The American Airlines and JetBlue alliance is under threat. Why is this important.
The alliance between
and JetBlue Airways in the northeast is threatened by the US Department of Justice months after taking off.
The Department of Justice, six states and the District of Columbia filed a lawsuit Tuesday in an attempt to block the partnership, alleging it “eliminates competition in New York and Boston” and would ultimately result in higher fares for travelers. . Specifically, they said it would significantly reduce JetBlue’s incentive to compete with American, further consolidating an industry where “just four airlines control over 80% of domestic air travel.” All four are American (ticker: AAL),
American and JetBlue (JBLU) see it differently. US CEO Doug Parker said the alliance has increased competition and the lawsuit seeks to “remove consumer choice and inhibit competition, not encourage it.”
Aside from the merits of both arguments, it’s worth considering the importance of the alliance and the potential impacts of blocking it, as well as what might happen next.
Why is the alliance important?
American and JetBlue announced their partnership in July 2020, but it didn’t start until early this year after being cleared by the Department of Transportation in the dying days of the Trump administration. The Department of Transportation made the couple agree to lose take-off and landing slots at New York’s JFK Airport and Washington’s Ronald Reagan National Airport and not discuss fares.
Above all, the alliance allows the two carriers to pool their boarding gates and take-off and landing slots, giving them a much larger presence in some of the country’s largest airports. Airlines also share codes on 175 routes, where one airline can market and sell another airline’s flight like its own, and the partnership has introduced 58 new routes.
From the perspective of both carriers, they have joined forces to better compete with Delta and United, although the need to recover from the Covid-19 crisis has also played a role.
Parker said the alliance had created a “third large-scale competitor in New York,” noting that prior to the partnership, Delta and United “dominated the New York market.”
This is confirmed by data from four New York airports: JFK, LaGuardia, Newark Liberty and Stewart International. United Airlines held a 26% share of seats on flights at the four airports in 2020, while Delta had a 29% share, according to figures from travel data provider OAG and MKM Partners. In comparison, the combination of American and JetBlue reached 31% with a 50-50 split between the two.
What happens next?
Both airlines have made it clear that they intend to fight the lawsuit, so it is likely that the wait for a result will be long. Meanwhile, American and JetBlue are expected to continue their alliance. American’s response refers to the alliance’s plan to offer more than 700 daily flights from New York and Boston this winter, a plan it unveiled in July.
MKM Partners executive director Conor Cunningham said he “wouldn’t be shocked” if the Justice Department ended up asking the pair to forgo more slots at key airports. He added that MKM viewed a decision to block the alliance as anti-competitive, not the other way around.
What happens if the alliance is blocked?
“If the alliance were blocked it would be a huge victory for Delta and United as they would retain their dominant share, as we would expect the 58 new routes launched as part of the alliance to be canceled.” , Cunningham said.
As to the impact on the two airlines, Seaport Research Partners analyst Daniel McKenzie said the lawsuit “does not affect the larger story of either earnings recovery. airline over the next 1-2 years “. If successful, it would reduce income upward “but not materially,” he added.
He said that in a scenario where the Justice Department was partially successful, shares of JetBlue would likely hit $ 28-35 in the coming years, compared to $ 30-40 previously. For American Airlines’ actions, the impact would be negligible, he added.
“Reading between the lines, the Justice Department fears it will lose a ‘maverick competitor’, a recognized antitrust doctrine that applies to an airline that keeps others honest by limiting industry fare increases.” McKenzie said. “To paraphrase, the Justice Department does not want JetBlue to become a hostage competitor to American Airlines.”
Write to Callum Keown at [email protected]