The controversial northeast alliance between American Airlines and JetBlue Airways, dubbed a “pseudo-merger” by some, is no more. Well, in under 30 days time and pending a possible appeal.
U.S. Court for the District of Massachusetts Judge Leo Sorokin gave the U.S. Justice Department a big win on May 19, and ordered the airlines to unwind their alliance, known as the NEA, within a month. He found that American and JetBlue, by entering into what is essentially a domestic joint venture, hurt consumers and eliminated competition from the Boston and New York markets.
“A hallmark of a free market is the incentive to fight for revenue and customers against one’s direct competitors,” Sorokin wrote. “As between American and JetBlue, that incentive is eliminated by the NEA.”
Attorney General Merrick Garland called the ruling “a win for Americans who rely on competition between airlines to travel affordably.”
An American spokesperson called the ruling “incorrect,” and described the alliance as “anything but anticompetitive.” And a JetBlue spokesperson said they were “disappointed” in the decision.
American and JetBlue unveiled their alliance in July 2020 amid the depths of the Covid-19 pandemic. The unprecedented pact for two U.S. domestic carriers allowed them to coordinate schedules and share revenues in Boston and New York where they both committed to grow. JetBlue essentially became a shorter-haul feeder for American in those markets, while the latter expanded its international longhaul footprint in both cities. The alliance was approved with few conditions in the waning days of the Trump administration in January 2021.
The DOJ, under the Biden administration, nearly immediately took a new look at the pact and sued to block it that September.
“By aligning its interests with [American], JetBlue has sacrificed a degree of its independence and weakened its status as an important ‘maverick’ competitor in the industry,” Sorokin wrote in his decision.
For example, Sorokin cited separate decisions by both the U.S. Department of Transportation and UK’s Competition Markets Authority deeming JetBlue ineligible for certain airport slots as a result of its American partnership. The DOT awarded 16 “runway timings” at Newark to Spirit Airlines after deeming JetBlue ineligible. And the CMA came to the same conclusion regarding London Heathrow slots divested by American and British Airways as a remedy for the transatlantic joint venture.
JetBlue leased slots from Qatar Airways to launch its flights to Heathrow that began in August 2021.
Wall Street analysts and many industry watchers had expected a ruling in favor of American and JetBlue. In January, J.P. Morgan analyst Jamie Baker wrote that he was “not impressed” by the government’s arguments in court. For example, the government’s arguments over concentration in New York focused on just two of the city’s airports — JFK and LaGuardia — whereas most regular New York City flyers would say the city has three main airports — including Newark — and price check flights across all three.
Sorokin, rather, took a much broader look at competition in his ruling. Citing the Sherman Act, he wrote that federal antitrust law was “not concerned with making individual competitors larger or more powerful. It aims to preserve the free functioning of markets and foster participation by a diverse array of competitors.” And American and JetBlue’s alliance effectively removed a competitor in Boston and New York.
TD Cowen and Raymond James analysts, in separate reports, similarly expressed surprise over the ruling. TD Cowen analyst Helane Becker said she believes the ruling could be appealed by American and JetBlue.
An American spokesperson said the carrier is “considering next steps.” A JetBlue spokesperson said it was “evaluating” next steps.
The broader implications, however, are significant. JetBlue stands to lose the most without the alliance given the nearly 100 additional New York JFK and LaGuardia slots it leased from American, and the access to its larger competitor’s deep rolodex of corporate customers. American, for its part, would have to decide if it makes sense to resume all of the shorter, regional routes that it previously flew from New York with the slots it leased to JetBlue.
But the bigger question is what the ruling means for JetBlue’s pending merger with Spirit Airlines. The DOJ has already sued to block the combination with antitrust regulators arguing, again, that it would reduce competition and hurt consumers. JetBlue and Spirit, unsurprisingly, argue that it would benefit consumers by creating a stronger, larger airline.
Analysts are split on what it could mean. Most acknowledge that, without the American alliance, JetBlue’s argument that it needs Spirit is stronger. But at the same time, they view the DOJ’s win here as strengthening its arguments against a JetBlue-Spirit combination. “Hard to say how this plays out either way,” Melius Research analyst Conor Cunningham wrote last week.
Many believed that JetBlue’s best bargaining chip with the DOJ was the American alliance. JetBlue could have, had the court upheld the pact, offered it up as part of a negotiated settlement with the regulator. That option is off the table now. Without Spirit, JetBlue risks returning to being the third largest airline by seats in northeastern U.S. — its most important region — rather than the largest when combined with American, according to Cirium Diio data.
The DOJ, for its part, has indicated that it views the JetBlue-Spirit deal as anti-competitive even without the American alliance. And officials have indicated that their concern is over competition or lack thereof on a route-by-route basis; something that cannot be remedied with slot or gate divestitures.
“We have an administration that we believe can be reasonably characterized as anti-M&A,” J.P. Morgan’s Baker wrote. “In our minds, JetBlue needs some sort of an asset to be willing to trade away in order to curry regulatory favor. We felt the NEA was such an asset. Therefore, in the absence of the NEA, it is difficult for us to identify potential remedies that JetBlue can offer up.”
The JetBlue-Spirit merger case is scheduled to go to trial in October. JetBlue CEO Robin Hayes has said repeatedly that he intends to fight the DOJ in court.
For American, the unwinding of the northeast alliance is not good for the carrier’s competitive position in Boston or New York; it repeatedly cited losses in the latter prior to forming the alliance with JetBlue. But it may not be that bad either: American Chief Financial Officer Devon May said last week that unwinding the partnership would not be “meaningful to our earnings projections” for 2023.
It could also allow American to more fully recover its operations outside of the two northeast markets. Sorokin noted in his ruling that the airline moved longhaul aircraft from Philadelphia to New York to support the partnership even when those new routes underperformed. No longer needing to fly additional longhaul services from New York could allow American to rebuild its Philadelphia hub where capacity remains down nearly a quarter from before the pandemic, Diio data show.
Ryanair Posts Negative First Quarter Margin
Wait a minute, Ryanair lost money? Well, yes. Its calendar first quarter operating margin was negative 12 percent. But that’s not abnormal. In 2019, its operating margin in the sleepy January-to-March quarter was negative 17 percent. That said, Europe’s largest low-cost carrier does have an earlier history of earning at least modest first quarter profits. Also keep in mind that both 2018 and 2019 were uncharacteristically weak for Ryanair. Its operating margins in those two years were 16 and 13 percent, respectively. And yes, that would be great for most airlines. But from 2015 through 2017, its margins were between 22 and 24 percent. Those final two years of the 2010s were burdened by major fleet disruptions owing to Boeing’s 737 Max problems. In addition, Ryanair was at the time stomaching startup losses from acquisitions, including its takeover of Lauda Air in Austria, then a bloody low-fare battleground. Fares across Europe were in general depressed. Then came the pandemic, which Ryanair endured better than most, even managing to avoid layoffs.
Now, the discounter finds an extremely strong fare environment, plus more fleet planning certainty — “The Boeing delivery delays are getting resolved,” CEO Michael O’Leary said during Ryanair’s earnings call last week. “I think we’re now down to talking weeks instead of months for the remaining aircraft for this summer. We’re now reasonably confident we’re going to get all of the 51 aircraft by the end of July.”
O’Leary, as usual, spent much of the call trash-talking competitors, regulators, and unions. And he also trumpeted Ryanair’s enormous cost advantages, which he said will expand with the new fleet of 737-10s it ordered earlier this month. Fortuitous fuel hedging has also saved the carrier more than $1 billion in the past year. The demand situation, meanwhile, could hardly be better. Europeans are traveling for sure, “despite fears over energy cost, inflation, [and] rising interest rates.” In addition, Ryanair’s planes will be full of visiting Americans and even Asians this summer.
Fares are up not only because of this strong demand situation. They’re also up because “a huge amount of capacity has been weeded out of Europe.” O’Leary named Thomas Cook, Flybe, Germanwings, Alitalia, TAP Air Portugal, and Lufthansa as carriers either defunct or significantly downsized their shorthaul capacity. “Lufthansa, for example, this year in the German market, is still only operating at 80 percent of its pre-Covid capacity in the shorthaul market, and yet prices have doubled.” O’Leary added: “Business travel, leisure travel, visiting friends and family, is no longer a luxury. It appears to be kind of a necessity.” Ryanair’s own costs are rising though. That includes fuel costs, with 85 percent of its needs now locked in at about $89 a barrel (it’s currently trading in the $70 range).
Does Ryanair still have plentiful growth opportunities? Can it really fill all those new seats it’s planning to add? Yes, insists O’Leary. “We have more growth opportunities out there than we can handle, not just for the next 12 months, but certainly for the next 5 or 6 years.” One path of opportunity will lie with mergers, perhaps of its own volition, or perhaps by buying airport slots divested in conjunction with other airlines merging — IAG buying Air Europa, for example. Ryanair has said it will look to eastern Europe and the Middle East for more traffic. it still sees more growth potential in Italy, its largest country market. Ditto for Spain, the UK, and its home country Ireland. It has no intention, however, of flying across the Atlantic.
Some of Europe’s Top Domestic Markets Aren’t Coming Back
A shift is underway in how Europeans get around. Air travel is still king with discounters, like Ryanair and Wizz Air, carrying record numbers of fliers around the continent. But in some of Europe’s largest domestic markets, trains are emerging as clear winners.
Airline seats in France and Germany, two of the continent’s largest aviation markets — both within Europe and globally — are down double digits since 2019. There are 49 percent fewer airline seats in Germany today than there were in 2019, Cirium Diio schedule data for the second quarter shows. And seats in France are down 20 percent over the same period. Domestic seats are also down in Finland, Norway, Sweden, and the UK.
Several domestic markets, particularly those in southern Europe, do continue to grow. Seats in Greece are up 10 percent, Italy 9 percent, and Spain 7 percent in the second quarter compared to four years ago, according to Diio. This growth comes despite robust rail networks in Italy and Spain; though the latter’s system focuses primarily on Madrid and Barcelona, and not connecting secondary cities. Greece, on the other hand, has limited ground transport options given its primarily archipelagic geography. The three countries are also among the air travel recovery leaders as fliers have flocked to warmer, outdoors-oriented markets.
“We’re never going to go back — we’re not going to go back to the [pre-crisis] levels,” Air France-KLM Chief Financial Officer Steven Zaat said on the French domestic market in July 2021. And while at the time Zaat’s comments were true for Air France, it is increasingly clear that the entire French domestic airline market is unlikely to fully recover amid broad shifts in the way people travel.
Anne Rigail, CEO of Air France, said in March that the shift on routes like Paris Orly to Marseille has been “so strong [and] so quick,” that the airline was forced to reactively slash schedules.
French rail operator SNCF is seeing record ridership on its high-speed TGV and long-distance trains. Ticket sales on these trains were up 10 percent from 2019 levels to a record 28 million last summer, a SNCF spokesperson said. And this summer, the rail operator expects further increases with forward sales “really positive.”
France stands out as being the sole country in Europe to ban domestic flights where trains can make the journey in two-and-a-half-hours or less as part of a climate law aimed to cutting carbon emissions. Air France said it has suspended three routes from Paris Orly airport as a result. Recent criticism of the law has focused on the fact that connecting flights still operate — for example ones to Air France’s hub at Paris Charles de Gaulle airport — and that initial proposals sought to ban flights on routes where trains made the journey in four hours or less, which would have significantly increased the number of affected routes.
“We see an increased change in behavior of the customer on the point to point [domestic] routes lately,” Rigail said in March. “Maybe because there [are] a lot of topics around lowering the consumption of energy. But also in the government recommendations in France, they recommended all the public companies to prefer the train under four hours of travel.”
Corporate travelers, the bread and butter for airlines like Air France, have shifted in even greater numbers to trains, Rigail added.
Germany is seeing a similar travel mode shift. Domestic policies like the so-called nine-euro ticket for regional and medium-distance trains have promoted rail travel within the country. And rail operator Deutsche Bahn has recently opened new lines, for example a new high-speed track between Stuttgart and Munich, that allow for more, faster trains. The railroad carried 132 million passengers on its long-distance trains last year, below the pre-pandemic high of 152 million but exceeding 2019 numbers during the peak summer months.
“Demand is good and is continuing to grow strongly,” Deutsche Bahn CEO Richard Lutz said in March. “We may well set a new record in 2023, with significantly more than 150 million travelers on our long-distance trains.”
While Lutz did not comment on corporate versus leisure travelers, Lufthansa Group CEO Carsten Spohr said earlier in May that they do not expect 100 percent of domestic Germany corporate demand “ever coming back.” Lufthansa, as well as other airlines like EasyJet, has shifted aircraft and resources away from domestic German routes and to other European and international markets.
Air France and Lufthansa’s decisions to shift aircraft out of their respective domestic markets comes amid a global push to reduce carbon emissions. Both airlines have committed to net-zero emissions by 2050, and significant reductions during the intervening 27 years. The industry is embracing everything from sustainable aviation fuel (SAF) to electric and hydrogen-powered planes to achieve its targets. And a renewed push for “air-rail connections,” or tickets that include both flights and trains on a single itinerary, are widely seen as an easy and relatively quick way to cut emissions on some shorter routes.
Air France has recently expanded the number of destinations covered by its Train + Air partnership with SNCF, and is working to improve the on-the-ground connection experience at Charles de Gaulle. Lufthansa has similarly recently expanded its Lufthansa Express Rail tie up with Deutsche Bahn at the Frankfurt airport, and the German rail operator has even become Star Alliance’s first multimodal partner. And in its ITA Airways deal announcement Thursday, Lufthansa devoted an entire paragraph to how it aims to develop “intermodal transport for feeder traffic” with Italy’s Ferrovie dello Stato Italiane railroad at Italian airports.
Delta, Iberia, KLM, Swiss Air, and United have also recently expanded partnerships with rail operators.
Air-rail connections, however, still account for a very small percentage of airline traffic. Air France sees about 160,000 Train + Air passengers annually, and Lufthansa roughly 575,000 Lufthansa Express Rail customers.
“We will definitely increase [the number], because of [the] better experience [and] the fact that a lot of people buy separate tickets at the moment,” Rigail said of Air France’s plans for its Train + Air partnership.
At the same time Rigail was clear: Air France has no plans to resume the domestic France schedule it flew in 2019.
In Other News
- Australia’s Qantas will give an in-depth investor presentation this week, outlining its vision for the years ahead. Last week it gave a brief update on current market conditions, with outgoing CEO Alan Joyce describing demand as “extremely” strong. Joyce’s replacement Vanessa Hudson answered investor questions as well, echoing the message that yields are strong and should remain that way, especially for international markets. Leisure demand and small business demand are leading the way. Corporate demand is still “well below from where it was before Covid.” It thinks corporate demand will improve only when people get back to working in offices. On the cost side, Qantas feels its operations have stabilized to the point where it can remove some of the buffers it implemented last year. And that will reintroduce efficiencies. It’s also taking new planes — four already this year, and another eight before the end of calendar 2023. These will enable new routes like Auckland-New York and the re-entry to markets it previously served, like San Francisco and Shanghai. On a final note, longtime American CEO Doug Parker, who recently retired, is now a Qantas board member. American and Qantas, remember, operate a closely-aligned transpacific joint venture.
- The Lufthansa Group and Italy’s Ministry of Economy and Finance agreed to a deal for ITA Airways. The Frankfurt-based group will acquire an initial 41 percent stake in the state-owned airline for €325 million ($348 million) and full control of ITA at a later date. The much talked about deal is the first post-pandemic consolidation among European airlines with more likely on the way — Air France-KLM is interested in TAP Air Portugal, and International Airlines Group is awaiting approval for its takeover of Air Europa. Lufthansa, however, will not have it easy: ITA, and its predecessor Alitalia, have lost money for years and frustrated other commercial partners, including Air France-KLM and Etihad Airways. No matter, Lufthansa Group CEO Carsten Spohr said the deal is a “win-win,” and emphasized plans to grow ITA’s Rome hub into a southern gateway for the group.
- Airlines for America (A4A) forecasts 257 million people will fly on U.S. airlines this summer from June through August. The outlook represents a nearly 1 percent increase from 2019 numbers, and would occur despite schedules that are about 10 percent smaller than four years ago. The average number of seats per departure, however, is estimated to be up 14 percent to 137. Everyone is on the lookout for potential operational disruptions following last summer’s chaos. Transportation Secretary Pete Buttigieg said the Memorial Day weekend holiday, the unofficial start of summer in the U.S., will mark a “test of the system.”
- The U.S. air traffic controller shortage is not expected to get better anytime soon. “This is going to be a journey, especially when you factor in attrition, to get to levels we want to see … I think it’ll be a while before we’re at levels we’d like to see,” Secretary Buttigieg said last week. The Federal Aviation Administration is about 3,000 controllers short of its target staffing levels this summer though, Buttigieg said, it plans to hire roughly 1,500 new controllers this year. Another 1,800 could be hired next year if Congress approves President Biden’s budget request. However, former National Air Traffic Controllers Association (NATCA) President Paul Rinaldi said separately last week that about half of new hires drop out of the FAA’s controller training program.
- Delta has named Mike Spanos, a long-time senior executive at PepsiCo, as its next chief operating officer. He replaces Gil West who left the airline in early 2021. Spanos’ first day at the Atlanta-based carrier is June 12.
- Malaysian regional carrier SKS Airways has ordered 10 Embraer E195-E2s. Deliveries of the 136-seat aircraft leased from Azorra will begin in 2024. SKS will use the planes as the “core” of its expansion plans in the Southeast Asian country. And, speaking of Azorra, the lessor has finalized a previously announced deal with Singapore Airlines‘ subsidiary Scoot for nine E195-E2s, also for delivery from 2024.