The long-rumored court action is finally here. Months ago, The Wall Street Journal broke the news that the US Department of Justice (DOJ) was considering challenging the American and JetBlue so-called Northeast Alliance (NEA). Then last week, the rumors picked up steam. A Friday letter from Sen. Blumenthal (D-CT) to DOT condemning the approval process was just an appetizer before the lawsuit filed by DOJ in a Massachusetts court Tuesday. Though there are some valid concerns in the lawsuit, most seem to have already been addressed by DOT. And more importantly, I can help but wonder… why now?
The lawsuit is filled with bluster and accusations, including the frequent use of the word “unprecedented” (five times in the press release alone) which — despite the actual meaning of the word — is meant to suggest something sinister is happening. The negative overtones are everywhere, even saying that American CEO Doug Parker is referred to internally as the Godfather of consolidation.
The overall tone of the lawsuit is that American is this big bad monster that is going to ruin everything about JetBlue, an airline which DOJ seems to consider the greatest airline flying. DOJ lavishes praise on JetBlue as being a “uniquely disruptive low-cost airline.” It says “JetBlue’s reputation for lowering fares is so well known in the airline industry that it has earned a name: the ‘JetBlue Effect.'” No it hasn’t. The Southwest Effect? That’s absolutely a thing. But I’ve never heard anyone call it the JetBlue Effect except for JetBlue itself.
DOJ continues by noting that “JetBlue has challenged the major airlines… by offering lower fares and better service.” In DOJ’s mind, this is the David to American’s Goliath. That stodgy, old line way of thinking seems to have framed DOJ’s mindset, and the Department has twisted its “proof” to try and make its case.
A Questionable Definition of Anti-Competitive
Broadly, the lawsuit seems to be lacking much substance. There are plenty of wild accusations — including a tremendous number of barbs being thrown at international joint ventures, so that’s a warning for the future — but they don’t seem grounded in reality. The ones that even remotely ring true seem to fail to grasp industry dynamics.
If we get beyond this determination that American is evil and JetBlue is great, what is really being argued here is that competition will be drastically reduced. To prove this point, DOJ turns to its favorite metric, HHI. This is something that usually gets used for mergers, and it seems unclear to me why DOJ can just use its merger template and apply it here, but apparently that is the plan.
HHI squares the market share of all airlines in a market, with American and JetBlue as separate carriers and then again as one carrier (using full year 2019). It then adds those numbers together. Anything over 2,500 is highly concentrated and an increase of 200 or more is considered significant. Apparently DOJ didn’t think it looked bad enough with a normal review, so it opted to arbitrarily decide that Newark along with its United hub aren’t really competitive options for domestic travel. I’m pretty sure millions of people in Manhattan, Staten Island, and parts of Brooklyn would disagree.
Even after eliminating Newark, DOJ could still only find 17 markets of concern from New York, and every single one of those is also served by Delta, so it wouldn’t turn into a monopoly even if American and JetBlue could coordinate on price, which they can’t. Further, of the 17, ten of them have service from another airline in addition to Delta.
This wasn’t just limited to New York, of course. In Boston, DOJ identified 11 routes, but 7 of those have competition from at least one other airline (or train in the case of New York). The remaining four — Charlotte, Phoenix, Rochester, Syracuse — do not have any others but the airlines volunteered to remove them along with Boston – Dallas/Fort Worth and Philly from the NEA as a concession to alleviate the concern.
DOJ also gets into connecting markets that will be impacted, but that’s just madness. JetBlue connects very little traffic on its own aircraft, and it doesn’t price low in order to get connections. Bringing these two together will not do harm in the connecting world, and in fact, it will most likely be positive. This is where I find myself so confused.
So Far, Positive Impacts Abound
What’s unique about this lawsuit is that the NEA is not being challenged in advance of anything being done. It has already been in place, and so far, everything we’ve seen has been positive. Here’s a rundown of just some of the consumer benefits we’ve seen:
- American upgauged all regional flying in New York to use two-cabin airplanes with more seats than the old single-cabin 50 seaters.
- American has launched long-haul flights from New York to Athens, Delhi, Santiago, and Tel Aviv.
- American has added shorter-haul flights from New York to Bogotá, Cali, Kalispell, Kansas City, Key West, Medellín, Myrtle Beach, Oklahoma City, Omaha, Orange County, Pensacola, Providenciales, Rapid City, Savannah, and St Lucia.
- American will launch service from Boston to Asheville, Columbus (OH), Guatemala City, Jackson Hole, Traverse City, and Wilmington (NC).
- JetBlue will add New York to Boise, Charleston (SC), Denver, Kalispell, Kansas City, Key West Milwaukee, and Puerto Vallarta along with a slew of new Newark destinations.
This doesn’t include all the loyalty benefits. I’ve written before about how American is an also-ran in New York while JetBlue is a leisure airline that just touches pockets of business (transcon, London). Alone they cannot compete for all business the way that United can with its Newark hub and Delta with its JFK and LaGuardia split hub. This combination changes that, but DOJ apparently doesn’t care about the actual, tangible changes. It’s just focused on all the “what ifs” that may come.
As the airlines say in their NEAflies.com website defending the agreement:
The DOJ also did not need to challenge the NEA now. The NEA is not a merger, and the DOJ is not operating under a deadline. The NEA is a contractual collaboration that could be unwound if, unlikely as it seems, it produced anticompetitive effects.
DOJ’s concern about big, bad American having undue influence over delicate flower JetBlue seems misguided. The thought is that because of American’s overall size advantage (despite JetBlue dwarfing American in these particular markets) plus the high level of overlap (70% of JetBlue’s routes are under this alliance) American can make JetBlue do things it doesn’t want to do.
The idea of American having too much influence is something that was a real threat for JetBlue to consider, according to the lawsuit:
…before entering the Northeast Alliance, JetBlue warned its Board of Directors that the Northeast Alliance created a risk of JetBlue being “co-opted by Connie [American] manipulation” and noted that potential ways to alleviate this risk might help preserve only some level of JetBlue’s independence.
Ah yes, gotta love code names. If American was Connie, well, then we know what JetBlue must have been….
You thought I would have gone with Electra instead of two notorious criminals? But I digress.
The point is that JetBlue had these concerns, but it had identified ways to alleviate the risk. What this complaint doesn’t say is whether JetBlue implemented those or not, but it would seem like negligence if they did not.
A Slot Question That Has Already Been Resolved
DOJ really hammers home this concern with the idea that American can give JetBlue slots if it is pleased with the airline and take them away if it’s displeased, acting like a true puppet master. That’s a great way to ruin a partnership, but it’s also not allowed. Remember, DOT and the airlines came to a settlement which allowed the NEA to move forward. In section III. C. of that agreement, it says:
- American and JetBlue will be prohibited from withdrawing, reducing or degrading the provision of slots and gates in response to, or to influence, the other’s competitive behavior, including but not limited to its pricing, within or outside of the geographies covered by the NEA.
- With respect to slots specifically, the NEA will be amended so that slots will be leased between American and JetBlue for a minimum of two IATA seasons [Ed note: that’s about a year], unless the slot lease is for seasonal flying only.
DOT already thought through this concern and resolved it to its satisfaction. If American is stupid enough to try to retaliate by withholding slots — which seems incredibly unlikely — then the government should and could go after the airline since it would clearly violate the agreement. DOJ knows this clause exists, but it doesn’t care. It really doesn’t seem to have high regard for anything DOT did here, trashing the agreement it negotiated with the airlines.
There will be much to say on this in the coming weeks, but this doesn’t actually appear to be a “just fork over some slots and we’ll call it a day” kind of thing as I originally thought. DOJ seems like it really wants to put the brakes on this alliance for good, even though the benefits have all been positive so far. This isn’t a merger. If there is harm, this can easily be dissolved, but so far, it seems like consumers have benefited and that seems like it should be the ultimate goal.