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Economist touts millions in savings from JetBlue-American merger

While the government is calling the alliance anticompetitive, the airlines' expert says their collaboration in two Northeast cities has already been a big boon to the public.

BOSTON (CN) — An economist fought back Monday against charges that a partnership between JetBlue Airways and American Airlines hurts consumers, estimating that the deal will actually save flyers more than $500 million a year.

The testimony came on the 14th day of a major antitrust trial in which the Justice Department is claiming that the airlines’ alliance in Boston and New York is illegal.

Mark Israel of the consulting firm Compass Lexecon said the joint venture will ultimately result in 25 new planes and 5.7 million more passengers a year. That’s a 3% total increase in passengers, which implies a 1.5% price reduction or a savings of $634 million.

Although the alliance has been in place only since February 2021, it has already produced estimated savings of $510 million to $610 million, Israel said. Competition and consumer benefits would only increase, Israel continued, if Delta and United — the dominant carriers in the two markets — respond.

The partnership is “a creative, innovative way to compete in a difficult environment … and it seems to be working,” Israel said. The government’s criticisms “are not based on the reality of the markets,” he added, and “blocking it would be bad for consumers in Boston and New York and kill an innovative approach before it’s been given a chance.”

JetBlue's joint venture with American allows the two carriers to coordinate schedules, share revenue and offer reciprocal frequent-flyer benefits on flights to and from the two cities. The U.S. Department of Transportation approved the deal after a six-month review, but the U.S. Department of Justice has called it unlawful.

Israel calmly shrugged off criticisms of his work made by the government’s economist, Robert Town of the University of Texas at Austin. Town criticized Israel’s methodology as unusual, but Israel noted that it’s been used for 50 years, including by the Justice Department itself. He also claimed that Town attacked him for using a modeling method that he never in fact used.

On cross-examination the government’s lawyers repeatedly pointed out that Israel’s analysis of the airlines’ increased capacity ignored the fact that the airlines might have increased their capacity without the alliance. Israel replied that he had made “an apples-to-apples comparison.” He said other possible growth initiatives were speculative and ultimately “meaningless” due to the pandemic.

The Justice Department is suing under the Sherman Act, which generally requires proof that a particular practice is harmful to consumers. But it has made almost no effort to show that the joint venture has harmed consumers by limiting routes and options or raising prices.

A different law, the Clayton Act, applies to mergers and says that the government can enjoin a merger without showing harm to consumers if it can prove that it is more likely than not to substantially lessen competition. So, in a novel approach, the government is trying to show that the joint venture is a de facto merger in the two cities.

Still, it has to show that the alliance is likely to stifle competition. The government has been trying to do this by insinuating that companies working together could conspire to harm consumers, even if they haven’t done so yet.

“An oligopolist considering whether to increase capacity might consider if rivals will increase capacity,” a Justice Department lawyer stated. “Airlines don’t have to sit down in a room together and talk in order to agree on an accommodation of what fares to charge. Isn’t that right?”

The unruffled Israel replied that companies always consider what their rivals are doing when making plans, and there’s nothing remarkable in that.

The government’s complex and somewhat leading questions appeared to wear on U.S. District Judge Leo Sorokin, who interrupted several times to try to clarify what the Justice Department’s lawyers were asking and finally rebuked them for their approach.

“Shorter questions with shorter words are more effective than longer questions with longer words, in my experience,” Sorokin dryly noted from the bench.

Categories / Business, Consumers, Trials

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