Today’s testimony in the government’s anti-trust trial against the American Airlines-JetBlue Northeast Alliance has featured the CEO of JetBlue and the incoming Chief Operating Officer of Southwest Airlines, which prefers not to see stronger competitors (naturally).
It doesn’t seem like the government made any tangible progress demonstrating anti-competitive effects of the partnership, but the answers given on the stand by senior airline executives are interesting to parse.
JetBlue’s CEO Back On The Stand
Yesterday the government asked JetBlue CEO Robin Hayes whether his goal was to maximize profits, as though that was some sort of gotcha. The government needs to show Hayes as ready to raise fares now that he’s been co-opted by American Airlines. Hayes responded that… the airline hasn’t made money in the past two and a half years and they do need to do so. They clearly aren’t earning monopoly profits!
Today he was on the stand staying that the airline needs to grow, and government slot controls make that impossible in New York (JFK and LaGuardia). Partnering with American they’ve grown from 15 flights a day at New York LaGuardia (and were going to lose some of those slots) to 50 a day.
The alliance with American, Hayes believes, will also grow JetBlue’s loyalty program – which underperforms both on revenue and margin.
Loyalty programs can have a 30-35% margin, Hayes says. Some airlines make more of a profit from their loyalty programs than from actually flying, he testified yesterday (incidentally, this has applied to American).
— David Slotnick (@David_Slotnick) September 28, 2022
American’s frequent flyer program a 52% margin and it accounts for the entirety of the airline’s profits. Hayes doesn’t seem to realize, though, that it isn’t size which is JetBlue’s biggest problem. Greater relevance in the biggest credit card spend markets matters (and American is benefitting from the JetBlue alliance in New York here) but JetBlue’s program just isn’t very good.
JetBlue’s points aren’t valuable and their partner redemptions aren’t valuable. They’re improving their elite program but the real work is still to come.
Hayes argues that customers benefit from their ability to protect passengers on American Airlines during flight disruptions.
JetBlue had always wanted and sought a reprotection agreement with one of the legacy airlines, Hayes said, but none of them would ever bite. The only airline who had been willing to do one was Alaska, he said.
— Leah AntiTrustButVer1fy Nylen (@leah_nylen) September 28, 2022
Many observers make the point that there’s nothing at all which requires JetBlue and American to have a broader partnership in order to enter into a reprotection agreement. Even American Airlines and Delta re-started theirs four years ago, after terminating it when Delta demanded 5x the customary price.
However interlining involves complexity, including IT and other costs, and isn’t something low cost carriers generally do. The Northeast Alliance gives them a reason to make the investment, and gives American Airlines an incentive to do this with them. So this does, in fact, support consumer benefit from the Northeast Alliance.
Another customer benefit he cites is the better JetBlue product on routes where JetBlue has displaced American – free wifi, more legroom, and seat back entertainment. Yesterday the government highlighted internal documents showing JetBlue considering the risk to its brand of partnering with American. This was not a bombshell, they commented publicly last year about mitigating brand risk by redesigning their website to make clear which flights (American flights) wouldn’t feature signature JetBlue elements so customers wouldn’t be disappointed.
There was discussion of JetBlue’s Heathrow slots which came from Qatar Airways and Aeroflot and whether Newark is a New York airport – when it’s advantageous to JetBlue they talk about New York as JFK and LaGuardia, and at other times as JFK, LaGuardia and Newark.
Southwest’s Chief Operating Officer On Competition In New York And Boston
Southwest’s Andrew Watterson testified next. He says JetBlue is “on a multi-year shift to a legacy carrier” due to flying multiple aircraft types with different seat types (Even More Space, Mint). That undermines the government’s contention that partnering with American undermines JetBlue as a low cost carrier – it’s already becoming a legacy carrier, according to its own witness.
He blames Southwest’s inability to expand at New York LaGuardia on government slots, but that’s not really an anti-trust issue it’s a capacity issue. Airports need more runways, and airspace needs more throughput, and both of those are government failures. We should be better at infrastructure, and at funding air traffic control and managing large IT projects.
Watterson’s airline really can’t expand in Boston because their current terminal has its gates allocated, but there’s no indication that Southwest has much interest in growing there anyway. They don’t fly Boston to DC because slots at National Airport are scarce. (Indeed, Southwest believes it’s possible to grow in Boston, pre-Covid their internal planning showed that both Delta and United planned to do so, Delta planned to call Boston a hub and has even been spurred to grow in Boston by the American-JetBlue alliance.)
He also argues that Southwest brings passengers from other cities to New York, they aren’t really an airline for New Yorkers. That’s the legacy US Airways strategy for New York that launched in 2014, when American viewed itself as not able to grow big in New York to compete. Without explicitly saying so, Southwest – as government witness – is really laying out the problem American faced in not being a viable New York competitor without the JetBlue alliance. He explains Southwest’s decision to exit Newark as being the result of that airport being for local customers, those in the New York area for whom it’s convenient, rather than out-of-towners flying to New York.
Since Southwest can’t get more slots, American and JetBlue together can grow and offer better schedules, and be a more attractive airline than Southwest for New York travel (which of course they already were in most cases, since both were bigger than Southwest in New York and Southwest has chosen to exit Newark). He makes the point that partnering benefits American/JetBlue, and that’s not good for Southwest, which is why of course he wants the government to stop it – because that benefits his airline. Offering a more attractive product to customers than Southwest can offer is not an anti-trust violation, though.
American’s lawyer makes the point that eliminating the Northeast Alliance won’t allow Southwest to grow in New York. Southwest benefits here by (1) hurting a competitor, and (2) extracting slots for itself if American and JetBlue agree to a settlement where they give up additional slots, and the government directs those slots to Southwest.
What’s At Stake
I haven’t been a fan of airline mergers or joint ventures. They haven’t generally benefited consumers. I haven’t been a fan of the moves made by JetBlue under CEO Robin Hayes, or many of the moves at American Airlines since US Airways management took over.
However the “Northeast Alliance” between American Airlines and JetBlue legitimately gives customers more options. The frequent flyer partnership gives customers earning, redemption, and status recognition across more flights. This deal creates a viable competitor to Delta and United in New York.
Naturally, Delta and United don’t like it. And smaller airlines would love to see the government demand more New York slots from American and JetBlue in a settlement, beyond what the two airlines have already given up to get government approval for the deal last year, and redistribute those slots to… them.
But the reasons to object to the deal are cronyist in nature – killing the deal benefits American’s and JetBlue’s competitors. Several politicians, representing the interests of those competitors, have jumped on the bandwagon. And the Biden Department of Justice wants to be ‘aggressive with anti-trust.’
Ultimately the consumer benefit standard in anti-trust is what should prevail here. We can imagine scenarios where customers don’t come out ahead. But we haven’t really seen that yet, on net, and the partnership has been underway for a year and a half. There’s no reason to quash consumer benefit based on the hypothetical risks that competitors are using as a fig leaf, since the partnership already exists (after being signed off on in a settlement with the Department of Transportation). We should let it ride and address competition concerns when those are real.
Don’t take viable choices away from customers in the meantime. We have few enough of those as it is.
Gary: “The “Northeast Alliance” between American Airlines and JetBlue legitimately gives customers more options.”
That’s patently false. Both JetBlue & AA have reduced or outright dropped flights between destinations since this started. AA no longer flies the BOS-LGA shuttle, nor do they fly BOS-PIT (a route they used to fly 4x/day). Both airlines have reduced their flights between BOS-LAX and JetBlue conveniently stopped increasing flights to DFW & MIA, which are AA captive hubs (aka $$$). You think that’s just a coincidence?!?
The benefits of this alliance are nebulous. JetBlue is claiming it’s ff can now redeem on AA, but that’s mostly false. Reciprocal benefits are very thin. And if I’m flying on a AA flight from JFK-BOS, I can’t even use elite status to move to a B6 flight, if it’s more convenient. So the benefits to travelers, even elite ones, are minimal. This is AA replacing their regional airlines with B6, while also reducing/eliminating a competitor. And for B6, it means they get feeder business. That’s it. It shouldn’t be allowed and reducing competition DEFINITELY doesn’t help customers.
well said, Sean.
When the yardstick is AA’s underutilization of slots at LGA and JFK and the solution is to add a partnership that is focused on protecting AA’s slots from being confiscated by the DOT, it is a given that AA and B6 are going to do all they can to minimize competition while shifting B6 connecting traffic from AA to B6. It is unbelievable that AA employees and their unions have put up with this – even to be told – falsely that the flights being shifted are just regional jets. True competition would be if AA’s unused slots were confiscated and redistributed to other carriers that have no relationship with AA or B6.
Also, WN’s comments are interesting but not unexpected. WN wants more slots at LGA and he is right that B6 is becoming a legacy carrier. But his comments also will come back and bite B6 in its merger proceedings – not only is the NEA eliminating competition between AA and B6 but it will push NK’s fares much higher to the detriment of consumers.
The reason why DL has been able to grow as aggressively in Boston is because B6 has shifted resources to NYC to preserve slots. Arguing that DL is acting for any other reason is patently false.
As for reprotection agreements, no airline wants to be the “trash can” to clean up after any airline. B6 cannot run a reliable operation and needs someone to pick up the mess on a regular basis. The only reason that AA agreed to do what no one else would do is because B6 will help AA not lose its slots.
Hayes said yesterday that B6 owed AA $200 million which probably means AA carried far more B6 passengers than the other way around. The entire argument that AA and B6 have used to justify the NEA is not working in real life.
The real case will be closed when the DOJ’s attorneys walk through their figure of an increase of $700 million in costs to consumers.
Southwest is lying saying they can’t grow more in Boston. They could easily fit in more flights on their current gate allocation. They just hate competing against multiple airlines (delta and JetBlue) in this case.
@Sean – claiming “AA no longer flies the BOS-LGA shuttle” in the context of the alliance is silly, since B6 has 15 peak daily departures on the route. This alliance lets them shift who flies which routes. And there are routes that are going to be added and dropped, that make more sense or less sense, and that’s true both with and without the alliance.
“Reciprocal benefits are very thin” hardly, what sort of benefits do they lack that you would actually expect them to have at this point in the partnership? Draw comparisons to same point in other airline partnerships, show your work.
There are MORE SEATS FROM B6/AA COMBINED than before the alliance, and that’s even utilizing fewer slots (since they had to give up slots). They’ve upgauged flights and are using slots more efficiently to fly where customers actually want to go … rather than, squatting slots like AA was doing because they had no viable strategy for those slots. Giving AA a path to compete is what this has done. They were squatting slots before (as I wrote about pre-pandemic) was precisely because they weren’t a relevant competitor in New York and had no vision for how to become one.
In other words, this has made American a viable competitor in New York when they weren’t one before, and that’s even while they shift much of their domestic flying to B6!
As for @Tim Dunn – these answers basically apply, and I know that you’ll never see anything done by an airline other than Delta as smart and will support whatever position Delta self-servingly takes, so… 😉
Gary,
I can and do see things objectively.
You diminish your own credibility when you dismiss legitimate issues which your readers bring.
When the yardstick is that AA underutilized its slots so any increase above what AA and B6 combined is more than it was pre-covid is a flat out manipulation that you should be capable of seeing through.
The American people deserve true competition. Allowing AA and B6 to combine resources and act as one is not competition.
If I were generally interested in seeing Delta protected, I wouldn’t be advocating that AA and B6 compete with each other. Delta benefits from higher fares and also has benefited greatly while AA and B6 have focused on NYC where they still have not gained a larger share than the two had separately before the deal. All the NEA has done is allow AA and B6 to shift resources around as if they are a single carrier – which the DOJ says it is not permissible for two carriers that should be competing or operating on a simple codeshare basis.
DL could not have grown the way it has if B6 had not shifted its focus to NYC; AA/B6 still has not overtaken DL in any market compared to pre-covid. The same is true with UA at EWR.
All the NEA has done is allow AA and B6 to raise fares – which most certainly have increased as has been the case across the nation- while avoiding competing with each other in key markets.
Think critically, Gary, instead of taking the childish route of some of your posters.
With this alliance, JetBlue added nonstop flights to MCI from both JFK and BOS, which I’ve already flown and I certainly enjoyed using my AA elite benefits to get a nice seat and a checked bag. We previously did not have a direct JFK flight, only LGA.
Also, the fares are cheaper than SW to NYC.
Is it just me that thinks it is a misnomer to consider UAL a NYC airline? Combined at LGA and JFK they represent maybe 5% of pax. I know it may be a bigger number than I think but how many folk are coming in at EWR and heading to Manhattan? Or Brooklyn Queens or Long Island?
“Don’t take viable choices away from customers in the meantime. We have few enough of those as it is.”
Well said. JetBlue colluding with American is one less choice. Way too many mergers have been approved and look at the outcome: unreliable airlines who mistreat customers and want less transparency (in pricing, in rules, in everything) to mistreat even more.
We need more choice (airlines), not less. But Gary is (obviously) on AA’s payroll, so he’ll lie about it.
Well I could be wrong (and I’m often am my wife tells me) but Hayes is delusional if he thinks he can keep the NEA and get the merger with Spirit approved. If he were smart he would offer to drop the NEA and use that as leverage in his attempt to get the merger approved. In the end whichever side loses will most likely appeal the decision.
“American’s frequent flyer program a 52% margin and it accounts for the entirety of the airline’s profits.”
An utterly idiotic statement. If AA stopped flying it would not make more profit. This kind of idiocy is what happens when you think like an accountant, addition and subtraction. The relationship between the airline’s operations and its FF program is one of economic relationships that are nonlinear, not simple bookkeeping addition.
@L3 – “If AA stopped flying it would not make more profit” a complete non-sequitur. If AA terminated its loyalty program it would make zero profit. No one is suggesting AA stop flying, and I have argued that its pulldown in New York prior to the B6 alliance was a mistake – doing the accounting wrong – since it failed to account for the role of its cobrand card and the importance of spending in the NYC market.
@TDF – I mock Newark as a NYC airport all the time but the truth is it is more convenient to parts of Manhattan than JFK for sure, and if you live on Staten Island…
The whole argument that AA should stop flying because its credit card portfolio makes so much money makes as much sense as saying that the NEA is a good thing for consumers because AA underutilized its slots and came up with a deal that conslidates its NE efforts with another carrier in order to fix it – and the DOT was dumb enough to sign off.
Add in the proposed merger and even the most optimistic Blue koolaid drinker realizes that B6 is biting off more than it can defend or chew in trying to defend the NEA and get its merger with NK approved.
@Gary Leff” “f AA terminated its loyalty program it would make zero profit.”
Not so, and you illustrate my point. You are trying to answer this as though it were an accounting question. It is not. It is an economic relationship. AA would adjust on other margins in response to an termination of its FF program.
@Gary is the government attacking the entire alliance or just parts? The schedule coordination around the slot swaps is the most unsettling for me. Who cares about codeshares/interlines/and reciprocal benefits.