Ben Goldstein The Northeast Alliance between American and JetBlue is at risk after the Biden administration sued to block it on antitrust grounds.
Ben Goldstein
JetBlue says a lack of available slots leaves it with limited options for growth in New York. Credit: Joepriesaviation.net
Less than a year after the outgoing Trump administration approved the Northeast Alliance between American Airlines and JetBlue Airways, the U.S. Justice Department is seeking to block it. Given the mostly positive record of consumer benefits produced thus far by the partnership, though, industry analysts and observers say the government will face an uphill battle trying to unwind it.
Under the Northeast Alliance (NEA), which encompasses Boston Logan International Airport (BOS) and three airports in the New York City area—John F. Kennedy International (JFK), LaGuardia Airport (LGA) and Newark Liberty International Airport—the two carriers were permitted to pool revenues and coordinate schedules but were barred from coordinating on pricing.
American and JetBlue have described the arrangement as a means to create a viable third competitor to Delta Air Lines and United Airlines in Boston and New York City.
“In New York’s airports, there has been quite literally no room for us to add flights” JetBlue CEO Robin Hayes said in a recent update on the state of the NEA. “There are no slots available at LGA and JFK, and it remains extremely difficult to grow in Newark given gate and space constraints. These obstacles to growth led us to an unlikely alliance with American Airlines which, even as the world’s largest carrier, also has not been able to compete with Delta and United’s dominance in the Northeast.”
Before approving the deal, the Transportation Department put a series of safeguards in place to prevent anticompetitive behavior. The partners relinquished seven slot pairs at JFK and six at Ronald Reagan Washington National Airport. They also committed to growing their post-pandemic capacity in New York according to fixed annual targets or be subjected to additional slot divestitures.
The Biden administration, however, says those measures do not go far enough. In a complaint filed with the District Court of Massachusetts, the Justice Department—joined by six states and the District of Columbia—alleges that the NEA will “effectively merge” the two airlines’ operations in the Northeast. This will “eliminate significant competition between American and JetBlue that has led to lower fares and higher-quality service for consumers traveling to and from those airports,” the filing states.
Throughout the complaint, the Justice Department argues that American is using the NEA to co-opt JetBlue through “an unprecedented domestic alliance” conceived as a workaround to an outright merger. By consolidating its operations with JetBlue, the department says American is able to “effectively absorb” the New York-based carrier’s Boston and New York operations, allowing it to reduce investment in those cities and forgo independent growth that would have benefitted consumers.
The government says American’s move to integrate with JetBlue fits into a historical pattern of domestic consolidation pursued by the company and other legacy airlines. The Justice Department points out how American CEO Doug Parker presided over America West during its merger with US Airways in 2005 as well as the combined company’s merger with American in 2013. The department notes that 80% of commercial air travel in the U.S. is now controlled by the four largest airlines, up from 55% in 2000.
The Justice Department also asserts that the strategy pursued by the NEA resembles legacy airlines’ efforts to consolidate service in international markets through immunized joint ventures and global alliances. Those tie-ups have allowed airlines to engage in “extensive coordination and sharing of revenues,” the department says.
“American Airlines’ ‘alliance’ with JetBlue is, in fact, an unprecedented maneuver to further consolidate the industry,” U.S. Attorney General Merrick Garland said in a statement. “It would result in higher fares, fewer choices and lower-quality service if allowed to continue.
“The complaint filed today demonstrates the Justice Department’s commitment to ensuring economic opportunity and fairness by protecting consumers and competition,” Garland added.
Still, the civil lawsuit will be anything but an open-and-shut case. Industry-watchers and analysts are highly skeptical that the Justice Department will convince a court that allowing American and JetBlue to partner in two markets will substantially harm consumers.
“What I see is a partnership that can compete where it matters,” says Henry Harteveldt, a travel industry analyst with Atmosphere Research Group. “They can align on schedules and have the ability to work with reciprocal frequent-flyer program benefits but are not allowed to discuss or collaborate on pricing, and I think that is a critically important factor.”
Jefferies analyst Sheila Kahyaoglu writes in a research note that the NEA should not harm competition, although she does note “some overlap” at BOS—where the carriers’ alliance would control approximately half of all departures, compared with around 20% for Delta.
Kahyaoglu identified a series of synergies that will allow the two airlines to offer a more compelling product than either could alone. In New York, for example, American can provide JetBlue with long-haul reach, while JetBlue can feed short- and medium-haul traffic to American that it cannot generate on its own with existing slot constraints. American also brings in corporate customers that JetBlue has struggled to attract, and the two carriers can cooperate for more efficient slot use.
“Our initial read of the complaint, despite our team’s lack of expertise in antitrust law, is that the argument appears fairly weak,” Kahyaoglu writes. “We expect the NEA to continue to grow and help close American’s [unit revenue] deficit in the Northeast.”
In its complaint, the Justice Department argues vigorously that allowing the two airlines to partner will lead to service cuts and higher fares in the affected markets. But this prediction is undercut by the facts on the ground since the NEA took effect. The carriers have launched dozens of routes and ramped up frequencies, including American’s reinstated long-haul trips to Athens and Tel Aviv from JFK, which may not have been possible without the added feed from JetBlue.
Evaluating the impact on fares is somewhat more challenging due to the effect of the pandemic, which has reduced prices across the board. But there is no evidence so far that the airlines will raise fares.
“Each airline has added routes and capacity where they feel the need to, and that benefits the consumer,” Harteveldt says.
Nonetheless, even if it loses, the administration has clearly laid out its opposition to more domestic consolidation and presented a strong skepticism of international joint ventures.
“In my view, this is not as much about American and JetBlue as it is a virtual warning shot across the bows of the three largest network airlines—American, Delta and United—that they shouldn’t even think of asking for any more antitrust-immunized joint-venture partnerships with other airlines,” Harteveldt says. “I see this as a potential step that the [Justice Department] may take to investigate some of the existing [joint ventures] and possibly even attempt to dilute or dissolve them.”
