American Airlines and JetBlue Airways have announced a Northeast alliance for 2020. Regulators are now closely monitoring this alliance.
DOJ sues American & JetBlue
The Department of Justice's antitrust division filed a lawsuit this week claiming that JetBlue and American have entered into an arrangement that is detrimental to competition. This alliance is alleged to threaten competition and lead to higher fares. This seems to be a reflection of the aggressive antitrust enforcement policies of the Biden administration.
This agreement was first announced by American Airlines and JetBlue in July 2020. It launched in the early 2021. This partnership:
American is looking to expand its long-haul network from New York. JetBlue will provide much of the feed, thanks to its network to and from JFK.
American and JetBlue had the to give up slots in New York City and Washington to get approval from the Department of Transportation.
Both airlines can coordinate their schedules within the framework of the partnership. However, they are not allowed to discuss pricing or fares.
American Airlines and JetBlue have both implemented reciprocal mileage earning. It is expected that the airlines will offer elite perks and redemptions for reciprocal miles later in the year.
American is making a bigger shift in its dependence on domestic partners. This new alliance is part a larger change. American is a partner with JetBlue on the East Coast and Alaska on the West Coast. As American develops a long-haul hub in Seattle, it also has a strong partnership with Alaska.
American Airlines has added long-haul flights from New York to its fleet
The lawsuit focuses on the American & JetBlue alliance
The 42-page lawsuit was filed at the United States District Court for the District of Massachusetts. It is fascinating reading, even if you aren't usually interested in this type of stuff. First, I enjoy the general sassiness of government lawyers, especially when they are writing something that will be widely readable. Let me briefly summarize the arguments of the DOJs.
American Airlines is the world's largest airline, and JetBlue is a disruptive low-cost carrier (is the DOJ advertising JetBlue? The two airlines entered into an unimaginable and anticompetitive agreement (is it really unprecedented? .
Here's the bottom line:
The rivals have quietly agreed under the so-called Northeast Alliance to share their revenue and coordinate which routes, when and who will fly them. They also agreed to coordinate what size planes they use for flights to and from four major airports, including Boston Logan International Airport, John F. Kennedy International Airport, John F. Kennedy International Airport, LaGuardia Airport, LaGuardia, Newark Liberty International Airport (Newark Liberty). American and JetBlue will consolidate their business operations at the four airports, which together account for nearly two-thirds of JetBlue's business. The Northeast Alliance will remove significant competition between American Airlines and JetBlue, which has resulted in lower fares and better service for customers traveling to and from these airports. The alliance will closely link JetBlue's fate to American's, which will reduce JetBlues incentive to compete in all markets across the nation. This action is brought by the United States and Plaintiff States to stop the harm to consumers of hundreds of millions of dollars if these two competitors are allowed to keep this modern-day version a nineteenth-century business trust.
Some quotes were made by airline CEOs in the lawsuit against them.
American CEO Doug Parker spoke out about the fact that there are fewer airlines and therefore fewer people trying to obtain the same number customers. He also stated that domestic consolidation is one of America's long-term projects.
Robin Hayes, JetBlue CEO, stated just months prior to forming this alliance with American that he believed mega-carriers were large enough and didn't believe it was in the interests of consumers or workers to allow them to grow. He also said that the only way for airlines to become more powerful is to reduce options, offer high fares, and provide poor service.
The most striking thing about the lawsuit is its faith in American management. It paints JetBlue as the victim.
American had promised to win BOS back before signing an agreement with JetBlue. This would have allowed American to add more routes and be more competitive with JetBlue. Instead, American will not compete in Boston.
A JetBlue network planning executive said that the trend of JetBlues 20-year history was easily stealing share away from AA and ultimately winning. The incentive to do so is no longer there.
American is aware that a merger with JetBlue would not be approved so American seeks out to co-opt JetBlue through unprecedented domestic alliances. American also seeks to align JetBlue's economic incentives with its own via a wide-ranging partnership based upon the same types of alliances American used to consolidate international airline travel.
JetBlue recognizes the dangers posed by Northeast business and warned its Board of Directors two months prior to the introduction of this alliance that it was being coopted by Connie [American] manipulation.
The Northeast Alliance provides American ways to reward JetBlue for complying with its wishes. If American isn't happy with JetBlue's behavior, the Northeast Alliance offers American tools to punish JetBlue or bring it down.
The alliance provides American executives with new opportunities to interact with JetBlue executives and offers them carrots as well as sticks to reward JetBlue for their actions.
JetBlue is the victim of this partnership
Are American and JetBlue partners bad for competition?
I will be the first one to admit that the airlines in the United States should be controlled and have too much freedom. Upon reading the lawsuit, I concluded that the American-JetBlue partnership was actually beneficial for competition. Why?
American is legally turning JFK into an international long-haul hub with new flights to Delhi and Tel Aviv. It's highly unlikely that American would launch these flights without JetBlue feed.
Many frequent flyers agree that the reciprocal redemption and earning of mileage, as well as elite perks, are all benefits for consumers.
American is currently a distant third in NYC. Delta has a megahub at JFK and United has one at EWR. This partnership allows American to compete more effectively with those airlines.
The airlines don't have the ability coordinate pricing. Instead, they work together on scheduling to make each other's networks more complementary. To be precise, all airlines indirect coordinate pricing between Los Angeles and San Francisco. Virtually all airlines offer $49 entry-level fares.
JetBlue's transatlantic flight offering will not be part of the Northeast agreement. JetBlue will operate there independently and won't be able coordinate with American.
These partnerships, according to me, are the best. Compared to a merger, consumers get upside. But you still have a competitor in the market
What does the lawsuit make me feel? Although there are some valid points, I believe the DOJ approaches this too idealistically than realistically. When it comes to its ability execute a strategy, the DOJ is giving American too much credit and treating JetBlue as if she were the victim.
American could build operations in New York and Boston without JetBlues assistance, leading to greater competition. You could theoretically agree with that, but do you think Americans management would be able execute this well? Have they been following the airline over the past decade?
Although competition between American Airlines and JetBlue is decreasing, it does allow them to compete more effectively against Delta and United. That is good for competition
American would not have grown internationally without JFK, so although this may not be a great deal for domestic competition I think it is good for international competition.
If JetBlue pulled the agreement, I don't think American has all the cards. Americans long-haul network out of JFK could be in serious trouble.
It seems too late. If the DOJ was concerned about competition, stopping mega-mergers over the past 15 years would have been a lot more than trying stop this alliance. Of course, these DOJ lawsuits at some level reflect who is in power, so I understand that it is not that easy.
JetBlue is not the victim in my eyes.
Bottom line
The Department of Justice has challenged the American & JetBlue strategic alliance for the Northeast. It was launched earlier in the year. This allows the two airlines to coordinate their schedules. American can turn JFK into an international hub for long-haul travel, while JetBlue provides the bulk of the feed.
According to the DOJ, the new alliance severely limits competition and eliminates the incentive for JetBlue and American to compete. The argument is that American is using JetBlue's advantages here and that JetBlue has no control.
I'm curious to see what happens.
What do you think of the DOJ's challenge to the American & JetBlue alliances? Is the alliance good or bad for consumers?
