DOJ wins: JetBlue, American NEA declared illegal

JetBlue and American Airlines must unwind their Northeast Alliance (NEA), and quickly. Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts issued a 94-page ruling declaring the partnership a violation of the Sherman Antitrust Act. The ruling is, of course, bad news for the two airlines. The impact may be broader than that.

To the defendants, competition is enhanced if they join forces to unseat a powerful rival. The Sherman Act, however, has a different focus. Federal antitrust law is not concerned with making individual competitors larger or more powerful. It aims to preserve the free functioning of markets and foster participation by a diverse array of competitors. Those principles are generally undermined, rather than promoted, by agreements among horizontal competitors to dispense with competition and cooperate instead. That is precisely what happened here.

The proposed merger between JetBlue and Spirit Airlines, also opposed by the DOJ, bears much similarity in terms of the competitive impact, though at a different scale and mostly in different markets.

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 Bad for consumers at every turn?

There are, perhaps, ways that the coordination and cooperation between American and JetBlue is beneficial to consumers. Judge Sorokin repeatedly notes in the ruling, however, that these claims are either specious or insufficient to rise above the harm caused. 

Essentially, American and JetBlue defend their partnership by broadly urging that “bigger is better,” and by claiming that they will be able to match or overtake (or, as they say, “compete with”) Delta only if they are permitted to stop competing with one another. That is not the kind of “competition” valued and protected by the Sherman Act. Federal antitrust law does not concern itself with which competitor wins the largest share of a market.

And, in particular, the cooperation in markets where both carriers hold significant market share is especially harmful.

It distorts the concept of free-market competition to pretend that Delta and United are the only two competitors that presently matter in the northeast, then insist that American and JetBlue must be allowed to join forces so that a third competitor becomes available. That is simply not a reasonable characterization of the industry or its participants, either in general or in terms of the evidence before the Court.

The judge also cites concerns – and evidence supporting them – that JetBlue would act in a manner that supports the NEA, even outside of coordinated airports. Losing out on remedy slots at Heathrow was a huge hit. So was losing out on Newark slots, eventually allocated to Spirit.

It is neither logical nor possible to view the NEA’s impact on the defendants’ competitive relationship as confined to the northeast. Both carriers have a strong and vested interest in the NEA’s success. They intended to form a long-term partnership, and they each have invested substantial time and resources in developing and implementing the partnership. All of this materially changes the competitive relationship between American and JetBlue, increasing their mutual interest in the success and survival of the other within the NEA and beyond.

Sorokin also points out the benefits of the frequent flyer reciprocity the carriers implemented. The value of this is, however, declared de minimus relative to the harm caused by the NEA.

There is, however, an acceptable option, one that the carriers considered and passed over in favor of the NEA.

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But the Alaska Airlines relationship is fine

If coordination at this level is a problem then what of American’s west coast partnership with Alaska Airlines? Judge Sorokin sees no problem with that deal. Indeed, he recommends that JetBlue and American consider revamping their partnership to emulate that, should they want to keep cooperating.

The key differences Sorokin identifies between the two are:

• Lack of schedule coordination and capacity planning on the west coast
• Revenue sharing isolated to American’s international services and Alaska’s domestic
• No codesharing in markets where both airlines operate

These limitations would require true competition between the pair where they overlap, an approach the court sees as beneficial to consumers.

JetBlue would still need to lease a ton of slots from American to keep its operations at the current levels. It is unclear that American would be motivated to provide the slots to JetBlue only for international feed, however.

It is also unclear that American has the capacity available to ramp back up its regional operations in the northeast. And there’s no (reasonable) way they’d be able to wet lease the JetBlue E190s over to fill that gap.

Trouble with the experts

Another interesting factor in the case – one that the carriers may lean on should they appeal – comes in how the judge considered evidence from the experts involved. In short, the testimony of those called by the airlines was “tainted by bias.”

The defendants presented four expert witnesses. All of the defense experts work together for the same consulting firm. This is not the first time a GNC has retained their firm—or any of them in particular—in connection with an antitrust matter. Two of them have written papers funded by a GNC, and they accepted feedback from the GNC before finalizing and publishing at least one such paper. Two have never rendered an opinion adverse to a GNC’s position in an antitrust proceeding, and another has not done so in the last two decades. American itself has retained at least two of them in the past. These facts cause the Court to view the testimony of each of these experts with heightened skepticism, as they suggest partiality and substantially undermine the independence and credibility of all four defense experts. Moreover, each defense expert exhibited during his testimony, to varying degrees, the demeanor and tone of an advocate invested in the outcome of this case.

Not only did Judge Sorokin believe them biased, but he also believed the evidence they presented was “not soundly reasoned, tailored to this case, or supported by the evidence.”

Looking to the future

Looking at the proposed JetBlue merger with Spirit, it seems likely that a similar argument could be argued by the government regarding elimination of a competitor in Fort Lauderdale.

The details of that partnership are even less debatable than those of the NEA. JetBlue plans to fully subsume the Spirit operations; there is no doubt that it will reduce competition in some markets. The question is whether that reduction is justifiable for the benefits elsewhere.

The court mentions access to gates and slots several times in recognizing the challenges for a new airline to grow in congested markets. New York City and Boston are two of the most challenged, but Fort Lauderdale is not easy. JetBlue and Spirit agreed to divest gates there. But that may not be enough.

The two carriers combine to offer 42% of ASMs in the Fort Lauderdale market and 20% in Orlando. Those numbers increase to 44% and 25% for the domestic markets. Should the courts consider Miami and Fort Lauderdale separate markets this level of combination may prove too great to overcome, even with divestiture of a few gates.

And to read Judge Sorokin’s ruling, it is possible to consider that any elimination of a competitor in the domestic air market is unacceptable. And, in particular, that growing through a merger in order to compete more effectively is insufficient to overcome the tests Sherman requires.

In sum, the NEA has materially altered the competitive landscape in a highly concentrated industry, and in a region with significant barriers to entry. It has accomplished this in at least three ways. It has reduced the number of competitors (and, thus, choices) by one in a setting where such a reduction is especially harmful. It has reduced JetBlue’s independence and undermined its status as an important “maverick” competitor. And, it has allowed the defendants to engage in horizontal market division, a practice historically and consistently invalidated as a matter of antitrust law. Each of these three actual effects already have resulted from the NEA and, considered together, they amount to a powerful showing of serious anticompetitive harm.

There is no doubt that the JetBlue/Spirit merger would reduce competition. It would change the status of Spirit as an important competitor in the market.

Maybe JetBlue can successfully argue that it avoids the bulk of these issues, or that it is too small in too many markets for the combination to affect competition more broadly. But that is also counter to the “bigger is better” argument it has made publicly and repeatedly to investors in attempting to secure shareholder approval. To argue before the court that it doesn’t really mean that would be quite awkward.

And also incredibly difficult difficult to prove, especially considering this ruling.