2

Free stories left to read

Airline Weekly subscribers get unlimited access to daily news and weekly issues.

What’s Next for American and JetBlue After Court Rejects Alliance

May 22nd, 2023 at 10:21 AM EDT

The controversial northeast alliance between American Airlines and JetBlue Airways, dubbed a “pseudo-merger” by some, is no more. Well, in 30 days time and pending a possible appeal.

U.S. Court for the District of Massachusetts Judge Leo Sorokin gave the U.S. Justice Department a big win Friday and ordered the airlines to unwind their alliance, known as the NEA, within a month. He found that American and JetBlue, by entering into what is essentially a domestic joint venture, hurt consumers and eliminated competition from the Boston and New York markets.

“A hallmark of a free market is the incentive to fight for revenue and customers against one’s direct competitors,” Sorokin wrote. “As between American and JetBlue, that incentive is eliminated by the NEA.”

Attorney General Merrick Garland called the ruling “a win for Americans who rely on competition between airlines to travel affordably.”

An American spokesperson called the ruling “incorrect,” and described the alliance as “anything but anticompetitive.” And a JetBlue spokesperson said they were “disappointed” in the decision.

American and JetBlue unveiled their alliance in July 2020 amid the depths of the Covid-19 pandemic. The unprecedented pact for two U.S. domestic carriers allowed them to coordinate schedules and share revenues in Boston and New York where they both committed to grow. JetBlue essentially became a shorter-haul feeder for American in those markets, while the latter expanded its international longhaul footprint in both cities. The alliance was approved with few conditions in the waning days of the Trump administration in January 2021.

The DOJ, under the Biden administration, nearly immediately took a new look at the pact and sued to block it that September.

A Weakened Maverick?

“By aligning its interests with [American], JetBlue has sacrificed a degree of its independence and weakened its status as an important ‘maverick’ competitor in the industry,” Sorokin wrote in his decision.

For example, Sorokin cited separate decisions by both the U.S. Department of Transportation and UK’s Competition Markets Authority in deeming JetBlue ineligible for certain airport slots as a result of its American partnership. The DOT awarded 16 “runway timings” at Newark to Spirit Airlines after deeming JetBlue ineligible. And the CMA came to the same conclusion regarding London Heathrow slots divested by American and British Airways as a remedy for the transatlantic joint venture.

JetBlue leased slots from Qatar Airways to launch its flights to Heathrow that began in August 2021.

Wall Street analysts and many industry watchers had expected a ruling in favor of American and JetBlue. In January, J.P. Morgan analyst Jamie Baker wrote that he was “not impressed” by the government’s arguments in court. For example, the government’s arguments over concentration in New York focused on just two of the city’s airports — JFK and LaGuardia — whereas most regular New York City flyers would say the city has three main airports — including Newark — and price check flights across all three.

Sorokin, rather, took a much broader look at competition in his ruling. Citing the Sherman Act, he wrote that federal antitrust law was “not concerned with making individual competitors larger or more powerful. It aims to preserve the free functioning of markets and foster participation by a diverse array of competitors.” And American and JetBlue’s alliance effectively removed a competitor in Boston and New York.

TD Cowen and Raymond James analysts, in reports out Friday, similarly expressed surprise over the ruling. TD Cowen analyst Helane Becker said she believes the ruling could be appealed by American and JetBlue.

An American spokesperson said the carrier is “considering next steps.” A JetBlue spokesperson said it was “evaluating” next steps.

Implications for JetBlue-Spirit

The broader implications, however, are significant. JetBlue stands to lose the most without the alliance given the nearly 100 additional New York JFK and LaGuardia slots it leased from American, and the access to its larger competitor’s deep rolodex of corporate customers. American, for its part, would have to decide if it makes sense to resume all of the shorter, regional routes that it previously flew from New York with the slots it leased to JetBlue.

But the bigger question is what the ruling means for JetBlue’s pending merger with Spirit Airlines. The DOJ has already sued to block the combination with antitrust regulators arguing, again, that it would reduce competition and hurt consumers. JetBlue and Spirit, unsurprisingly, argue that it would benefit consumers by creating a stronger, larger airline.

“For JetBlue, the loss of earnings potential is partly offset by the likely improved odds of winning the lawsuit against the merger with Spirit, in our opinion, albeit we believe the DOJ will be further emboldened by this win,” Raymond James analyst Savanthi Syth wrote Friday.

Many believed that JetBlue’s best bargaining chip in the DOJ’s suit against its Spirit merger was the American alliance. JetBlue could, if the court upheld the pact, offer to give it up as part of a negotiated settlement with the regulator. That option is off the table now, though JetBlue’s argument that it needs Spirit to compete is truer today without American than it was before with the alliance. JetBlue risks returning to being the third largest airline by seats in northeastern U.S. — its most important region — rather than the largest when combined with American, according to Cirium Diio data.

The DOJ, for its part, has indicated that it views the JetBlue-Spirit deal as anti-competitive even without the American alliance. And officials have indicated that their concern is over competition or lack thereof on a route-by-route basis; something that cannot be remedied with slot or gate divestitures.

“We have an administration that we believe can be reasonably characterized as anti-M&A,” J.P. Morgan’s Baker wrote Monday. “In our minds, JetBlue needs some sort of an asset to be willing to trade away in order to curry regulatory favor. We felt the NEA was such an asset. Therefore, in the absence of the NEA, it is difficult for us to identify potential remedies that JetBlue can offer up.”

The JetBlue-Spirit merger case is scheduled to go to trial in October. JetBlue CEO Robin Hayes has said repeatedly that he intends to fight the DOJ in court.

For American, the unwinding of the northeast alliance is not good for the carrier’s competitive position in Boston or New York; it repeatedly cited losses in the latter prior to forming the alliance with JetBlue. However, it could be good for its operations outside of the two northeast markets. Sorokin noted in his ruling that the airline moved longhaul aircraft from Philadelphia to New York to support the partnership even when those new routes underperformed. No longer needing to fly additional longhaul services from New York could allow American to rebuild its Philadelphia hub where capacity remains down nearly a quarter from before the pandemic, Diio data show.

Up Next

The Airline Weekly Lounge Podcast

Airline Junk Fees Under Scrutiny

In this week’s episode, Gordon Smith and Jay Shabat are joined by Skift airlines reporter Meghna Maharishi to discuss why ancillary fees are coming under pressure from lawmakers in Washington.…

Special Offer: Choose From Quarterly or Annual Subscription Plans

2 of 3 free stories left to read

Already a subscriber? Login