Wednesday, December 6, 2023
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Does Newark Airport serve New York City? Billions of dollars may ride on the answer

As the government sues to shut down an airline alliance, the role of a hub across the Hudson River may determine the future of the industry.

BOSTON (CN) — Tempers flared Tuesday on a key question in the government's bid to break up a joint venture in the Northeast between American Airlines and JetBlue Airways: whether Newark’s airport is part of the New York City market.

“You have this big airport proximate to New York, and to act like that’s not part of the New York market is counterintuitive and implausible,” asserted Jan Brueckner, a professor at the University of California at Irvine who has published 37 academic papers on airline economics.

Established in February 2021, the airlines’ joint venture allows them to coordinate schedules, share revenue and offer reciprocal frequent-flyer benefits on flights to and from New York and Boston. The U.S. Department of Transportation approved the deal after a six-month review, but the Justice Department brought antitrust claims to quash it.

Most of the airlines’ New York flights involve the John F. Kennedy and LaGuardia airports, both in Queens, so the answer to whether the tie-up is anticompetitive turns in large part on whether the New York market includes a major player in a neighboring state: Newark Liberty International Airport, which is dominated by the airlines United and Delta.

Testifying for the airlines Tuesday, Brueckner said the government's argument that Newark is a wholly separate market “goes against intuition” whereas including it “conforms to common sense."

The airlines’ lawyers have been ridiculing the idea that Newark is a separate market ever since opening statements, when American’s chief lawyer Daniel Wall of Latham & Watkins used the courtroom’s computer to search Google for flights to New York and immediately pulled up numerous flights to Newark.

Later, Boston economist Darin Lee noted that almost 18% of taxi and rideshare trips between Manhattan and an airport go to Newark.

“But that means that the vast majority of riders are going to JFK and LaGuardia, right? Over 80%,” Justice Department lawyer Edward Duffy shot back.

Supporting his economic analysis that includes Newark in the New York market, Brueckner noted that prices at all three airports fluctuate when low-cost carriers add capacity at one of them. He said of the government’s contrary approach: “How they reached that conclusion is not clear … they don’t have a decision rule.”

On cross-examination, however, Duffy confronted Brueckner with an analysis that the witness created in 2014 to defend the United-Continental merger. Duffy said the data at the time showed Newark wasn’t part of the New York market, but Brueckner ignored the data to help his client, declaring that Newark was part of New York.

“You had no decision rule for Newark in 2014,” Duffy said.

“The decision rule was common sense,” Brueckner claimed.

“Yes, but there’s no econometric rule for common sense,” Duffy countered.

In another contrast to 2014, Duffy noted that Brueckner’s latest report came up with different conclusions about which airports should be included in six of 13 other metro markets. Brueckner insisted that it didn’t make a difference but acknowledged that there was no proof of that in the evidence. “So we just have to take your word for it,” Duffy said.

Duffy then asked why Brueckner’s report didn’t consider Dulles International Airport to be part of the Washington market even though it was only 25 miles away, and Brueckner had trouble answering. “I’ve been to Dulles,” he finally said. “Getting there is very inconvenient.”

The airlines had better luck with their next witness: Brian Znotins, American’s president of network strategy. Znotins rejected the government’s contention that the alliance would allow the airlines to reduce capacity and increase prices, saying that coordinating schedules with JetBlue had in fact allowed the airlines to add 29 new routes in New York and 18 in Boston.

Using JetBlue’s routes as feeders enabled American to profitably add new international destinations such as Delhi, Doha and Tel Aviv, Znotins said.

“You can’t shrink to profitability,” he added. “We have a heap of fixed costs. Shrinking becomes a vicious cycle. You’re spreading your fixed costs over fewer seats.”

Justice Department lawyer James Moore confronted Znotins with documents suggesting that American was planning to add capacity even before the joint venture was announced, but the lanky and thoughtful Znotins effectively responded that the documents were just lists of options and possibilities, not actual plans. They didn’t become plans until the alliance became a reality, he said.

The trial will continue this week and closing arguments are expected the week of November 7.

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