Why the Judge Ruled Against American and JetBlue’s Northeast Alliance – Cranky Flier

On the surface, it looked like American and JetBlue had a strong case to continue their partnership, but in a 94-page ruling released Friday, Judge Leo Sorokin painted a picture of ineptitude. He cited the airlines for contradicting themselves multiple times, failing to prove what they needed to prove, and putting forward biased expert witness testimony in what ultimately was made to look like a clown show. In the end, he definitively ruled against the airlines’ Northeast Alliance (NEA) and doomed it to end in 30 days, barring an appeal. This is not the end of the story, but it is a very sharp rebuke of the airlines’ plans and at the very least put the partnership’s future viability in doubt.

The NEA was designed to allow American and JetBlue to partner together within the New York and Boston markets. Beyond a traditional partnership, it was an attempt to allow the two airlines to operate nearly as one, coordinating schedules, swapping slots, and sharing revenue in addition to the usual frequent flier and codeshare partnership that wouldn’t have triggered the government to challenge the deal. Despite gaining approval from the Department of Transportation (DOT) with some concessions, the Department of Justice (DOJ) later decided to challenge the plan in court.

It took longer than expect for the ruling to be issued considering the trial ended late last year, but Judge Sorokin was quite thorough in his dismantling of the airlines’ case. As he explains at the beginning:

This case turns on what “competition” means. 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.

In other words, the entire argument that the airlines would combine to create a third relevant rival in New York to counter Delta and United is irrelevant in his view of the law. That was the wrong case to be making entirely, and I think it’s where many analysts failed here, including myself. This is why you should always listen to your local anti-trust attorney. It’s not about rational thinking; it’s about what the law provides. And while American and JetBlue certainly disagree with this interpretation of the law, it’s the one that counts.

The question before the judge was whether or not the NEA is considered an “unreasonable restraint on trade” as required by the Sherman Act. This is not a black and white decision, but there is plenty of precedent to help frame how this gets reviewed.

The government first had to show that there was either a “sufficiently high risk” of or an actual “substantial anticompetitive effect” here. And on this point, the judge finds that harm has been proven in three different ways.

  • The NEA has eliminated competition between two of the four dominant carriers in the northeast
  • JetBlue has had to give up some of its independence and weakened its status as a disruptor or as the judge calls it, a “maverick”
  • The divvying up of routes between the two carriers is actually illegal on its face

There’s even more, but the judge didn’t need more. This was more than enough for the burden to then shift to the airlines to prove to the court that a “procompetitive rationale” for the NEA exists. They failed miserably.

As I already mentioned, the rationale that this would create a viable third competitor in New York was shot down. As the judge says, “strengthening their own position against one or two rivals—is not a valid justification, and cannot render an unreasonable restraint on trade reasonable, under the Sherman Act.”

Further, the pooling of slots to create a better offering isn’t valid as a rationale either. The judge uses the example of two companies pooling their joint resources as a way to fund something they couldn’t pay for on their own as a possibly valid reason. But in this case, they are just adding their slots together because they want to. They can each fly what they’re doing today without violating the Sherman Act. There is no 1+1=3 type of scenario.

In the end, the judge says the airlines did not prove any significant procompetitive benefit that would justify the anticompetitive behavior. This devastating ruling thoroughly and completely destroys the NEA. The question is, can it be salvaged in any way?

The airlines certainly have the ability to appeal. American’s statement suggests the judge doesn’t know what he’s talking about, and the airline will come back and fight.

We believe the decision is wrong and are considering next steps. The Court’s legal analysis is plainly incorrect and unprecedented for a joint venture like the Northeast Alliance. There was no evidence in the record of any consumer harm from the partnership, and there is no legal basis for inferring harm simply from the fact of collaboration. The Northeast Alliance has been a huge win for customers and anything but anticompetitive.

There may be an opportunity to fight here since much of what the judge does here is describe a very poorly run case by the airlines. He gives plenty of detail about efforts by the airlines to prove certain points that failed miserably. For example, the airlines said that their partnership drew a competitive response from Delta and United but the judged called their proof “milquetoast at best.” Claims that the growth in the northeast that resulted from this alliance also fall flat since they failed to prove that they weren’t just repurposing capacity that would have gone elsewhere.

The judge also absolutely destroyed the expert witness testimony that the airlines put forth, saying that their expert witnesses were all tainted by ties to the airlines. He found their testimony was biased.

The list of failings is long and paints a picture of a completely miscalculated trial strategy. Presumably the airlines could clean this up and actually present a competent defense in an appeal, but there are also several things that the airlines can’t fix. For example, there are reams of materials found in discovery, through depositions, and in testimony that show the airlines contradicting themselves over and over again. In one place, they say they’re still competing in the northeast but then somewhere else they aren’t. The list is long, and that can’t be changed.

It seems highly likely to me that the airlines will want to appeal. If for no other reason, the judge’s ruling that they must end further coordination within 30 days would seem to be problematic at best. If they can appeal and get a stay on the judgment until the appeal is heard, it would at least buy them time. But I can imagine a world where they might not feel so strongly about pushing ahead with the NEA in the long run anyway.

JetBlue has been tying itself in knots trying to get its acquisition of Spirit done, saying it’s a major competitor and disruptor versus the legacy airlines. It’s hard to say that when the airline is also trying to share revenue with one of those legacies. Continuing to push on the NEA could further cloud the airline’s efforts to fight the DOJ in the trial for its Spirit merger in the fall. (On the flip side, DOJ now has a blueprint for how to successfully fight that merger.)

At the same time, American has to be wondering what it got itself into with JetBlue, an airline that now wants to take over Spirit and provide more national competition to American in places where Spirit is stronger than JetBlue ever was, like Dallas/Fort Worth. Does American find it worthwhile to keep providing all these benefits to JetBlue travelers in a vastly expanded JetBlue assuming the merger goes through?

It’s not clear to me that the airlines can recover from this ruling, but once again, I’m not an antitrust lawyer. What I do know, however, is that the judge paints a very clear picture for how the airlines can move forward if they so choose. They can emulate what American and Alaska are doing in the West.

In order to shift this agreement into something that wouldn’t be viewed as anti-competitive, the airlines would have to stop sharing revenue on domestic routes and would not be able to coordinate scheduling decisions at all. Instead, American can continue to fly long-haul from JFK while JetBlue feeds that domestically. They can share revenue on that. And of course, they can continue to share frequent flier benefits and all that. They can even layer in a slot lease agreement on top that would allow JetBlue to fly more from LaGuardia as it has been doing.

This presents a whole host of other problems, of course. Without the sharing of revenue and joint scheduling decisions, American would not get the benefit of JetBlue’s presence in New York. It could bolster its long-haul operation, but it would be stuck with a ton of domestic slots with which it would need a new clear strategy. The old strategy of “squat on them with 50-seaters” isn’t an option any longer. This puts American at a crossroads.

In the end, this should cause some serious soul-searching at both airlines. While I do expect some kind of appeal, it would seem that both airlines should be actively preparing for a world where the NEA in its current form is dead.

2023-05-22 10:45:00