Note: I’m moving my Thursday post up to Wednesday this week, just because I really want to talk about this and don’t feel like waiting.
The press release simply says that American and JetBlue are “advancing” their strategic alliance. There’s the obligatory quote to fluff now-Senate Majority Leader Chuck Schumer’s ego, and a few vagaries about what’s coming. At first glance, you might just ignore this, but the text of the release woefully understates exactly what’s happening here. American and JetBlue have quietly been granted the authority to coordinate schedules in New York and Boston. This is a big deal.
It’s the very last paragraph of the release that holds the real substance here.
… DOT has agreed to terminate its review of the alliance in exchange for a series of commitments to ensure the alliance delivers consumers benefits without harming competition. These include growth commitments to ensure capacity expansion, slot divestitures at JFK and at Washington, D.C.’s Reagan National Airport (DCA), and antitrust compliance measures.
I spoke with American’s Chief Revenue Officer Vasu Raja yesterday to get a better understanding of what exactly this means. It turns out, there is a public document that outlines the agreement with the Department of Transportation. This is a worthwhile read.
American and JetBlue will be able to coordinate their schedules in New York and Boston without fear of anti-trust concerns. That means they can work together to re-time flights to more broadly serve a market. (Vasu gave a hypothetical example of Austin – JFK where they could now spread their flights out instead of sitting on top of each other.) They can also trade slots freely between each other to maximize the value. For example, American has already talked about wanting to have more slots in the late afternoon at JFK so it can operate more long-haul flying at peak times. Conversely, JetBlue will be able to do more at LaGuardia with American’s slots.
I was talking about this with someone, and the last time either of us could remember this kind of coordination being allowed domestically was Hawaiian and Aloha back in 2001. (And to be fair, he remembered that. I didn’t.) That was 20 years ago, so this doesn’t happen often.
This is not a fully immunized joint venture or anything like that. The airlines are not allowed to coordinate on pricing at all. Nor are they going to be able to coordinate on schedules anywhere outside New York and Boston. Further, DOT is requiring that the airlines put together strict protocols that DOT will approve to make sure that they abide by this.
Why is this being allowed at all? Apparently, DOT likes the idea of a combined American/JetBlue providing real competition to Delta and United in the New York area. After all, the big airports are either slot-controlled or pretty full, so there isn’t really a way to organically create a true third competitor. Cooperation is the way to make that happen, but how can DOT make sure the airlines actually follow through instead of just stomping on competition?
It all comes down to slot divestitures. Right off the bat, American will divest 4 slot pairs at New York/JFK and 4 at Washington/National. JetBlue will divest 3 at JFK and 2 at National. Wait, National? This doesn’t even cover that, right? Sure, but that’s a constrained airport where DOT could hold sway over the largest slot-holder. I should point out that the National slots actually just have to be given up on leases to other airlines. So, if the partnership ends, American and JetBlue can get them back either 5 years from now or 6 months after the agreement ends, whichever comes later.
Interestingly, nothing at LaGuardia has to be given up, but there’s a reason for that. Let’s look at the slot-holding data at each of those airports.
Percent of Slots Operated by Airline – Summer 2019
At National, JetBlue and American combined have 60 percent of the slots. At JFK, they have 40 percent — 43 percent if you include American’s joint venture partners. But at LaGuardia, they only control 32 percent. I’m assuming that was the reason that LaGuardia divestment wasn’t forced on them there.
Now, here’s where it gets interesting. DOT has put in an incentive for the airlines to actually improve utilization of the slots they have today. DOT wants more seats flying, so they created a formula. As I understand it, this is how it’ll work.
- Take the number of seats that operated to/from LaGuardia for each airline in 2019. Using Cirium’s T100 data, I get 10,218,647 on American and 1,589,824 on JetBlue.
- Add the number of seats JetBlue flew to/from JFK in 2019 (17,280,281) and add the number of seats American flew from JFK in 2018 (8,496,871). (DOT clearly didn’t like American’s 10 percent drop in seats from 2018 to 2019 so it made them use 2018.)
- Take the number of divested slots at JFK (14), multiply that by 365 days, 72 seats on average, and then by 80 percent slot utilization and you get 294,336.
- Total that up and you get 37,291,287. That should be the baseline that is used for future evaluation.
Now, using that baseline, the combined airlines need to operate 105 percent of that number in 2022. In 2023, that goes up to 110 percent. By 2025 that goes to 115 percent. (Note: The increases in percentages get pushed back one year if the total flights across all airlines at JFK and LaGuardia fail to top 75 percent of 2019 levels in 2019. Call it COVID insurance.) If they don’t meet those numbers, they’ll have to divest up to an additional 10 slots. There’s a formula for how many slots get divested, but I think we’ve had enough math for today. You can read the doc if you want details.
Don’t think that DOT hasn’t thought about these airlines getting sneaky. American’s long-haul capacity growth only counts if it’s growth above and beyond the total operated by American and its joint venture partners. So, let’s say American added 100,000 seats but it offset that by having British Airways pull back 100,000 seats. Too bad. That counts as no increase. Smart move by DOT. Further, JetBlue’s Transatlantic flying, when it begins, will be excluded from capacity calculations, because it’s not part of the agreement.
The upshot of all this is that DOT wants those slots to be used better than they’ve been used. Instead of having all those 50-seaters buzzing around LaGuardia, preventing others from coming in, this will create incentive for American to use more 70/76-seaters. (It promises to have First Class on all flights by the end of this year.) Even beyond that, it can have JetBlue operate flights with even larger gauge. And with American adding more long-haul flights — it is still planning on Tel Aviv and Athens — that further creates more seats buzzing in and out of these constrained airports. Mission accomplished.
With these two airlines working together, they are making a bet that they can successfully compete with Delta and United. Whether that’s true or not remains to be seen, but there is a great deal of flexibility here. Think about it this way. JetBlue has really struggled in some of the business markets it serves, especially those in the middle of the country. It’s suspending Minneapolis/St Paul from JFK until April, for example while American usually flies it twice a day from LaGuardia. Nobody is doing well with that service.
With JetBlue’s general value in New York plus American’s corporate accounts that are presumably keeping this route flying at all, you can imagine a world where American can put more frequency on 76-seaters during the week from LaGuardia, becoming more attractive to a business traveler. Then on the weekends, JetBlue could fly more leisure-focused, larger airplanes less often from LaGuardia using an American slot. Slot usage can swing by day here.
I have no knowledge about specific plans for this market, but that kind of flexibility makes for some really compelling possibilities. It takes solid execution and planning, but with schedule coordination capability, all of this stuff is now on the table.
One thing that still remains up in the air is just exactly what the softer side will look like. How will transfer at JFK work between terminals? What will earning and burning of miles look like? How will elite benefits be given? There are many things that need to be worked out to ensure that schedule coordination actually pays off.
One thing I was told is that the earning of frequent flier miles will be mostly limited to flights to/from New York and Boston. That means that if JetBlue was hoping to get AAdvantage members onboard its new Miami flights to LA… good luck. This is really being designed as New York and Boston-focused. The key to it all working, however, is making elites on each airline feel like there is no penalty if they fly on the other airline to, from, or through those cities.
With the ability to coordinate schedules, JetBlue and American have a chance of making this work. It’s far from guaranteed, especially since the two airlines are supposed to walk this fine line of cooperating in some areas and fiercely competing in others. That’s not easy. But the fact that it was able to get DOT blessing to work more closely together in the Northeast means the chances of success have improved.