The American Airlines and JetBlue Alliance Is Under Threat. Why It Matters.
September 22, 2021
By Callum Keown, Barron's
The alliance between American Airlines and JetBlue Airways Corporation in the Northeast is under threat from the U.S. Justice Department just months after getting off the ground.
The Justice Department, six states and the District of Columbia filed a lawsuit Tuesday attempting 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 diminish JetBlue’s incentive to compete with American, further consolidating an industry where “just four airlines control more than 80% of domestic air travel.” The four are American (ticker: AAL), Delta (DAL), United (UAL) and Southwest (LUV).
American and JetBlue (JBLU) see it differently. American CEO Doug Parker said the alliance increased competition and the lawsuit seeks to “take away consumer choice and inhibit competition, not encourage it.”
Putting aside the merits of both arguments, it’s worth looking at the significance of the alliance and the potential impacts of it being blocked, as well as what might happen next.
Why is the alliance important?
American and JetBlue announced their partnership in July 2020 but it only began earlier this year after being cleared by the Transportation Department in the final days of the Trump administration. The Transportation Department made the pair agree to lose some takeoff and landing slots at New York’s JFK airport and Washington’s Ronald Reagan National Airport and not discuss fares.
Crucially, the alliance allows the two carriers to pool their gates and takeoff and landing slots, giving them a far greater presence at some of the country’s biggest airports. The airlines also ‘code-share’ on 175 routes, which is where one airline can market and sell another airline’s flight as its own, and the partnership has introduced 58 new routes.
From the two carriers’ point of view they joined forces to better compete with Delta and United, though the need to recover from the Covid-19 crisis also played a part.
Parker said the alliance has created a “third, full-scale competitor in New York,” noting that before the partnership Delta and United “dominated the New York City market.”
That is borne out in data from four New York airports—JFK, LaGuardia, Newark Liberty and Stewart International. United Airlines had 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?
The two airlines have made clear their intentions to fight the lawsuit so it’s likely to be a long wait for an outcome. Meanwhile, American and JetBlue are expected to press ahead with their alliance. The response from American referred 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 would “not be shocked” if the Justice Department ended up asking for the pair to give up more slots at key airports. He added that MKM viewed a move to block the alliance as anticompetitive, not the other way around.
What happens if the alliance is blocked?
“If the alliance were blocked it would be a huge win for Delta and United given they would maintain their dominant share, while we would expect the 58 new routes launched under the alliance to be rolled back,” Cunningham said.
As for the impact on the two airlines, Seaport Research Partners analyst Daniel McKenzie said the lawsuit “doesn’t affect the broader revenue recovery story of either airline over the next 1-2 years.” If successful it would cut into revenue upside “but not materially,” he added.
He said in a scenario in which the Justice Department was partially successful, JetBlue’s shares would likely reach $28 to $35 in the coming years, down from its previous view of $30 to $40. For American Airlines stock, the impact would be negligible, he added.
“Reading between the lines, the Justice Department is concerned about losing a ‘maverick competitor,’ a recognized antitrust doctrine that applies to an airline that keeps others honest by containing industry fare increases,” McKenzie said. “Paraphrasing, the Justice Department doesn’t want JetBlue to become a hostage competitor of American Airlines.”