DOJ challenges JetBlue-American Airlines alliance


Last year, American Airlines (NASDAQ: AAL) and JetBlue Airways (NASDAQ: JBLU) announced a unique cooperation agreement in the New York and Boston markets in order to compete more effectively with its main rivals Delta Airlines (NYSE: DAL) and United Airlines.



DOJ challenges JetBlue-American Airlines alliance


© Provided by The Motley Fool
DOJ challenges JetBlue-American Airlines alliance

The US Department of Transportation approved the arrangement (with certain conditions) in January. As a result, American and JetBlue began implementing their new partnership this year. However, on Tuesday, the US Department of Justice and several states sued American Airlines and JetBlue on antitrust grounds. Let’s see what this development means for the two airlines.

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What the alliance does

Today, Delta Air Lines and United Airlines dominate the New York market. While JetBlue has a base at JFK International Airport and American has small hubs at JFK and LaGuardia airports, neither company has as many slots as Delta or United. This makes competition difficult. For example, American Airlines cannot offer enough connecting flight options to offer a wide range of international flights from New York. Meanwhile, significant holes in JetBlue’s route network make it difficult for the carrier to compete for corporate contracts.

In Boston, JetBlue is the market leader, with a 33% share of domestic traffic in 2019. But even there Delta has managed to gain market share – especially among business travelers – by supplementing its offerings without stopover with a large global network of routes that offers many connection possibilities. American struggled even more, steadily losing shares to Delta and JetBlue.



a large passenger jet landing on a runway: a JetBlue Airways plane landing on a runway.


© JetBlue Airways
A JetBlue Airways plane landing on a runway.

The Northeast Alliance calls on American Airlines and JetBlue to coordinate route planning and scheduling (but not fares) and codeshare on a wide range of routes affecting New York and Boston. In addition, they offer reciprocal benefits to frequent flyers to encourage customers to travel with both airlines. Finally, American is giving JetBlue access to many niches at LaGuardia and JFK that it has struggled to use productively and profitably, allowing JetBlue to grow there.

To align their financial incentives, JetBlue and American Airlines will pool their revenue in the markets covered by the alliance, so that every airline receives the same revenue, regardless of which airline operates a customer’s flight.

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This week, the DOJ and several states sued American and JetBlue. They allege that the new Northeast Alliance is anti-competitive (in violation of the Sherman Antitrust Act) and want to untie it. The federal and state governments believe the deal essentially eliminates JetBlue as an aggressive, independent low-cost carrier that imposes price discipline on its rivals.

Specifically, the complaint argues that while JetBlue and American have agreed not to talk to each other about pricing, they can always increase the fares by coordinating to reduce the number of seats they offer. The DOJ highlights 11 Boston non-stop markets, 17 New York non-stop markets and 98 connecting markets where a hypothetical JetBlue-American Airlines combination would significantly increase market concentration, making it “presumptively anti-competitive”.



An American Airlines plane on the ground.


© American Airlines
An American Airlines plane on the ground.

Video: Delta Air Lines seeks to create shared no-fly unruly passengers list with other airlines (Veuer)

Delta Air Lines seeks to create shared no-fly unruly passengers list with other airlines

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FOLLOWING

Top DOJ Antitrust Lawyers Meet with JetBlue and American Airlines Officials, Says The Wall Street Journal, but they were unable to come to an agreement that would avoid litigation.

A fragile case

Not surprisingly, the executives of American Airlines and JetBlue have strongly defended the Northeast Alliance. JetBlue said it plans to add about 100 daily round trips from New York’s three major airports from 2019. Most of this growth would have been impossible without the American Airlines alliance due to slot constraints. and doors. He also plans to add dozens of new flights to Boston.

For its part, American Airlines noted that alliance partners have already added 58 new routes and increased service to more than 130 others. CEO Doug Parker also pointed to the inability of American or JetBlue to compete effectively with Delta and United in New York on a stand-alone basis.

Indeed, the antitrust case against the North East Alliance rests on shaky ground. While the arrangement would lead to less competition on some routes, it will increase competition on many others, due to JetBlue’s expansion plans and American’s international growth. The DOJ argues that airlines could thrive without a revenue-sharing alliance – but makes no convincing argument that they actually would.



A table highlighting the combined growth plans of JetBlue and American Airlines in the Northeast.


© American Airlines and JetBlue Airways
A table highlighting the combined growth plans of JetBlue and American Airlines in the Northeast.

The complaint also underestimates the ability of other airlines to introduce new competition in markets where JetBlue and American Airlines could reduce capacity. Finally, recent history does not support the DOJ’s claim that the alliance will have a chilling effect on competition. Over the past year, JetBlue has launched flights to Miami and has grown significantly in Los Angeles, both of which are hubs for American Airlines.

What does this mean for investors?

While the DOJ faces a tough climb to prove that the Northeast Alliance is illegal, investors nonetheless need to prepare for the possibility of American and JetBlue losing in court. Airlines could also offer new concessions to settle the case.

If the government succeeds in blocking the alliance, it will disproportionately harm American Airlines. JetBlue would miss out on growth opportunities in New York and have to fight harder for customers, but the carrier could continue organic growth in Boston.

In contrast, without the JetBlue deal, heavily indebted American Airlines will face an unattractive choice between further contraction in key Northeast markets and increased service on routes where it is unlikely to make money. money. So the American has a lot more at stake in this fight.

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Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways. The Motley Fool recommends Delta Air Lines and JetBlue Airways. The Motley Fool has a disclosure policy.

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