American Walks a Tightrope on Northeast Alliance Messaging, Now Plays Down Its Importance

American, JetBlue, JFK - New York/JFK, LGA - New York/La Guardia

Remember the Northeast Alliance (NEA) between American and JetBlue? Of course you do. It was going to create a strong third competitor in the northeast until a judge shot it down. After extolling the virtues of this unique partnership for years, American is now trying to reverse course and say it’s not all that important in the scheme of things. At the same time, it is still appealing the decision and saying that it still wants the NEA. This is a tap dance like no other as the airline tries to tell different groups what they all want to hear.

When the NEA was first launched, American readily admitted it had a problem in New York that it needed to fix, and JetBlue was the answer. As Chief Commercial Officer Vasu Raja said on the airline’s Q1 2021 earnings call, JetBlue was already delivering big numbers shortly after the partnership began.

So March was our first month in which we turned on the codeshare. We only had about three weeks’ worth of bookings. And at least for JetBlue on AA, that was only about 25 to 30 markets. But JetBlue has already become our largest global codeshare partner.

…we look at not just the total revenue production on us, but how much of that revenue is really incremental that is coming in higher fares than what we — what AA is organically booking or coming in periods where the flights were light. And we’re finding that somewhere between 30 and 40% of that is incremental…

This is exactly what American had hoped would happen. American felt it just couldn’t get big enough in New York on its own thanks to slot controls. Vasu explained the problem in an interview with Simple Flying in September 2021.

…figure American Airlines in a peak time has something in an order of magnitude of 100 slots in JFK. That’s not enough to really go and create an an international operation out of. Furthermore, those 100 slots are spaced throughout the day. It’s not like there’s a big chunk from two in the afternoon to seven at night where we have a ton of slots and can go fly everything, and make the airport go to sleep in the other times. So, we were never big enough there.

Why does it matter if American can’t get big enough? In that Simple Flying interview, Vasu continued:

Customers used to love us in New York because they love the transcon product on JFK-LA. But, if we couldn’t get them to Seattle or San Diego or Sacramento or Atlanta or any place like that, then they’re going to fly somebody who could. No matter how much they love the the transcon product, they would end up always going with the other guy. So, at best we were always somebody’s number two. We were never a number one carrier for any single customer who is there, unless that that customer only flew to Heathrow, DFW, and Los Angeles.

With JetBlue, American could cover all those bases for its AAdvantage loyalty program members. The revenue-sharing and network coordination meant American could remake its network, pushing slots to JetBlue at LaGuardia, upgauging regional flights to larger airplanes (and actually filling them), and adding significant long-haul flying. This was no small feat, and at least based on those early opinions from the airline itself, it was working.

By that summer, things were cooking nicely. To put some numbers around that, Vasu said this in the airline’s Q3 2021 earnings call.

For us, as we see it, in New York, historically, we might have been a 25% player. But we were competing for something which was actually like 10% to 15% of the available business travel market at large, not just the corporate market. And so — in large part because, though we had a really great product in Heathrow or in the transcon market, if we couldn’t get you very effectively to Toronto, at some point, customers, especially larger accounts or power travelers, business to our customers, just stop flying us. And now as we see it, we have the best network between AA and JetBlue.

…And when we get to compete for it, we see in New York whose RASMs instead of underperforming the system by 10% to 15% can perform in line with the system.

This wasn’t just something American talked about in the early days of the alliance either. It has had a consistent message about just how important the NEA is. Then the judge shot down the partnership and the message changed. Oh sure, the NEA was still important and should stand, but it’s not “material.”

Here’s what CFO Devon May had to say at the Wolfe Research 16th Annual Global Transportation & Industrials Conference as he tried to thread that needle and bridge the two messages.

And the NEA has been great for us in New York. It’s been great for our New York strategy overall. But just for perspective on the NEA and what it means to investors. New York is important to us. The NEA is very important to us. But New York is a pretty small fraction of our overall capacity. American Airlines runs a really significant network. We create a lot of O&Ds. And so yes, New York is important. But if you think about earnings, it is not a meaningful impact to our earnings.

Devon went on to explain, “so New York, excluding the flying we do to our other hubs and to our partner hubs, it’s about 5% of our total capacity.”

That’s some cherry-picking right there After all, the NEA isn’t just New York but also Boston. And I don’t see why you’d exclude flying to other hubs — including partner hubs — when JetBlue can still have a meaningful impact on how that flying performs. Maybe it’s not as significant of an impact, but Vasu had said that New York unit revenue would go from underperforming by 10 to 15 percent to being up at system average, so… let’s do some math.

If you look at Boston, JFK, LaGuardia, and Newark for the first half of 2023, Cirium data shows that nearly 15 percent of American’s available seat miles (ASMs) touched those cities. If American was able to improve performance to system average from a 10 to 15 point deficit, that should add more than a point to unit revenue to the system. That’s a lot, and you’d think it would be material. But maybe I’m overestimating.

Maybe Vasu’s comments were truly only referring to New York and not Boston. Maybe he was really only talking about New York-originating traffic and not the whole system. Maybe it is a lot less… but that whips us back to the other thought… why bother if it doesn’t notably impact the bottom line? Maybe it just hasn’t reached its potential yet, but all that bullish talk above suggests that it was performing as advertised.

CEO Robert Isom backed that up at Bernstein’s 39th Annual Strategic Decisions Conference 2023 a week after Devon’s comments. He echoed what Devon said but also noted “…we entered into [the NEA] for all the right reasons, and I think it was producing all the right benefits….”

Fast forward to the airline’s recent Q2 2023 earnings call where J.P. Morgan analyst Jamie Baker asked “why shouldn’t I assume New York reverts to being a meaningful margin drag from this point forward?”

Vasu tried to explain it away saying, “the circumstances that gave rise to the NEA have changed.” Specifically, two things are now different.

One, our slot holding didn’t match with demand. That is the majority of demand in New York was for short-haul day trip business markets. Our slot portfolio is better matched to mid-continental, transcontinental, and transatlantic markets. Well, that’s changed. Short-haul business demand hasn’t recovered to its historical level, but those other markets are much greater.

It wasn’t long ago that Vasu said it was important to serve markets like Atlanta, Sacramento, San Diego, Seattle. American served all of those via JetBlue. In fact, it pulled out of Atlanta so that JetBlue could fly it instead. With the exception of Atlanta, these are not short-haul day-trip types of markets that American seems to think no longer matter. It’s hard to see how American’s position has changed that much in New York just due to those shifting trends.

Even though I don’t put much stock in the first reason, the second one is really out there.

But also our expense base, especially in New York Kennedy has changed. Through co-locating partners and any number of fleet changes, our enplanement expenses in JFK are materially advantaged to what any other carrier is in New York.

Here Vasu is saying that Jamie shouldn’t worry about American’s margin in New York, because its expense base is lower and that will help. That may make American’s margin look better than it would have when expenses were higher, but in terms of the NEA itself, this is irrelevant. The margin would still be better with a JetBlue agreement that produced better revenue performance. Costs don’t change.

While these may help the northeast’s margin look less bad, it’s still going to well underperform where it could have been with JetBlue. Or will it? Vasu went on…

And so far, since the NEA has been announced, we’ve seen that. New enrollments in the Advantage program continue to rise. Credit card acquisitions continue to rise, spending continues to rise. So though this chapter is closed, another one might open, but we don’t expect any material change to our financial outlook.

Because of the NEA, American has attracted new AAdvantage members and credit cardholders, so that’s going to help American’s performance in New York. But isn’t the issue that without the kind of coverage that American had with JetBlue, it will have trouble retaining those cardholders? It’s better to have those cardholders than not, but the reason they weren’t cardholders before may be the reason they walk away again with JetBlue out of the picture.

Lastly, Vasu tries to downplay the important of the alliance in the opposite way in which he crowed about its success just two years ago.

Look, the NEA was a great outcome for customers who got to go and experience our product who weren’t there before. But actually, when you look at those international flights, roughly, as things have settled out and markets recover, roughly 35 to 40 points of the load factor that’s on them is actually being generated by international partners. Our partnership within the NEA was actually a very small amount of the onboard load factor that’s there.

With all of this, Vasu says of the airline, “we believe that we can go and really replace a lot of the demand, especially now that we’ve got such a larger New York City originating customer base than what we had before.”

It’s a tortured argument. It may be so that this isn’t going to be considered “material” for an airline that’s this large, but if the NEA was performing as hoped, math suggests it should have been. Maybe it was underperforming, or maybe American really is just bullish about its standalone position today compared to pre-pandemic. Either way, the loss of the NEA hurts. American’s comments just make it hard to find out exactly how much.

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22 comments on “American Walks a Tightrope on Northeast Alliance Messaging, Now Plays Down Its Importance

  1. Vasu is the king of cherry-picking data to fit his narrative. It’s why he has risen so quickly at the airline after their strongest analyst departed (Scott Kirby) who could see through that.

    AA’s RASM problem in New York can in part be attributed to flying 777’s on their international routes while competitors have smaller widebodies. They’re forced to fill all those extra seats with lower yielding passengers that drag down the financials. This is sort of alluded to in the slot timing comment where they aren’t able to create a large enough bank for European departures to grab better yielding connecting passengers outside their hubs.

  2. American merges with JetBlue. The NY airports are carved out for the US3. America doesn’t do infrastructure spend the way Europe does, and no new airport will ever be built for the region. Find a hedge fund or private equity partner to help close the deal with financing. JetBlue is too big but not big enough for NY. It runs a terrible operation, with delays. It chases leisure. It isn’t profitable enough given its size. The experiment has run its course. Put more efficiency into the NY market by ridding it of WN, F9, NK, etc…who don’t make enough of a dent to matter. Let the market be run by DL, UA, and AA. Consumers will be better off.

    1. Eh, the many NYC-area leisure travelers may disagree about being better off without WN, F9, NK, etc in the NYC market, especially if fares increase to the point where upper middle-class families in the NYC metro have to pay hundreds more for their annual “week at a warm beach” vacation.

    2. Two problems here:

      * If the DOJ sued to prevent the NEA, and is suing to prevent JetBlue from acquiring Spirit, there is no way in Hell, Norway, that they would let American acquire JetBlue.

      * How, exactly, would you “rid the NY market” of the smaller players? Are you proposing some sort of massive re-regulation of the industry? And how would removing airlines from the market improve competition?

      A duopoly or triopoly is inherently anti-competitive: we’re seeing this right now in Australia and Canada in the grocery industry, where profit margins have gone up because of an effective duopoly (Australia) or triopoly (Canada).

      It also makes no sense from an organizational perspective: most airlines use some variation of the hub-and-spoke model (even Southwest, though they don’t use the term “hub”.) This would leave New York as a “hub only” airport – there’s no reason why NY can’t be a spoke too.

      1. You are also about to witness this in the US Grocery industry, given the merger between Kroger and the Safeway / Albertson’s holding company has been approved, as Kroger wants to focus its attention on competing solely with Wal-Mart. For those communities that have no Wal-Mart (yes, there are still a few in the US), the population will see prices go up steadily since Kroger will have no real competition.

        I agree that there is no way that an American – JetBlue merger / takeover would ever get approved by the Justice Dept. And, it would likely not be good for consumers. The industry has already consolidated enough, and any additional takes out more consumer buying power.

        1. Well, the Kroger-Safeway/Alberton’s merger actually hasn’t been approved by the Justice Department. Many states are considering suing to block it and Justice hasn’t announced a decision yet. I think it’s almost certain they will sue to block it.

        2. I used to work for a supplier to grocery stores and was thinking about the grocery industry in the US as starting to become more oligopolistic as well. In industries known for low and/or volatile (such as groceries, airlines, trucking, & shipping) selling largely commoditized products, increasing a company’s size and share of the market is a classic way to help gain some pricing power and to (hopefully) drive costs down a little.

          There are still some solid regional players in the US grocery market (Publix & Meijer come to mind), but it’s tough to compete on price against Kroger or Walmart.

    3. There is zero chance that AA (or UA, or DL) will be allowed to merge with anyone. It’s a longshot that B6 will be allowed to merge with Spirit as it is.

      And even if they did allow it, there would be conditions – and divesting gates and slots at JFK/LGA would be a big one.

      1. Why do people keep bringing up divestments in jfk! NK has zero jfk slots, the acquisition would give B6 no net growth in jfk. They are already divesting lga slots and Boston gates and fll gates. This merger will go through. This doj case is garbage!

        1. I’m bringing up JFK to respond to the question of an AA/B6 merger. I don’t think the DOJ would ever approve it to begin with, but even if they did (for the sake of argument) they would absolutely require massive divestitures at JFK to start with.

          Meaning, if the goal of a merger would be to consolidate service at JFK, there is no way that would be allowed (via merger, anyway).

          But again, the idea of AA, UA, DL, or WN merging with *anyone* is done. It’s over. Not going to happen.

    4. Using that logic, why stop with DL, UA and AA? Afterall, AA has been handicapped in NYC for years. Give it all to DL & UA.

  3. Two thoughts come to mind. 1, “The fox & the grapes” & 2. imagine you meet someone that you think is super hot & after you date them for a while you find out they are a total schmuck. That is how American is trying to spin the Northeast alliance.

  4. Experience is showing me how this is failing. Before the Jet Blue hookup, AA and DL each had 5 daily nonstops on the BNA-LGA run using a combination of RJs (and for a few months DL’s really nice A220s). For much of this year, however, AA moved to 2X/day on A319s while DL stayed at 5X with E175. The result? DL has 60 F seats in each direction every day while AA has 16. AA’s been dropping fares in that time but I suspect, like me, biz travelers prefer the scheduling options.

  5. The bigger issue is not the size of the banks AA can create at JFK – which basically limits the size of the international operation to routes with large local demand, to partner hubs, and unique destinations that DL and UA have somehow chosen not to serve.
    The real issue is AA’s underperformance on so many of its LGA markets where their size is much closer to DL’s LGA and UA’s EWR domestic system. While it is certain that AA can fix its cost issues at JFK, not try to compete in all the markets DL and UA serve, and use the A321s on routes where DL and UA use widebodies, LGA is largely point to point so the only benefit of the NEA was using B6 to fly routes at a lower cost than AA could fly on its mainline aircraft. AA also now has fewer regional jets available and they can make more money elsewhere. BOS for AA is much like a hybrid of JFK and LGA – underperformance on non-hub routes, a smaller international network.
    AA will have to test how small it can get to maintain nationwide corporate contracts that require some relevance in the NE and how much it is willing to lose on what it deems essential to maintain. I am far more confident that AA of today can better make those decisions than for the past 20 years while also relying on the strength of its southern hubs.
    Vasu has done a remarkable job of doing and justifying whatever decisions his bosses have wanted. Given that AA is outperforming UA in financial metrics, it would appear that Scott Kirby and Doug Parker’s departures have allowed Vasu to make better financial decisions.
    The NEA was an attempt to try to reduce the cost of subsidizing AA’s northeast operations. AA is now justifiably downplaying the impact of having to pull it down while also telegraphing that reducing NYC and BOS to spokes is on the table.

    1. Discover10 – I have no idea, but I tend to assume that it just hasn’t had the results they kept saying it was having. That would mean maybe it isn’t material, but that’s because it never did what they hoped it would. But I really don’t know for sure, there are so many moving parts.

  6. Cranky is spot on. I’d like to see AA win its appeal if only to hear some more pretzel logic from Raja on an earnings call about how everything he originally said was correct.

  7. Confused by AA comment that its JFK slots are designed for long distance travel when it does not offer non stop service between JFK and SAN, LAS, and SLC. These are major cross country markets that AA has abandoned. Hopefully AA will serve the top 20 population centers across the nation with nonstop service from JFK/LGA.

  8. JetBlue’s abysmal financial results today perfectly illustrate why it will eventually be acquired. It is big enough to be relevant, but not big enough to turn a profit in the markets it serves and runs a terrible operation.

  9. While the focus of this article and AA post-NEA, B6’s earnings release today shows that the end of the NEA will have a significant negative effect on them. B6 expects revenue to contract in the third quarter as the NEA is wound down which also might explain why AA’s 3rd quarter revenue expectations are so much lower than DL and UA – which AA execs repeatedly failed to explain to analysts.
    B6 also said that longhaul international travel is pulling away some domestic demand which explains why WN’s revenue performance for the 2nd quarter and estimates for the 3rd quarter are weaker than for the big 3.
    The upshot is that, if trends continue, AA might have more success in maintaining longhaul international capacity and slowing the return of domestic capacity from BOS and NYC – but still has to find a way to use the slots it will get back at some point (which probably explains the big drop off in B6 revenue). Given that UA is realizing it cannot maintain the size of schedule at EWR it has add, AA’s domestic task in NYC is a little easier, even though DL is their most direct NYC competitor.
    While I don’t think the economics of the A321NEO across the Atlantic will be as favorable as a lot of people believe, esp. under new pilot contracts, the A321 might be the best way for AA to maintain enough flights from JFK while also rebuilding PHL which has fairly good connectivity and also lean on the large hubs at CLT and DFW for widebody international operations.
    AA’s size will still be too large to combine w/ any other airline – they generated the most domestic revenue in the 2nd quarter, just beating out DL.

  10. I wonder what AA will do now: fold up the tent and leave AA as a spoke from its hubs with some cursory international operations to partner hubs. Or add back all of the domestic flying it pulled out of over the past 10 years–cities mentioned in the article, plus: TPA, MCO, ATL, AUS, DEN, SJU, and some other domestic and caribbean destinations to fill out the slot portfolio. They’ll never be able to match the scale of the other players at JFK, but they can still be creative serving a wide range of destinations with 100 slot pairs.

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