Airlines was not a viable competitor in New York before the pandemic.
  2. Because of slot controls at the New York airport, the total number of flights is fixed. The deal won’t reduce flights.
  3. The settlement the airlines reached requires the two carriers to operate more seats, increasing supply in the market which would tend to reduce prices.

On its own American Airlines was the #4 airline in New York pre-Covid. Management had walked away from competing for New York business and tried to be an airline that brought people from other cities to New York. Two years ago they appeared to be in a New York death spiral and viewed their limited New York operation as ’boutique’.


New York JFK Terminal 8

The idea that there’ll be less competition in the New York market is silly, because the government limits the number of flights at New York JFK and LaGuardia. The number of flights at those airports will remain the same. And to meet the conditions of approval for the deal, American and JetBlue have to operate more seats.

  • JetBlue already agreed not to exit JFK non-stop (non-seasonal) routes it served as of February 2020, except for Long Beach, Oakland, and Worcester, Massachusetts.

  • The two airlines aren’t allowed to discuss “future fares, fare levels, or revenue management strategies” and they separately can’t discuss route, scheduling or capacity outside the scope of the New York/Boston agreement.

  • American had to permanently give up 4 slot pairs at New York JFK and JetBlue permanently gives up 3.

  • American had to lease 4 slot pairs at Washington National airport and JetBlue had to lease 2, leases have to be available to other airlines for these slots for the duration of the American-JetBlue partnership.

  • If American and JetBlue do not grow their seat capacity at New York JFK and New York LaGuardia combined by at least 5% they have to give up 10 more JFK slot pairs (American has already announced they’ll no longer fly small regional jets).

I haven’t been a fan of many of the moves made by current American Airlines management, and I’m skeptical of mergers and anti-trust exemptions in a world where incumbent airlines are protected from competition through foreign ownership restrictions and government-imposed restrictions on which airlines can fly into congested airports.

However this is a case where customers actually benefit, competitors don’t like it, and whether the Justice Department realizes it or not they’re carrying water for cronyist corporate interests and not passengers. The move has been pushed hard by Senator Amy Klobuchar whose interest here is in representing Delta, which operates a hub in her home state of Minnesota – and hardly the people of New York or Massachusetts.

At the end of the day, too, shouldn’t government approval be government approval? The federal government signed off on the partnership this year and anyone who cares about the rule of law should object to this intervention. How can anyone operate in an environment where the government doesn’t keep its promises? Unless the agreement that was reached has been violated, which no one has yet alleged, the DOJ should stand down.

(HT: @crucker)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Pingbacks

Comments

  1. The primary concern with the AA-B6 is the abililty to swap slots at two of the three airports that have slot controls. AA has been underutilizing its slots in NYC for years and came up with a plan that would basically allow them to pass the slots to carriers where they saw benefit rather than returning them to be redistributed. Remember, that slot controls were lifted at Newark when United failed to fully utilize its slots. If any part of the deal is revoked, it will likely be the slot transfer mechanisms.
    American is overhubbed in the NE and has shifted the focus to NYC; American has put PHL on hold to develop NYC w/ B6 but they have failed in most of the same markets from other hubs so their NE strategy doesn’t look much different from their China strategy – which has been to shift flights between multiple hubs other than DFW. The primary problem w/ AA’s international flights in NYC is that AA has to fix its average fare underperformance in international markets relative to DL and UA from NYC – which B6 cannot help. B6 might feed enough traffic to help American but the percentage of connecting traffic on B6’ flights will be low – which basically allows B6 to grow in markets for a fairly small benefit of increased connections, many of which AA could carry over its own network from other hubs. AA is simply trying to turn around its presence in NYC which has been shrinking for years – and the B6 partnership doesn’t fix that.
    As for talk of a merger, AA and B6 have such dramatically different unit costs that a merger would eliminate service in B6 markets; AA has been shrinking for so many years because their costs are so much higher than their competitors including Delta.
    And the real question is whether this deal was given the appropriate review at the DOJ given its scope in limited access markets due to slot controls such as NYC and WAS. DOT was more focused on getting AA to use its own slots rather than considering the economic benefit if they were redistributed to carriers that likely would have added even more seats and priced them more aggressively.
    And the DOJ and DOT are both considering other changes to slot controlled airports to increase competition.

  2. I do wonder if there is more to it than that. For example, JetBlue cutting several new routes at PHL and pulling out of others like RDU-LAX. The DOJ could have evidence of antitrust violations (either working in conjunction with AA or even “we don’t want to compete with our NY/BOS partner in some of these other markets”), so hopefully the lawsuit reveals some of what the DOJ sees.

  3. Rule of law? Biden Administration? Remember, this is the clown car that knows something is illegal and dares the court to strike it down. Then threatens to pack the courts when it doesn’t get its way. Yes, yes, Trump was terrible and sometimes did the same thing, but these guys make them look like amateurs.

  4. Parker is getting what he deserves…..stabbed in the back by an administration that he has gone out of his way to “kiss their rings.” Meanwhile his former Lieutenant who now run his biggest competitor, UAL, is so “in” with them they are used as a shining example in one of POTUS feeble press conferences since they have cow towed to the illegal shot madidate. Oh well, as the ole saying goes:
    “What goes around, comes around.”

  5. So if I go on JetBlue.com and book a flight, misunderstand what “operated by American Airlines” means (because there’s definitely people out there that doesn’t know what that means), goes to JFK T5 only to get redirected to 8(?) and end up on an American flight…. I’m not sure how that can be considered an improvement.

    Their products (ignoring lounges and international/widebody fleet) do not have enough parity for this to be equal and will only result in disappointment when expecting one only to get the other.

  6. I am sorry but I do not see an issue with this arrangement. It definitely helps the consumer. Now, if JetBlue could improve service from underserved cities to NY then maybe that would make some pols happy.

  7. I don’t buy the claim that a US Government waiver and favor allowing for American and JetBlue to collude is good for consumers in a highly concentrated, oligopolistic marketplace as is already the case in the US passenger airline service market.

    Having a de facto 3-4 player oligopoly is not good for flyers to and from the NYC area.

    Too bad the government won’t break up both Delta and United.

  8. Given it’s a democrat doj this is probably just an attempt to extort aa and JetBlue. The left uses the law as a weapon despite how they claim to care about “justice”.

  9. Six states including Mass, DC, Virginia, CA, AZ and Florida are also part of the suit. It doesn’t speak well for AA-B6 when multiple states that host AA and B6 hubs don’t like the idea and are joining the DOJ in their objections.

  10. “However this is a case where customers actually benefit”

    C’mon Jeff, that’s speculation at best and likely to be wrong. Let’s not pretend that JetBlue & AA have our best interests at heart as they mutually cut competitive routes. While it might be true in limited markets, places like BOS are already seeing significantly increased pricing because of this ‘Alliance’.

  11. Delta enjoys a virtual monopoly east of the Hudson River in New York. It obviously can’t stand any kind of serious competition at JFK, BOS, and LGA. Spirit simply wants more slots. It wouldn’t surprise me to see some additional money show up in Sen. Blumenthal’s campaign coffers courtesy of Delta and Spirit. As Mark Twain observed, “We have the best government that money can buy.”

  12. @Sean – I don’t think JetBlue and American have our best interests at heart! But having one viable competitor in the combo in NYC is an improvement, plus they’re forced to add seats to the market or lose slots – increase supply should lower price, all else equal. At a minimum there’s no compelling case for consumer harm here.

  13. @Jeff – Fair enough, but I guess we’ll have to agree to disagree. While there may be minor improvement in NYC, this alliance already has shown significant negative impacts in BOS.

  14. If airlines were not permitted to collude and reduce choice, they would not be able to continue to screw customers over with ever-so-restrictive one-sided rules.

    You buy a ticket for a lunch in another city, the airline changes the schedule so that you now would miss the lunch, and yet the airline keeps your money because the fact that you now arrive at 1 pm instead of the 9:10 am you purchased is 4 hours or less? Do we all live in Russia now?

    Screw AA; they don’t deserve JetBlue. Thank you government for finally stepping in this market failure full of collusion and soak-the-customers attitudes.

    Capitalism is free markets, not markets rigged by oligopolies.

  15. Radio,
    Delta does not and never has had more than 50% of the slots at JFK, LaGuardia or Washington National airports.
    USAirways had and American still has a majority of slots at Washington National while United had a majority of slots at Newark until they failed to use them and slot controls were removed at the airport.

    So, no, Delta has managed to become the largest airport by having a minority of slots at all of the slot controlled airports.

  16. This IS a really strange lawsuit. The government (being government, I guess) often gets antitrust issues wrong, especially involving non-dominant players (T-Mobile and Sprint anyone?). The pandemic is confusing things a bit, but are there ANY American or JetBlue customers in the Northeast unhappy with their partnership? If they are, they’re being foolish. Both airlines seem to have had an extra spring in their step in NYC of late, expanding services that they couldn’t make work without the partnership. Both airlines are now clearly MORE competitive because of the deal in that market. And the government doesn’t like this? Weird.

  17. chopsticks,
    have you bothered to read the DOJ’s filing. It is available for anyone to read and shows precisely why the AA-B6 partnership exceeds levels of concentration that has been allowed in previous airline mergers – and it also details how AA-B6 have ALREADY coordinated their schedules to even further DOMINATE markets.
    Read the DOJ’s filing and then get back w/ us by arguing the facts of the case, not anecdotal perceptions.

  18. @Tim Dunn
    Come on dude, admit it, you own DAL stock and press every opportunity to “analyze” in their favor and against other carriers.

    “…When United failed to fully utilize its [EWR] slots”

    Please cite a source for this. UAL took a big business risk in 2016 when they abandoned JFK in favor of building further scale at (and defending) EWR. They would not knowingly have un-squatted slots in their no1 metro market, especially in the midst of an economic boom.

  19. Gary’s analysis is excellent and spot on.

    Let’s just face it, running a full-service, full-network (meaning not just internationally but domestically to every Smallville) airline is something that requires enormous economies of scale and financial stability. In other words, we have to accept that network carriers form a *natural oligopoly*.

    Let me be clear, I have no vested interest in any airline, and as a consumer of course I’d like to see viable competition just as much as anyone. But when I learned about this story this morning in the WSJ, I just shook my head in disbelief. As Gary implied, not only do the actions of the DoJ effectively run contrary to consumer interests, I also oozes of ideological crusade. Sad.

  20. Marco,
    how about you start w/ the FAA’s own PUBLIC documents regarding their decision to remove level 3 slot controls at Newark?

Leave a Reply

Your email address will not be published.