Not Cleared for Takeoff: DOJ Sues to Stop American-JetBlue Alliance in the Northeast
On Tuesday, September 21, 2021, the Antitrust Division of the U.S. Department of Justice (“DOJ”) and the state attorneys general of Arizona, California, the District of Columbia, Florida, Massachusetts, Pennsylvania, and Virginia filed a lawsuit in the U.S. District Court for the District of Massachusetts seeking to block a series of agreements (“Northeast Alliance”) between American Airlines Group Inc. (“American”) and JetBlue Airways Corp. (“JetBlue”) to combine the airlines’ operations in Boston and New York City. This complaint represents the most significant antitrust challenge to consolidation in the heavily concentrated domestic airline industry in nearly a decade. Acting Assistant Attorney General Richard A. Power, head of the DOJ’s Antitrust Division, said that “the alliance will harm travelers in the Northeastern United States and nationwide through higher fares, reduced choice and lower quality service.”
Background on the parties
American is the largest airline in the world. According to the government’s complaint, American, along with Delta Airlines, United Airlines, and Southwest Airlines, control over 80 percent of domestic air travel.
JetBlue is a low-cost airline founded in 1998. JetBlue offers lower fares to consumers than American, Delta, and United, serving as a disruptive “counterweight” to those airlines. JetBlue’s CEO has noted that “JetBlue has always been a contrarian airline—a disruptor.” According to the government’s complaint, JetBlue is “uniquely disruptive” in that it is able to profit despite offering these lower fares due its significantly lower cost structure. JetBlue’s internal estimates conclude that its lower fares have resulted in $3 billion in savings for consumers flying out of Boston and $10 billion for all consumers since the airline’s founding.
On July 15, 2020, American and JetBlue entered into the Northeast Alliance, relating to the airlines’ operations out of Boston Logan, JFK, LaGuardia, and Newark Liberty airports:
American and JetBlue agreed to pool revenues and coordinate “on all aspects” of network planning at the four airports, including decisions on which routes to fly, when to fly them, who will fly them, and size of plane to use.
The airlines agreed to pool and apportion revenues earned on flights to and from the four airports such that each earns the same revenues regardless of whether a passenger flies an American or a JetBlue plane.
The airlines would market each other’s flights to and from the four airports. The parties have also agreed to pool their “slots” for takeoff and landing authorizations issued by the Federal Aviation Administration at JFK and LaGuardia.
The government’s complaint alleges that the Northeast Alliance violates of Section 1 of the Sherman Act as an unreasonable restraint of trade, noting that the combination of agreements effectively constituted a merger between American and JetBlue with regard to domestic markets that have either Boston or JFK/LaGuardia as an endpoint. According to the complaint, the alliance will harm competition by eliminating competition between American and JetBlue in the domestic markets to and from Boston and JFK/LaGuardia.
The government’s complaint also highlights the competitive concerns presented by the output coordination and revenue-sharing restraints of the agreements. Specifically, the complaint notes that this arrangement eliminates the incentive for either airline to compete with the other on price, as doing so would simply reduce the revenues each earns under the revenue-sharing agreement. As a result, the government contends that JetBlue would no longer have the incentive to offer their historically disruptive low prices to consumers.
The government’s complaint also noted that this arrangement could allow American and JetBlue to increase fares without even talking to each other about pricing. For example, one could simply exit a market and then share in the other’s increased profits; additionally, under the agreement the parties could agree to cut the number of seats they fly in a market and thereby raise prices.
While the government’s complaint includes only a claim for violation of Section 1 of the Sherman Act (which does not apply to mergers), the complaint does contain analysis usually reserved for merger challenges such as presumptions of illegality due to the concentration that the parties would have in the relevant markets. It will be worth keeping an eye on how the district court handles these merger-based arguments in this non-merger case.
It’s also interesting to note that the government’s complaint emphasizes that the Northeast Alliance echoes the global alliances (oneworld, SkyTeam, and Star Alliance) headed by American, Delta, and United. These global alliances involve extensive coordination and sharing of revenues, and have yet to be challenged under the antitrust laws.
When American and US Airways merged in 2014, the government negotiated a consent decree where the merging parties had to divest slots at a number of airports, including New York’s LaGuardia Airport and Boston’s Logan Airport. This opened the door for the expansion of JetBlue’s operations out of New York and Boston, with the subsequent savings and price competition that occurred there. The Antitrust Division apparently sees those benefits flying off forever with the Northeast Alliance and is moving to stop it.