American Airlines’ and Jet Blue’s Northeast Alliance gets shot down in flames

The Northeast Alliance found to be in contravention of competition law

Back in 2020, American Airlines and Jet Blue announced a new alliance co-operation covering the New York and Boston markets. They described it as “an innovative alliance to increase competition in the Northeast”, and defined its purpose as “to overcome the insurmountable obstacles historically faced by each airline in challenging Delta’s and United’s dominance in the region”. You can read what the two carriers have to say about the Northeast Alliance (NEA) on their dedicated site, although you might need to be quick.

Before implementing the agreement, the two airlines submitted it to the US Department of Transport (DOT) for review. The airlines say that the agreement was “approved by the DOT” in January 2021, subject to certain remedies, modifications and monitoring requirements, and proceeded to implement it.

However, the DOT made it clear in September 2021 that “DOT approved” is not quite the right description for the agreement that was reached:

“Section 41720 does not provide the Department the authority to approve or disapprove agreements submitted for review under that section; rather, the section gives the Department a limited period of time to review the agreements before such agreements may take effect. DOJ, which is responsible for enforcing Federal antitrust laws and has also been conducting its own review of the NEA, had not concluded its investigation at the time DOT’s review period ended and DOT entered in the DOT Agreement with American and JetBlue on January 10, 2021”

“The DOT Agreement did not address all of the Department’s concerns resulting from the NEA’s impacts on competition, but instead sought concessions from the carriers that were intended to mitigate some of the anticompetitive harm while providing a means for monitoring the NEA’s implementation.”

On the same date as DOT issued that clarification, the Department of Justice (DOJ) filed a lawsuit against the two airlines. That legal case has just concluded, with the Court finding that the NEA is in breach of US competition laws and giving the two airlines 30 days to unwind it.

The public response of the airlines was that they were “evaluating their next steps”. Before speculating about what those options might be, let us dig in to what the Court said in its judgement.

The judgement

You can download and read the full text of the judgement here. At 94 pages, it is not a short read, but for a legal document, it is a surprisingly entertaining one.

In the very first paragraph, the Court makes it crystal clear that it totally rejects the airlines’ position that the NEA enhances rather than reduces competition.

“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. 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.”

At the heart of the Court’s decision is their view that the NEA largely eliminates competition between two major carriers in the North East and to a large extent more broadly.

“Every antitrust suit should begin by identifying the ways in which a challenged restraint might possibly impair competition. Here, notwithstanding the defendants’ vigorous claims otherwise, the harms are considerable and obvious. Put simply, the NEA has replaced direct and aggressive competition between American and JetBlue on nearly every front (including routes, schedules, and capacity) with cooperation. This, in and of itself, is a fundamental assault on competition and an actual harm the Sherman Act is designed to prevent.”

“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.”

The airlines tried to argue that the NEA did not eliminate competition between them, but their arguments were dismissed with quite some derision.

“There is simply no credible evidence that American and JetBlue have continued to treat each other as competitors within the NEA … To the extent executives of both defendants have made general claims that they continue to view one another as competitors in the northeast… their assertions are unsupported by specific examples or objective evidence, and the Court does not credit them.”

Since both are significant airlines in the region, for the guardians of competition to sanction an agreement that eliminates competition between them would require compelling evidence of countervailing procompetitive effects and consumer benefits. To say that the airlines failed to convince the Court on the existence of such benefits is something of an understatement.

“… certain restraints, based on their character or context, pose threats of anticompetitive harm that are sufficiently obvious that they warrant careful scrutiny, if they can be justified at all. Such restraints include agreements between powerful horizontal competitors to control output or allocate markets, which trigger an especially heavy burden on the collaborators to justify what otherwise would be obviously unlawful collusion.”

“… the more significant the anticompetitive effects, the heavier the defendant’s burden to justify the restraints with evidence of procompetitive benefits.”

“Given the strength of the plaintiffs’ showing of anticompetitive harms, American and JetBlue are obligated to produce substantial, credible, and empirical evidence establishing the procompetitive benefits they claim arise from the NEA. They have not done so.”

The airlines main argument was that by themselves they were unable to provide a strong counterweight to the “dominance” of United and Delta. By permitting them to work together, competition would increase, especially for corporate customers. That argument was soundly rejected.

“Though the defendants claim their bigger-is-better collaboration will benefit the flying public, they produced minimal objectively credible proof to support that claim.”

“Very little direct evidence was adduced from any corporate clients. The plaintiffs offered deposition excerpts of testimony by two clients’ representatives; that testimony does not suggest either client perceived a need for, or a benefit from, the NEA for their own corporate travel purposes. The defendants offered no non-hearsay evidence demonstrating the views of any clients, relying instead on general testimony by the defendants’ own sales executives that they expected the NEA to strengthen their ability to establish new corporate contracts or expand existing ones. The Court believes the defendants’ sales teams expected such results, but testimony about these expectations is not a sufficient basis for the Court to find that the anticipated benefits described are real or substantial.”

“the defendants neither argued nor sought to prove that the NEA was necessary to ensure the survival of either partner. The record would not support such a defense, and the Court need not consider it further.”

I think this case reinforces something that all airline executives contemplating joint ventures or mergers and acquisitions ought to already know. If you do a deal with a significant competitor and that the deal would eliminate or reduce that competition, you’d better have substantive benefits to customers that you can demonstrate. And if you can’t rely on your customers speaking up in support of the deal, you are going to be in trouble when you try and argue that those benefits are real.

The expert witnesses

The Court reserved some of its most juicy language for delivering its verdict on the four expert witnesses fielded by the airlines, all from economic consulting firm Compass Lexecon. I’ve picked out a couple of examples, but I’d recommend a read of the full text if you want to appreciate the absolute roasting handed out to the consultants over the course of several pages.

“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 [Global Network Carrier] 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. Based on the combination of their historical ties to powerful airlines and the manner in which they expressed their opinions from the witness stand, the Court finds as a general matter that the defense experts’ testimony about the defendants and the NEA was tainted by bias.”

“The apparent bias of the defendants’ retained experts is reason enough to reject the opinions and conclusions they rendered in this case. Certain specific aspects of three defense experts’ testimony further undermine their credibility and merit comment. Dr. Darin Lee, an expert on competitive dynamics in the airline industry, expressed opinions that were not soundly reasoned, tailored to this case, or supported by the evidence. “

“Dr. Israel also testified about conversations he had with the defendants’ executives and lawyers regarding the Clean Team’s work (upon which he relied). Though he admittedly took no notes during these conversations, which occurred more than two years before the trial, he claims they are “imprinted in [his] brain” because “[t]his stuff is what [he] do[es] all the time.” That is not credible. It also is undermined by his own concession, moments later, that he could not “recall the specifics” of trial testimony for which he was present only two weeks earlier.”

In contrast, the Court liked the single expert witness fielded by the DOJ, Dr Miller.

“Dr. Miller was a thoughtful, credible, and well-credentialed expert witness. He was articulate and methodical in explaining his conclusions and the analysis underlying them, but also candid in acknowledging the limitations of his opinions. More than any other expert testifying in this case, Dr. Miller was consistently measured and precise in his responses, even throughout defense counsel’s aggressive cross-examination.”

“In sum, based on both the content of his testimony and the manner in which he provided it, the Court finds Dr. Miller’s analysis both credible and helpful. The same considerations lead the Court to reject, entirely, the opinions and conclusions offered by Dr. Lee, Dr. Israel, and Dr. Carlton.”

Ouch.

Options for Jet Blue and American

I’m not a lawyer, but having read the judgement, I’d doubt there is any point in trying to appeal or challenge the verdict. Perhaps the only thing that could be pursued is to get an extension of the 30 day deadline to unwind the alliance, at least certain parts of it, on grounds of practicality and avoiding disruption to customers.

Assuming the two airlines don’t decide to fully walk away from their collaboration, they will probably try to come up with a more limited deal which removes all elements of pooling of revenues and collaboration on pricing or schedules, perhaps modelled on American’s “West Coast International Alliance” deal with Alaska Airlines.

Perhaps if they had started with such a deal in the first place they would have been able to keep the DOJ onside. But it seems to me they have now created quite an expanse of “scorched earth” with the DOJ and it may be difficult to overcome that, even with a more limited deal.

In any event, if they do decide to try again, I think they are going to need to find some new expert witnesses.