U.S. Sues to Block American-JetBlue Alliance

Edward Russell

September 27th, 2021

The Justice Department (DOJ) on September 21 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 last week. “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.) earlier this month 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.

Madhu Unnikrishnan and Edward Russell

U.S. Bookings Pop as Entry Restrictions Ease

British Airways, Latam Airlines Group, Lufthansa, Swiss and Virgin Atlantic are among the growing number of carriers seeing a surge in U.S. bookings since the Biden administration said on September 20 that it would ease entry restrictions for vaccinated travelers from November.

Latam was one to report an eye-popping number: Bookings for flights between Brazil and the U.S. jumped 350 percent in the 24 hours after the announcement compared with the day before. Although the carrier did not provide a base off of which the jump occurred, the rapid rise is a confirmation of the “pent-up demand” for air travel that airline industry leaders have said lies in wait for restrictions to fall and borders to open. Latam operates Miami and New York John F. Kennedy flights from its São Paulo Guarulhos hub, and said the reopening could move up its resumption of Boston and Orlando flights.

Most eyes, however, are focused on the return of European holidaygoers who have effectively been blocked from the U.S. since March 2020. British Airways and Virgin Atlantic both said they saw triple digit booking increases — Virgin up to 600 percent — overnight after the announcement, while Lufthansa reported a more sedate 40 percent increase and Swiss a “strong increase.”

“It was a pleasant shock to get that news,” Air France-KLM Group CEO Ben Smith said Wednesday at the Skift Global Forum in New York. While he said it was too early to forecast any change in demand, Smith noted that he expects the year-end holidays will be strong for the group.

Although the reopening has improved many carriers’ year-end holiday outlook, the real focus is on the peak summer travel season next year. That’s when many Europeans are expected to pack their bags for — in many cases — delayed holidays to the U.S., whether it be sightseeing, visiting friends and relatives, or maybe just a long-planned trip to a Disney park.

“By the summer, we expect another jailbreak, and strong traffic on the north Atlantic,” wrote Cowen & Co. analyst Helane Becker on September 21. She expects the major U.S. carriers American Airlines, Delta Air Lines and United Airlines will be major beneficiaries of that boom.

American CEO Doug Parker, speaking at a Washington Post Live event on September 21, said the easing of restrictions was “good news,” and that it would “absolutely will drive bookings.” He did not provide any data on bookings since the announcement.

Returning travelers mean more flights will come back as well. While few carriers have finalized their summer 2022 schedules, there is a lot of room to come up from 2021 levels. Transatlantic capacity between Europe and the U.S. was down nearly 64 percent from June to August compared 2019, according to Cirium schedules. Comparatively, capacity within Europe was down 38 percent and within the U.S. just 9 percent over the same period.

Swiss is among the first airlines to set a return date for one of its suspended U.S. routes since the announcement. Flights between Geneva and New York JFK will return in mid-December, just in time to pick up some of that pent-up holiday travel traffic.

Edward Russell

European Recovery Accelerates as U.S. Flounders

Lufthansa and EasyJet are looking keenly to the fall and winter as the European travel recovery seems to have found firm footing. This is a turning of the tables compared with their U.S. peers, which almost universally have lowered expectations for the fall after the Delta variant took a big bite out of their previously rosy outlooks.

“Current bookings indicate a sustained demand recovery,” the Lufthansa Group said in a statement on a new €2.1 billion ($2.5 billion) capital increase on September 19. As such, the group — including its namesake carrier as well as Austrian Airlines, Brussels AirlinesEurowings and Swiss — expects positive cash flow and an operating profit in the third quarter.

EasyJet said on September 18 that there was a “surge” in UK bookings for travel this fall and winter after the UK government removed pre-departure testing requirements for fully vaccinated travelers returning to the country, beginning October 4. The airline did not provide a base off of which bookings jumped. The UK represents half of EasyJet’s scheduled capacity in September, according to Cirium data.

And earlier in September, Ryanair said strong pent-up demand was translating to stronger-than-expected bookings in October and through the fall.

Although no carrier is claiming that European travel has emerged from the crisis, the outlooks from three of the continent’s largest carriers show growing optimism at a time when previously buoyant U.S. carriers are toning down the positive rhetoric. Earlier in September, most U.S. carriers — including Alaska Airlines, American Airlines, Delta Air Lines and United Airlines — pulled back on fall outlooks citing the negative impact of the Covid-19 Delta variant. United, as well as Southwest Airlines, were also among those that cited a slowdown to revise back expectations of a third-quarter profit.

“There’s still really robust sort of underlying demand in terms of leisure travel and a desire for business travel to pick back up,” Alaska Chief Financial Officer Shane Tackett said on September 9. “We’ve just got to get through this wave and hope that there’s not another one — or hope that we’ve all adopted [a] view of life where we’ve got the vaccine and we’re moving on.”

Pent-up demand or not, the U.S. travel outlook for the fall looks moribund as airlines await a delayed business travel recovery and the year-end spike in holiday leisure flyers.

It’s a very different story in Europe. Corporate travelers are returning — whereas their numbers have plateaued in the U.S. — supporting Lufthansa’s plans to resume more flights. In addition, the group anticipates U.S. restrictions on European travelers to ease by year-end allowing it to resume more transatlantic flights, which are a key moneymaker for Lufthansa. All of this comes as the group filled more seats while operating more flights than planned in August, and expects the same in September.

The growing divergence comes as European vaccination rates have surpassed those in the U.S. In addition, EU citizens are increasingly supportive of national proof-of-vaccination mandates for many indoor activities. These added restrictions are likely helping fuel the travel recovery, especially among corporations who must weigh their duty of care against the business upsides of sending roadwarriors back out on the road.

This positive picture is paying off for Europe’s carriers. Lufthansa’s capital increase will allow it to repay all of the German state aid that it received in 2020 by year-end, which is earlier than previously planned. The funding plan comes on the heels of a £1.2 billion ($1.6 billion) rights issue from EasyJet that proceeds from which will be used to fund growth and fortify the discounters position in key European airports. And J.P. Morgan Analyst David Perry wrote on September 17 that there is increasing pressure on IAG for a second rights issue after a £2.5 billion one in September 2020.

Lufthansa will use proceeds from its capital increase to repay the €1.5 billion Silent Participation I in German stabilization funds, and for working capital. It plans to pay off the remaining €1 billion Silent Participation II by year-end eliminating all remaining state obligations from its balance sheet.

“We have always made it clear that we will only retain the stabilization package for as long as it is necessary,” said Carsten Spohr, CEO of Lufthansa Group, in a statement. “We can now fully focus on the further transformation of the Lufthansa Group.”

That transformation includes achieving €3.5 billion in structural cost savings by 2024 to become a more efficient carrier. The group has achieved roughly €2.1 billion of these savings, including €1.1 billion from workforce reductions alone. Lufthansa is also streamlining its fleet by replacing most four-engine jets — including the Airbus A380 superjumbo — with more efficient two-engine models like the Airbus A350, and consolidating its affiliate carriers.

Edward Russell

In Other News

  • A U.S. bankruptcy court has granted Aeromexico another extension to the exclusive period for it to file a Chapter 11 reorganization plan. The airline now has until October 8 but said last week that it intends to submit its plan by around September 30. Of the three big Latin American carrier bankruptcies during the crisis, only Avianca has filed a plan to date.
  • U.S. regional Republic Airways will build a new headquarters and training center in the Indianapolis suburb of Carmel, Ind. The new facility will consolidate the carrier’s scattered training operations from Cincinnati, St. Louis and Indianapolis into one location. Republic operates more than 220 Embraer E-Jets under contract for American Airlines, Delta Air Lines and United Airlines. In other U.S. regional carrier news, Mesa named Torque Zubeck its chief financial officer.
  • Things remain pretty dire for Cathay Pacific, although the airline remains optimistic that the year could end well. Cathay reported its August traffic was down 92 percent, compared with 2019 levels, and its capacity was down 87 percent. The carrier likes the trend, though: It flew just 135,000 passengers in the month, a 278 percent increase from last year, but still 95 percent down from 2019. Given continuing travel restrictions, Cathay says it will keep its August capacity level through the end of the year.

    Cargo was an entirely different picture for the Hong Kong-based airline. Cathay said that although August usually is a slow month for cargo, it wasn’t this year. Cargo traffic rose 9 percent from July and the carrier is operating a peak-season cargo schedule. Cathay is adding two more Boeing 777 preighters to its cargo fleet. “For cargo, market indicators suggest a strong peak season driven by the need for inventory replenishment, against a backdrop of ongoing air cargo capacity constraints and disruption to supply chains due to seaport congestion,” said Chief Commercial Officer Ronald Lam.
  • Speaking of cargo, FedEx, which had been reporting record quarter after record quarter, took a step back. Although demand remains high, the company is struggling with hiring and retaining staff and competing with other companies for talent. FedEx said labor troubles bumped its costs up by $450 million and resulted in network inefficiencies. As an example, the company said 600,000 packages a day are rerouted due to staffing shortages. Air cargo remains strong, even though capacity is down 10 percent from before the pandemic. International capacity remains “scarce,” President Rajesh Subramaniam said. FedEx reported net income of $1.1 billion on revenues of $22 billion, generating an operating margin of 6.4 percent in its most recent quarter.

Edward Russell & Madhu Unnikrishnan

Edward Russell

September 27th, 2021