Why American and JetBlue have to unwind their Northeast Alliance

American Airlines and JetBlue have yet to announce if they intend to appeal Friday’s ruling of the United States District Court in Massachusetts to unwind their Northeast Alliance (NEA) within thirty days. The alliance, which was launched in 2021, is seen as hurting consumers' interests by reducing competition in the New York/Boston areas. The Department of Justice welcomes the Court’s ruling and has always opposed the alliance. Why American and JetBlue have to unwind their Northeast Alliance. Responding to mounting competition from Delta Air Lines and United in the northeastern regions, American Airlines, and JetBlue found it was in their interest to work together. They started working on the Northeast Alliance plan in early 2020, just months before the start of the Covid crisis. The five-year NEA was publicly announced on July 15 of that year. Following a six-month review of the Department of Transportation, the two airlines said in January 2021 that they would start implementing their alliance. By aligning their flight schedules, the airlines wanted to offer customers better connectivity at the three New York airports JFK, LaGuardia, and Newark, and at Boston Logan Airport. JetBlue expanded its activities in the two regions and added capacity, while American upgauged the fleet and introduced Airbus A321s with First Class on board. Later in 2021, the two airlines launched a codeshare agreement that covered sixty American routes and 130 JetBlue routes. Customers would have benefited from the two carriers’ loyalty programs. Part of NEA was a revenue-sharing mechanism to split revenues annually, which would incentivize growth at both airlines. A graphic from December 2021, showing the combined networks of JetBlue and American. (JetBlue) The alliance was not unconditional: the DOT demanded that the airlines would divest slots at JFK and at Washington Reagan National Airport, commit to certain capacity expansions, comply with antitrust measures, and refrain from coordination at airports where American and JetBlue are competitors. 2021 was still dominated by Covid, with the Omicron effect extending through Q1 2022. But both carriers reported in their 2022 annual reports that the Northeast Alliance had been a contributory factor to their higher revenues. “The NEA is driving a year-on-year margin tailwind, coming via a maturation of significant New York City growth,” said JetBlue in its earnings presentation in March. 75 Percent of JetBlue's growth in 2022 came from the Northeast region. With eight percent of the alliance complete in late 2022, “NEA poised to grow earnings contribution in 2023 and beyond as growth matures with improving margin trajectory,” said JetBlue. But while the NEA was expanding month by month, there has been uncertainty over its long-term future since September 2021. That month, the Department of Justice and the Attorneys General from Arizona, California, Florida, Massachusetts, Pennsylvania, Virginia, and the District of Columbia, filed an antitrust complaint against American and JetBlue. They alleged that their alliance violated US antitrust law. A bench trial was held between late September and mid-November, 2022. In December 2022, two putative class action lawsuits were filed in the Eastern District of New York that also alleged that the NEA violated the antitrust law. The alliance changed the competition In his 94-page ruling released on May 19, Judge Leo T. Sorokin says that the NEA has changed competition between American and JetBlue in the New York and Boston regions. “It makes the two airlines partners, each having a substantial interest in the success of their joint and individual efforts, instead of vigorous, arms-length rivals regularly challenging each other in the marketplace of competition.” He adds: “Though the defendants claim their bigger-is-better collaboration will benefit the flying public, they produced minimal objectively credible proof to support that claim. Whatever the benefits to American and JetBlue of becoming more powerful—in the northeast generally or in their shared rivalry with Delta—such benefits arise from a naked agreement not to compete with one another. Such a pact is just the sort of “unreasonable restraint on trade” the Sherman (Antitrust) Act was designed to prevent.” The Court concludes that the revenue-sharing agreement, officially called Mutual Growth Incentive Agreement (MGIA), between American and JetBlue doesn’t guarantee any competition. On the contrary: “It is implausible that revenue-sharing terms designed and intended to align the parties’ economic incentives and foster decision-making in the best interests of the partnership will simultaneously spur the partners to compete vigorously with one another in terms of growth. Unchecked growth by one partner undermines the spirit of partnership and, thus, the entire venture.” NEA resembles a merger The Court confirms that the NEA is not a merger between the two airlines, as they continue to compete with each other in other markets. But Judge Sorokin says that the effects of the alliance resemble those of a merger. “First, American and JetBlue no longer compete with one another within the scope of the NEA. Rather, they function like a single airline in the NEA region, as much as possible. The revenue sharing established by the MGIA is designed to make the two carriers indifferent to whether a customer chooses to purchase a flight from American or from JetBlue. The provisions of the NEA aimed at optimizing the carriers’ schedules to produce one cohesive schedule mean that the carriers act as one airline in the northeast when choosing which routes to fly, when to fly them, and which aircraft (and which partner) will do so. (…) There is simply no credible evidence that American and JetBlue have continued to treat each other as competitors within the NEA.” “Second, the NEA has caused both American and JetBlue to adjust their overall network priorities, with both carriers now intensely focused on serving and growing in New York, at the expense of at least some pre-NEA plans to devote resources to growth elsewhere.” As an example, Sorokin mentions how American changed its original strategy to prioritize growth in Philadelphia from growth in New York after the NEA was signed. The NEA map version of September 2022. (JetBlue) “Third, since the NEA was announced, American’s slots at JFK and LaGuardia have been used more heavily and efficiently. This is in part because American has leased nearly a hundred of its slots to JetBlue, which operates them using larger aircraft (on average) than the small regional jets American had been using.” “Fourth, the NEA’s schedule optimization and capacity coordination process has led to decreased capacity, lower frequencies, or reduced consumer choices on multiple routes, including some that are heavily traveled. (…) In certain markets the defendants both previously served, the NEA has allocated the route to one of them and caused the other to exit. In short, they are dividing the NEA markets between themselves.” While frequent flyers and corporate clients have benefited from NEA’s reciprocity and codesharing features, they make up a relatively small proportion of American’s customers and account for less than half of its revenue, the Court adds. It also says that NEA has resulted in an increase in JetBlue’s operating costs, while it observed that the two airlines disregarded the MGIA agreement and financial terms as early as late 2021. The Court also notes that NEA has caused doubts with regulators in the US and the UK if jetBlue acts as an independent airline when it lobbied for slots at London Heathrow and Gatwick. Conclusion of the Court In its conclusion, the Court says: “The question before the Court is whether the NEA suppresses or promotes competition. The record supports only one answer. The NEA, operating as it was designed and intended by American and JetBlue, substantially diminishes competition in the domestic market for air travel. It does so by combining the Boston and New York operations of two airlines that are among the most significant competitors in that region. These two powerful carriers act as one entity in the northeast, allocating markets between them and replacing full-throated competition with broad cooperation.” “The plaintiffs have convincingly established that this arrangement immediately and substantially upsets the competitive balance in a highly concentrated industry, not only on a single overlap route or a handful of O&Ds, but throughout the northeast and beyond. The defendants have offered minimal evidence of any cognizable procompetitive effects arising from the NEA. Accordingly, having carefully parsed the record and evaluated the evidence in light of the governing legal standard, the Court concludes that the NEA plainly violates Section 1 of the Sherman Act.” As a result, American and JetBlue are “permanently enjoined from continuing, and restrained from further implementing, the Northeast Alliance, effective thirty days after the date of this Order.” The airlines have the right to appeal, but as said, they haven’t communicated yet if they will do. If not, American and JetBlue have just thirty days until June 19 to unwind their alliance and operations. Department of Justice The Department of Justice, which launched the antitrust lawsuit in September 21, is pleased with the ruling from the Massachusetts Court. In a media statement, Attorney General, Merrick B. Garland, says: “Today’s decision is a win for Americans who rely on competition between airlines to travel affordably. The Justice Department will continue to protect competition and enforce our antitrust laws in the heavily consolidated airline industry and across every industry.” Keep in mind that the DOJ has also filed a lawsuit to block the proposed JetBlue and Spirit Airlines merger for the same antitrust reasons. Assistant Attorney General Jonathan Kanter of the Justice Department’s Antitrust Division said: “We are pleased with the court’s decision. The outcome of this litigation recognizes the value of competition in the airline industry. We are grateful to our state law enforcement partners and the dedicated and talented Antitrust Division staff that investigated and tried this important case.” American and JetBlue responded with disappointment to the ruling and said that there is no evidence of any consumer harm from the partnership. The airlines have 21 days to decide if they will appeal.

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