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A little more than a decade ago, a Big Bang of mergers winnowed the U.S. airline industry down from more than a dozen major airlines to just four. Delta acquired Northwest; United acquired Continental; American merged with US Airways; and Southwest took over AirTran. A few years after this, a fifth large carrier was born when Alaska bought Virgin America in 2016 (after both American and JetBlue were said to be interested in Richard Branson’s U.S. airline).
Interestingly enough, both of those airlines found themselves in headlines on Wednesday about antitrust scrutiny.
But before we go there, it’s important to note that by the end of the Obama administration, regulators and many in the industry said enough was enough.
Consolidation had gone too far, reducing customer choice, raising fares, and cutting off access to many of the smaller cities airlines used to serve. But airlines argued, accurately, that the chronically money-losing industry had turned around, generating years of profits. Flush with profits reaped by consolidation, American CEO Doug Parker famously said no U.S. carrier would ever lose money again.
Until a global pandemic struck, that is.
So this led JetBlue into American’s arms. Realizing regulators would probably never approve a full-on merger, the two struck a deal last year that competitors called “a pseudo-meger,” deeper than a traditional codeshare relationship but stopping short of an actual merger. The alliance has generated more than its share of controversy, with competitors like Spirit and Southwest crying foul, arguing that the deal would reduce competition at some of the country’s most congested airports in New York and Boston. Despite these concerns, and after a months-long review and the usual public-comment periods, the U.S. Transportation Department (DOT) approved the deal earlier this year.
Enter the Justice Department (DOJ). The Wall Street Journal on Wednesday broke the story that DOJ is reviewing the American-JetBlue alliance and could recommend the DOT revokes its approval.
At issue is what Spirit has long complained about: Airport access. American and JetBlue combined flew 44 percent of the passengers at Boston and 32 percent of the passengers at New York John F. Kennedy International and LaGuardia airports in 2019. The latter two are among the most congested airports in the country, with the limited access at each coveted by airlines for the lode of passengers in the New York metropolitan area and for the connections those airports offer throughout the country and the world. Additionally, the two carriers have a large presence at Washington Reagan National Airport, among the most coveted — and restricted — airports in the country. American had to divest several slots, or takeoff and landing times, at the airport when it acquired US Airways, but its competitors are clamoring for more access.
As a remedy, the two airlines said they would divest some of their slots — takeoff and landing times — at all airports, a measure Spirit, among others, said did not go far enough. The alliance would create an almost insurmountable barrier to competition in the Northeast and was not in the public interest, opponents argued.
It is an open question if DOJ will buy that argument or if it will accept JetBlue’s and American’s defense of the alliance, which an American spokesperson said would “quickly bring more choice, lower fares, and better travel options to consumers in the Northeast.”
On the one hand, it can be argued that consolidation did go too far. Customers often face one major choice at an airport — think of Atlanta, for example, which Delta dominates. Sure, there are smaller players, like Spirit, Frontier, Sun Country, Allegiant, and even JetBlue, among others, but they don’t offer the networks and reach that the five largest carriers do Plus, those smaller carriers serve a niche: Primarily leisure travelers who don’t need the frequency and connectivity that a global network provides. An airline is only as strong as its network, and airlines with the strongest networks win this battle.
On the other hand, the pandemic has battered all airlines, but some more than others. American, Delta, and United have pivoted their networks to go after leisure passengers, now that international and business travel has all but evaporated. Anything that buoys their balance sheets by funneling passengers onto planes should be encouraged, as this American-JetBlue alliance would do.
Finally, JetBlue is at a considerable disadvantage —not big enough to play in the same sandbox as its larger competitors, but with a similar business and leisure network, and too upscale to compete effectively with the ultra-low-cost competitors. In the context of the pandemic, a deep partnership with a carrier like American could be a lifeline, feeding valuable passengers onto JetBlue’s network.
Which way will this DOJ review go? It would be highly unusual for Justice to ask DOT to reverse its approval. But we’re in a new administration, with a new head of DOT, Secretary Pete Buttigieg. His predecessor, Elaine Chao (wife of Senate Minority Leader Mitch McConnell, Republican of Kentucky), served in two Republican administrations and was known to be friendly to business.
Buttigieg, on the other hand, is a newcomer to the national scene who rose to prominence as a credible Democratic presidential candidate despite his only government service having been as mayor of South Bend, Indiana. He is young and ambitious, eager to make a bigger name for himself on the national stage and to prove his bona fides with Democratic voters. Could that include taking a stand for what he thinks is more consumer choice?
Whichever way Justice rules on this matter, it will send shockwaves through the industry. If DOJ upholds the deal, what’s to stop other “pseudo-mergers” and will any future such deal choke off access to the most coveted airports for all new entrants? Airlines like Spirit could forever be marginal niche players at major markets like New York and Los Angeles.
If DOJ recommends the partnership be cancelled, the fate of two large airlines, their businesses ravaged by the pandemic, could lie in the balance.