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Judge keeps alive challenge to American-JetBlue alliance

The Department of Justice’s antitrust attack on the airlines’ joint venture is “too important” to rule on yet, a federal court declares.

BOSTON (CN) — A federal judge rejected a motion Friday by American Airlines and JetBlue Airways to throw out the Department of Justice’s antitrust challenge to their joint venture in Boston and New York at the close of the government’s evidence.

“This case is too important” to rule on without a full trial, U.S. District Judge Leo Sorokin said, denying a motion for a directed verdict.

The joint venture 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, and it took effect in February 2021, but the U.S. Department of Justice claims it’s illegal.

The case is important not only because of its obvious business significance but also because it represents an almost completely novel legal theory put forward by the government.

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.

The airlines have introduced plenty of evidence showing that in the 20 months the alliance has been in effect, options and routes have increased considerably, and the two airlines have been better able to compete against Delta Air Lines and United Airlines, the dominant players in the market.

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, the government is trying to show that the joint venture is a de facto merger in the two cities and then import that analysis into the Sherman Act.

This approach is virtually unprecedented, which means that whatever ruling Sorokin makes will be groundbreaking and might explain why he wants as much evidence as possible.

In cross-examining the government’s witnesses, the airlines’ lawyers have been keen to highlight ways the alliance differs from a merger. The two companies don’t share profits, coordinate prices or consult on business decisions, for example.

Because the government can’t argue that the airlines have reduced services or raised prices, its case consists of trying to show that the airlines could do so in the future and would have a profit incentive to work together toward that goal. This week the government made that argument through two economists: Nathan Miller, a professor at Georgetown, and Robert Town of the University of Texas at Austin.

After Sorokin ordered the case to continue, the airlines’ first witness was Boston economist Darin Lee who directly attacked his professional colleagues. Miller’s analysis was “bizarre,” “puzzling” and “way out of whack,” Lee testified.

“It’s like Professor Miller did a homework assignment but only turned half of it in,” he said dismissively.

As for Town, “a whole bunch of things are wrong with his model,” Lee said. “It’s so fragile that if I just add one variable, it falls apart.”

Justice Department lawyer Edward Duffy attacked Lee on cross-examination, noting that the airline industry had paid him $10 million over 20 years for his work.

A key issue in the economists’ battle is whether Newark Liberty International Airport is part of the New York City market. The airlines insist it is, and Lee noted that almost 18% of taxi and rideshare trips going from Manhattan to an airport go to Newark.

“But that means that the vast majority of riders are going to JFK and LaGuardia, right? Over 80%,” Duffy pointed out.

Duffy introduced documents in which airline executives discussed “capacity discipline,” which he interpreted as shorthand for limiting seats to raise prices. But Lee argued that this was “a tarnished view.”

“Capacity discipline is about aligning supply and demand,” he said. “The carriers are just trying to avoid the mistakes that led a lot of them into bankruptcy.”

The trial was originally scheduled to wrap up early Monday, but the defense still has several more economists to call, and it appears that the legal battle will run substantially past the deadline.

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