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US lawyers struggled to paint American Airlines as a monopolist in first day of antitrust trial

The country’s largest carrier is breaking the law by trying to short-circuit its competition in Boston and New York, the Justice Department claimed, but it faced hurdles on the first day of trial.

BOSTON (CN) — The country’s largest airline is a predator that is co-opting its upstart rival JetBlue Airways so it can illegally reduce flights and jack up prices for consumers, the Justice Department told a federal judge Tuesday.

American Airlines “wiped out a competitor” and that will lead to “reduced options, higher fares and often worse service,” government lawyer William Jones told to U.S. District Judge Leo Sorokin in opening statements at an antitrust bench trial in Boston.

The government wants to halt a joint venture between the two carriers in Boston and New York that will cost customers “hundreds of millions of dollars a year” in higher ticket prices, according to William Matlock of the Massachusetts attorney general’s office, who represents six states that also joined the lawsuit.

But the government struggled with the fact that the joint venture has been operating for 18 months and there is apparently no evidence that consumers have actually been harmed.

“There is zero evidence that JetBlue has altered its pricing behavior at all,” said American Airlines’ lawyer Daniel Wall, of Latham & Watkins.

JetBlue’s lawyer, Richard Schwed of Shearman & Sterling, told Sorokin that the joint venture had already resulted in 50 new nonstop routes, extra capacity on 90 nonstop routes, 17 new international routes and 45 daily departures that have been upgraded to a better plane.

Wall took direct aim at the government’s case, arguing that the it was built entirely on an antitrust theory that was rejected last year by the Supreme Court as well as an extremely flawed report prepared by an economist.

The economist wrongly assumed that American and JetBlue had completely merged, Wall said, and then applied a “Rube Goldberg kind of logic” that was “wildly unrealistic” and led to “absurd” results — and even then, the economist could only get the results he did by falsely assuming that Newark Liberty Airport wasn’t part of the New York market.

“They want you to pretend that Newark Airport doesn’t exist,” Wall told Sorokin, after which he used the courtroom’s computer to search Google for flights to New York and immediately pulled up numerous flights to Newark.

After opening statements, the government called JetBlue’s CEO, Robin Hayes, as a witness. Justice Department lawyer John Davis spent hours throwing numerous punches, suggesting that JetBlue had done things that hurt consumers, but none of them landed.

The unflappable Hayes explained in his dry British manner that each of the actions was caused by the pandemic or by air traffic control problems.

Davis also cited numerous statements Hayes had made condemning American’s international joint ventures as anti-competitive, but Hayes calmly responded that they were anti-competitive because they were structured differently from JetBlue’s.

What came through in hours of testimony was Hayes’ utter disdain for the legacy carriers and their high-price business model, so the government might have shot itself in the foot by calling him as a lead witness — he didn’t seem at all to have been co-opted nor did he appear to want to raise fares.

The joint venture was announced in July 2020 as a way for American and JetBlue to better compete against Delta and United, the dominant carriers in the Boston and New York marketplaces. It was approved by the Department of Transportation after a six-month review and began operating in February 2021.

The two airlines are coordinating their schedules in the two cities as well as sharing revenue and offering reciprocal frequent flyer benefits.

The government’s theory is that American is threatened by JetBlue’s low-cost model and is trying to co-opt it to prevent competition, especially in Boston and New York which account for two-thirds of JetBlue’s business.

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JetBlue has also been thinking of ramping up low-cost service to Europe, the government claims, and the joint venture will allow American to block these plans because JetBlue will be wary of doing anything that will displease American.

The lawsuit comes at a time when the industry has already consolidated more than at any time in its history, according to Bob Mann, an independent airline industry consultant in Port Washington, New York.

Just four carriers — American, Delta, United and Southwest — account for more than 80% of domestic air travel.

Many of the mergers leading to this state of affairs were led by American’s CEO, Doug Parker, who is referred to within the company as “the Godfather of consolidation,” according to the government’s complaint.

Where Parker has been unable to arrange mergers, as with foreign carriers, he has accomplished much the same effect through joint ventures, with the result that while there appear to be many different airlines flying to Europe, some 87% of the flights are controlled by three joint ventures run by American, Delta and United.

In addition to the northeast joint venture with JetBlue, American recently inked a similar West Coast partnership with Alaska Airlines.

Consolidation of this sort is enormously helpful to large industry players in general because they can charge higher prices, said Mann. Before the post-9/11 industry shakeout, he said, there were many smaller and financially unstable carriers that offered very low prices because they desperately needed cash flow, and the large legacy companies were forced to reduce their own prices to compete.

Joint ventures can harm consumers in two ways, Mann said. The first is that airlines will be unlikely to begin offering nonstop service to a destination if they are getting revenue from a partner that is handling another leg of the flight.

The second is that consumers may book a flight with a legacy carrier, but it makes more economic sense to have the flight fulfilled by a low-cost partner, so consumers don’t get the level of service they expected.

“It’s a race to the bottom,” Mann said.

But Hayes testified that the JetBlue deal was carefully structured to avoid these problems.

Helane Becker, an industry analyst and managing director of investment bank Cowen Inc., thinks Hayes is correct. The deal “was implemented over a year ago and has apparently had the desired impact,” she said, including giving customers the benefit of earning frequent-flyer miles on multiple airlines.

As for JetBlue’s European plans, the company recently started service to London despite the joint venture and Becker thinks its ambitions beyond that are limited anyway. She said the company doesn’t have large enough aircraft to fly profitably anywhere but London, Madrid, Paris and Amsterdam and it has never shown any interest in ordering bigger planes.

It’s curious, Becker said, that the government has gone after the JetBlue partnership while not complaining at all about the similar deal with Alaska Airlines. But Wall suggested in an interview that the Alaska deal didn’t involve any overlapping routes and thus “even the government realized that it had no chance there.”

Although JetBlue is small compared to American — its annual revenue of $8 billion is dwarfed by American’s $45 billion — it has been doing some consolidation of its own. On July 28 it inked a deal to acquire Spirit Airlines for $3.8 billion after the collapse of Spirit’s planned merger with Frontier Airlines.

Schwed cited the deal as evidence that JetBlue remained independent and hasn’t been co-opted.

“American didn’t know about it until it read about it in the papers,” he told Sorokin.

Judge Sorokin wore a mask during the trial, so it was hard to read his reactions to the testimony.

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