U.S. Judge Leo T. Sorokin has permanently enjoined American Airlines and JetBlue from continuing their Northeast Alliance (“NEA”), in which the judge said the pair act as one company, replacing “full-throated competition” with “broad coordination” of business in and out of Boston and New York. That coordination includes trading information on which routes to fly, which company will fly them, and the seating capacity needed to accommodate passengers.
After presiding over several weeks of trial involving mountains of evidence, the judge concluded that the pact plainly violates Section 1 of the Sherman Act. The carriers illegally allocated the market between themselves, and failed to produce evidence of any of the procompetitive effects they claimed justified the arrangement.
“To the defendants, competition is enhanced if they join forces to unseat a powerful rival,” Judge Sorokin wrote, referring to the parties’ mutual competitor, Delta Air Lines. “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.”
This is a big win for the Department of Justice which is attempting to invigorate antitrust enforcement in furtherance of President Biden’s Executive Order on Promoting Competition in the American Economy (July 9, 2021). DOJ was joined in the case by the District of Columbia, Arizona, California, Florida, Massachusetts, Pennsylvania, and Virginia.
The U.S. airline industry is highly concentrated. Four carriers control more than 80% of the market, the global carriers, American, Delta, and United, and a low-cost carrier, Southwest. The remaining 20 percent is served by JetBlue, also considered by some to be a low-cost carrier, and the ultra-low-cost carriers, Spirit and Frontier.
American and JetBlue enjoy a significant number of slots in Boston and New York, where their mutual rivals are Delta in Boston and Delta and United in New York. Until 2020 and the outbreak of Covid-19, the pair were direct competitors in the region. However, in 2020 global airline revenue dropped from 2019's $818 billion to $360 billion due to the pandemic. American and JetBlue teamed up to coordinate their operation of flights in and out of Boston and New York and share revenue. Their Northeast Alliance, Judge Sorokin wrote, was a “sea change.” The NEA involved coordination by the partners regarding capacity, scheduling, network planning, revenue sharing, and the allocation to one partner of markets previously served by both partners. “Carriers in the United States have not historically attempted arrangements that intertwine their operations so broadly with other domestic airlines,” the Judge wrote. “This is at least partly due to a general understanding across the industry that such coordination would run afoul of federal antitrust law.” The government, the court concluded, “convincingly established that this arrangement immediately and substantially upsets the competitive balance in a highly concentrated industry, not only on a single overlap route or a handful of [origins and destinations] but throughout the northeast and beyond.”
The carriers’ defense was based on the fallacious theory of “countervailing monopoly,” that is, the notion that the antitrust law will tolerate the accretion of monopoly power by illegitimate means if its purpose is to constrain the monopoly power of a rival. Here, the carriers claimed that they could not otherwise challenge Delta and United in the northeast without the NEA. The court would have none of it. “That is not the kind of competition valued and protected by the Sherman Act,” he wrote.
“It is abundantly clear to the Court that the defendants’ primary motivation in establishing the NEA was to strengthen their own competitive positions against Delta (and, to a lesser extent, United) in Boston and New York. Their own witnesses, business records, and submissions to the Court have repeatedly described this purpose,” the judge wrote.
After itemizing the competitive harm—higher prices, fewer flights, and higher operating costs, and limits on previously available expansion opportunities—the judge concluded that the objective of the deal was not to provide the ballyhooed benefits to consumers from an “optimized” network and “bigger-is-better collaboration.” Rather, the NEA was merely a “naked agreement not to compete with one another … just the sort of ‘unreasonable restraint on trade’ the Sherman Act was designed to prevent.” The court concluded that the parties failed to show any procompetitive benefits that would justify its “substantial anticompetitive harms.”
In any antitrust trial, the outcome is likely to be significantly influenced by the testimony of the economic experts. Here, the court found the government’s expert “thoughtful, credible, and well-credentialed.” He was “candid in acknowledging the limitations of his opinions,” and “consistently measured and precise in his responses” even in the face of “aggressive cross-examination.” Accordingly, the court accepted his opinion that “the NEA will create upward pricing pressure, a conclusion which is well supported by basic economic principles and incentives, and which confirms the conclusions the Court reaches independently …”
By contrast, the court declined to give the parties’ experts any weight whatsoever. The court found them “tainted by bias,” exhibiting “the demeanor and tone of an advocate invested in the outcome of this case.” When one said the barriers to market entry were “quite low,” the judge said the assumption, among other things, “misunderstands the standards governing federal antitrust analysis.” The court found the opinions of another defense expert “absurd” and “contaminated” by scenarios crafted by the airlines.
With the existence of an agreement that impacts commerce “beyond dispute,” the court conducted “a deep and searching review of the voluminous record” into the reasonableness of the restraint. He found “considerable and obvious” competitive harm to once vigorous competition between two of the four largest domestic carriers in the northeast. But the court also found the assignment of routes to one NEA partner or the other to be a “straightforward example of market allocation,” which is a per se violation of Section 1. Although the court “declin[ed] to apply per se analysis where the plaintiffs d[id] not invoke it,” it considered the market allocation as strong evidence of the NEA’s actual anticompetitive effect. The NEA, he said, has “materially altered the competitive landscape in a highly concentrated industry, and in a region with significant barriers to entry.” It reduced competition, diminished JetBlue’s independence, and allowed the two airlines to “engage in horizontal market division.”
The court gave the parties 30 days to end their alliance.
Prior Airline Industry Posts from MoginRubin:
Edited by Tom Hagy. Photo by Hector Falcon on Unsplash