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Defense rests but fireworks continue at airline antitrust trial

The government wants to halt a joint venture in Boston and New York but its top economic expert faced grueling questions in court.

BOSTON (CN) — The defense rested its case Wednesday in the federal antitrust trial seeking to undo an alliance between American Airlines and JetBlue Airways in the Northeast, but the drama continued as the Justice Department recalled its top economic expert on rebuttal and JetBlue’s top lawyer subjected him to a withering cross-examination.

Richard Schwed of Shearman & Sterling tore into professor Robert Town of the University of Texas at Austin, seeking not only to undermine his conclusions but also to portray him as evasive, which appeared to be working.

“This is inefficient,” U.S. District Judge Leo Sorokin scolded Town at one point for equivocating. “It’s better if you just answer the questions.”

JetBlue's joint venture with American allows the two airlines to coordinate schedules, share revenue and offer reciprocal frequent-flyer benefits on flights to and from Boston and New York. The U.S. Department of Transportation approved the deal after a six-month review, allowing it to take effect in February 2021, but the Justice Department claims it’s anticompetitive because it will allow the carriers to restrict capacity and raise prices.

The airlines have vigorously disputed this at trial, arguing that the tie-up enhances competition by allowing them to offer a robust alternative to United and Delta, the dominant carriers in the two markets. They say the deal has allowed them to give flyers many new routes, larger planes and better options.

One of the airlines’ experts, Mark Israel of consulting firm Compass Lexecon, testified earlier this week that the joint venture will ultimately result in 25 new planes and 5.7 million more passengers a year, which implies an annual benefit to consumers of $634 million.

Town tried to undermine Israel’s conclusions, claiming that the airlines would have added capacity anyway, that much of the growth in the Northeast came at the expense of other parts of the country and that Israel had used a “very simplistic formula” to arrive at “implausible figures.”

According to Town, applying Israel’s formula to a new nonstop flight from Boston to Indianapolis resulted in an implied price to consumers of negative $1,135.

Town argued that historically airline consolidation hasn’t resulted in consumer benefits, but Schwed noted that he was asked earlier in the trial about a paper he was working on at the time the government hired him that showed consumer benefits from the American-U.S. Airways merger. Schwed asked him if he had gone back and reviewed the paper after he was asked about it, and Town said no. “You weren’t a little bit curious?” Schwed asked.

Town replied that the paper was never completed, but Schwed noted that one of his co-authors had presented it at a NYU seminar. “I don’t recall that,” Town said.

Schwed pressed Town on the fact that he had criticized Israel’s methodology but hadn’t offered an alternative. “You didn’t try to quantify the benefit?” Schwed asked. Town said no. “You didn’t attempt to derive a demand curve?” Schwed pressed. Town said no. “You can’t say there was no benefit, can you?” Schwed continued. Town said no.

Schwed forced Town to admit that his results differed from Israel’s on one issue because he assumed a different measure of price elasticity, but Israel’s assumptions were based on published data, and Town would have gotten the same results with those assumptions.

Town noted that three of the new routes American had added went to Colombia, but it was planning to stop those routes in the near future. “Do you know what they plan to do with those planes and those takeoff slots?” Schwed asked, and Town admitted that he didn’t. “If they’re stopping that service because it’s unprofitable and reallocating it somewhere else where there’s more demand, that would be a consumer benefit, wouldn’t it?” Schwed asked. “It’s hard to say,” Town answered.

Schwed pointed out that, as a result of the alliance, JetBlue had extended the life of a number of planes that it had planned to retire. “That shows growth, doesn’t it?” Schwed asked. “Potentially,” Town replied.

“Why do you keep saying potentially? Has anyone testified otherwise?” Schwed demanded.

Finally, Schwed attacked Town’s assumption that JetBlue planned to expand anyway, noting that it was based on an old planning chart that didn’t factor in fleet reductions resulting from Covid. “That changes the result, doesn’t it?” he asked. “It might,” Town replied.

“Dr. Town, at some point you have to stop saying ‘might’ and admit that some things actually do have an effect,” Schwed commented sarcastically.

Testimony is expected to conclude Thursday and closing arguments are slated for the week of November 7. Sorokin has indicated that he will review post-trial briefs and won’t issue an immediate ruling.

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