Airline Weekly

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Justice Department Sues American, JetBlue Over Northeast Alliance

Madhu Unnikrishnan
September 21st, 2021 at 5:08 PM EDT

Photo credit: American and JetBlue can begin implementing their proposed northeast alliance following regulatory sign off. Wikimedia / Eric Salard

The Justice Department (DOJ) on Tuesday challenged American Airlines’ and JetBlue Airways’ Northeast Alliance in federal court. The suit filed in federal district court for the District of Massachusetts calls into question the alliance and refutes the airlines’ claims that the deal would increase competition along the Eastern Seaboard.

In its suit, DOJ claims the two airlines will “effectively merge their operations” at Boston, New York John F. Kennedy International Airport, LaGuardia, and Newark Liberty. It will “eliminate significant competition between American and JetBlue that has led to lower fares and higher quality service for consumers traveling to and from these airports,” DOJ said.

“The United States and plaintiff states bring this action to prevent the hundreds of millions of dollars in harm to consumers that will occur if these two rivals are permitted to maintain this modern-day version of a nineteenth century business trust.”

Arizona, California, D.C., Florida, Massachusetts, Pennsylvania, and Virginia joined the federal government in the suit.

In its complaint, DOJ hinted that it thinks airline consolidation has gone too far, boding ill for future mergers in the industry if even this alliance comes under scrutiny. But the agency also noted that consolidation has long been American’s strategy. “As American’s current CEO explained in 2012: ‘With fewer airlines, there are fewer of us trying to get the same number of customers,” DOJ said, referring to Doug Parker speaking just before American merged with US Airways.

In fact, DOJ points out that JetBlue itself once opposed consolidation and that the carrier has increased competition, particularly in Boston, and has driven fares down. “By effectively absorbing JetBlue’s operations in Boston and New York City, American can reduce investments not just in those cities, but also in other parts of its network where it otherwise would maintain or add service,” the complaint said. “As a consequence, consumers across the country will have fewer options and pay higher fares.”

“Well they are wrong, and we will prove it,” Parker said on the expected suit’s anti-competitive allegations during a Washington Post Live event earlier on Tuesday. “It is entirely pro-competitive.”

JetBlue CEO Robin Hayes went further in defending the alliance in a lengthy memo to staff on Thursday. While similarly touting the partnership’s competitive benefits, he went a step further and blamed the DOJ for hampering JetBlue’s ability to expand in the Boston and New York areas, citing incumbent carriers gate and slot portfolios at the highly sought-after airports. Those “obstacles to growth” led JetBlue into the alliance with American, Hayes said.

“JetBlue’s commitment to competition and low fares remains as strong as ever,” he said. “This is not at all like a merger with American – we have two different business models and are not working together on pricing.”

Both American and JetBlue touted growth at the four northeastern airports as examples of the benefits for their alliance. American has launched new nonstops between JFK and Athens, Delhi and Tel Aviv under the pact, while the JetBlue has — or will — add nine new destinations and 32 new routes to its map. JetBlue has even delayed the retirement of 30 Embraer E190s to operate all of its new alliance flights.

The suit is the latest salvo in an intensifying battle over the Northeast Alliance. Sen. Richard Blumenthal (D-Conn.) last week in a letter to Transportation Secretary Peter Buttigieg raised concerns about the alliance. The alliance, approved in the waning days of the Trump administration by then-Transportation Secretary Elaine Chao, falls afoul of President Joseph Biden’s push to make the U.S. economy more competitive.”

“The Trump [Transportation Department] decision to terminate its informal review of the joint venture between JetBlue and American was pushed through with only 10 days remaining in the administration, without adequately airing the competitive issues raised by the agreement not to compete between two major airlines,” Blumenthal said. “What is more, in a highly unusual move, the Department did not afford the public and other industry participants any opportunity to comment on the competitive implications of this agreement.”

Biden’s executive order specifically notes that four airlines control more than two-thirds of the U.S. airline market. “I am concerned that the Northeast Alliance is exactly the kind of arrangement that has led us to this point and that will lead us to even further consolidation in an already concentrated industry,” Blumenthal said in his letter. “Under the circumstances, this arrangement deserves more scrutiny.”

DOJ’s suit is the first concrete action out of the review of the partnership that it launched this spring. The review followed rumors that the Biden Justice Department was increasingly uncomfortable with the deal. But for DOJ to order the Department of Transportation (DOT) to undo a deal would have been a highly unusual step. Instead, DOJ is challenging the alliance in federal court.

The Northeast Alliance goes beyond a codeshare and allows the two airlines to coordinate schedules — but not fares. Competitors, like Spirt Airlines, have criticized the deal as a “pseudo-merger.” Critics say the alliance would block out access at slot-restricted airports, like New York LaGuardia, essentially create a duopoly with Delta Air Lines there and in Boston, and would allow American to dominate Washington Reagan National Airport.

The DOT required American and JetBlue to divest at least seven slot pairs at JFK and six pairs at Washington National airports as a condition of its approval. These slots would become available to other carriers deemed “eligible” by the regulator.

But proponents of the alliance call it a “smart” strategy that address both American’s and JetBlue’s shortcomings in a highly competitive market. “I think this is a brilliant partnership,” Saikat Chaudhuri, a director at UC Berkeley’s Haas School of Business and College of Engineering who studies the airline industry, told Airline Weekly earlier this year.

American’s other alliance, with Alaska Airlines, has not come under as much industry and regulatory scrutiny. But it, unlike the Northeast Alliance, is a more traditional codeshare deal. And, with Alaska’s joining the global Oneworld alliance earlier this year, the benefits of the American-Alaska deal look more aligned with a traditional alliance.

Additional reporting by Edward Russell.

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