Today’s testimony in the government’s anti-trust trial against the American Airlines-JetBlue Northeast Alliance has featured the CEO of JetBlue and the incoming Chief Operating Officer of Southwest Airlines, which prefers not to see stronger competitors (naturally).
It doesn’t seem like the government made any tangible progress demonstrating anti-competitive effects of the partnership, but the answers given on the stand by senior airline executives are interesting to parse.
JetBlue’s CEO Back On The Stand
Yesterday the government asked JetBlue CEO Robin Hayes whether his goal was to maximize profits, as though that was some sort of gotcha. The government needs to show Hayes as ready to raise fares now that he’s been co-opted by American Airlines. Hayes responded that… the airline hasn’t made money in the past two and a half years and they do need to do so. They clearly aren’t earning monopoly profits!
Today he was on the stand staying that the airline needs to grow, and government slot controls make that impossible in New York (JFK and LaGuardia). Partnering with American they’ve grown from 15 flights a day at New York LaGuardia (and were going to lose some of those slots) to 50 a day.
The alliance with American, Hayes believes, will also grow JetBlue’s loyalty program – which underperforms both on revenue and margin.
Loyalty programs can have a 30-35% margin, Hayes says. Some airlines make more of a profit from their loyalty programs than from actually flying, he testified yesterday (incidentally, this has applied to American).
— David Slotnick (@David_Slotnick) September 28, 2022
American’s frequent flyer program a 52% margin and it accounts for the entirety of the airline’s profits. Hayes doesn’t seem to realize, though, that it isn’t size which is JetBlue’s biggest problem. Greater relevance in the biggest credit card spend markets matters (and American is benefitting from the JetBlue alliance in New York here) but JetBlue’s program just isn’t very good.
JetBlue’s points aren’t valuable and their partner redemptions aren’t valuable. They’re improving their elite program but the real work is still to come.
Hayes argues that customers benefit from their ability to protect passengers on American Airlines during flight disruptions.
JetBlue had always wanted and sought a reprotection agreement with one of the legacy airlines, Hayes said, but none of them would ever bite. The only airline who had been willing to do one was Alaska, he said.
— Leah AntiTrustButVer1fy Nylen (@leah_nylen) September 28, 2022
Many observers make the point that there’s nothing at all which requires JetBlue and American to have a broader partnership in order to enter into a reprotection agreement. Even American Airlines and Delta re-started theirs four years ago, after terminating it when Delta demanded 5x the customary price.
However interlining involves complexity, including IT and other costs, and isn’t something low cost carriers generally do. The Northeast Alliance gives them a reason to make the investment, and gives American Airlines an incentive to do this with them. So this does, in fact, support consumer benefit from the Northeast Alliance.
Another customer benefit he cites is the better JetBlue product on routes where JetBlue has displaced American – free wifi, more legroom, and seat back entertainment. Yesterday the government highlighted internal documents showing JetBlue considering the risk to its brand of partnering with American. This was not a bombshell, they commented publicly last year about mitigating brand risk by redesigning their website to make clear which flights (American flights) wouldn’t feature signature JetBlue elements so customers wouldn’t be disappointed.
There was discussion of JetBlue’s Heathrow slots which came from Qatar Airways and Aeroflot and whether Newark is a New York airport – when it’s advantageous to JetBlue they talk about New York as JFK and LaGuardia, and at other times as JFK, LaGuardia and Newark.
Southwest’s Chief Operating Officer On Competition In New York And Boston
Southwest’s Andrew Watterson testified next. He says JetBlue is “on a multi-year shift to a legacy carrier” due to flying multiple aircraft types with different seat types (Even More Space, Mint). That undermines the government’s contention that partnering with American undermines JetBlue as a low cost carrier – it’s already becoming a legacy carrier, according to its own witness.
He blames Southwest’s inability to expand at New York LaGuardia on government slots, but that’s not really an anti-trust issue it’s a capacity issue. Airports need more runways, and airspace needs more throughput, and both of those are government failures. We should be better at infrastructure, and at funding air traffic control and managing large IT projects.
Watterson’s airline really can’t expand in Boston because their current terminal has its gates allocated, but there’s no indication that Southwest has much interest in growing there anyway. They don’t fly Boston to DC because slots at National Airport are scarce. (Indeed, Southwest believes it’s possible to grow in Boston, pre-Covid their internal planning showed that both Delta and United planned to do so, Delta planned to call Boston a hub and has even been spurred to grow in Boston by the American-JetBlue alliance.)
He also argues that Southwest brings passengers from other cities to New York, they aren’t really an airline for New Yorkers. That’s the legacy US Airways strategy for New York that launched in 2014, when American viewed itself as not able to grow big in New York to compete. Without explicitly saying so, Southwest – as government witness – is really laying out the problem American faced in not being a viable New York competitor without the JetBlue alliance. He explains Southwest’s decision to exit Newark as being the result of that airport being for local customers, those in the New York area for whom it’s convenient, rather than out-of-towners flying to New York.
Since Southwest can’t get more slots, American and JetBlue together can grow and offer better schedules, and be a more attractive airline than Southwest for New York travel (which of course they already were in most cases, since both were bigger than Southwest in New York and Southwest has chosen to exit Newark). He makes the point that partnering benefits American/JetBlue, and that’s not good for Southwest, which is why of course he wants the government to stop it – because that benefits his airline. Offering a more attractive product to customers than Southwest can offer is not an anti-trust violation, though.
American’s lawyer makes the point that eliminating the Northeast Alliance won’t allow Southwest to grow in New York. Southwest benefits here by (1) hurting a competitor, and (2) extracting slots for itself if American and JetBlue agree to a settlement where they give up additional slots, and the government directs those slots to Southwest.
What’s At Stake
I haven’t been a fan of airline mergers or joint ventures. They haven’t generally benefited consumers. I haven’t been a fan of the moves made by JetBlue under CEO Robin Hayes, or many of the moves at American Airlines since US Airways management took over.
However the “Northeast Alliance” between American Airlines and JetBlue legitimately gives customers more options. The frequent flyer partnership gives customers earning, redemption, and status recognition across more flights. This deal creates a viable competitor to Delta and United in New York.
Naturally, Delta and United don’t like it. And smaller airlines would love to see the government demand more New York slots from American and JetBlue in a settlement, beyond what the two airlines have already given up to get government approval for the deal last year, and redistribute those slots to… them.
But the reasons to object to the deal are cronyist in nature – killing the deal benefits American’s and JetBlue’s competitors. Several politicians, representing the interests of those competitors, have jumped on the bandwagon. And the Biden Department of Justice wants to be ‘aggressive with anti-trust.’
Ultimately the consumer benefit standard in anti-trust is what should prevail here. We can imagine scenarios where customers don’t come out ahead. But we haven’t really seen that yet, on net, and the partnership has been underway for a year and a half. There’s no reason to quash consumer benefit based on the hypothetical risks that competitors are using as a fig leaf, since the partnership already exists (after being signed off on in a settlement with the Department of Transportation). We should let it ride and address competition concerns when those are real.
Don’t take viable choices away from customers in the meantime. We have few enough of those as it is.
