Issue No. 798
When a Codeshare Becomes a 'Pseudo-Merger'
The JetBlue-American Agreement Raises Eyebrows
Pushing Back: Inside This Issue
Fourth-quarter and full-year 2020 earnings season kicked off last week with Delta's report. The Atlanta-based behemoth thinks business travel will start to recover by the end of this year. IATA and aviation analysts aren't as optimistic, but only time will tell.
Elsewhere in this issue, we look at the JetBlue-American agreement. Southwest and others have aired concerns. Is the deal, given the regulatory nod last week, a codeshare or a pseudo-merger?
Meanwhile, airlines are figuring out how to recall furloughed workers. Aeromexico is in more turmoil as it seeks to cancel its collective bargaining agreements. And all eyes are on the newly fortified Washington as one of the strangest presidential transitions in history occurs.
Coming up: United reports earnings this week.
"We do not expect customer demand in the long haul sector to recover in the near future, and our focus will be on developing our short haul network as we emerge from the reorganization process."Norwegian CEO Jacob Schram
Delta Air Lines is mapping out a three-phase recovery plan for the return of corporate travelers, prompting executives to forecast the optimistic possibility of profits by summer.
A new survey of the Atlanta-based carrier’s largest corporate customers found that 40% plan to resume 2019 levels of business travel this year and another 11% in 2022, Delta CEO Ed Bastian said during the company’s fourth-quarter earnings.
Conversely, another 42% of large corporations were unsure when they would return to 2019 travel levels and 7% said they would never fully return.
“All indications is corporate travel is ready to start coming back and will come back pretty aggressively beginning the second half of this year,” Bastian said.
The return of big-spending corporate road warriors is critical for the airlines’ recovery and is key to the industry’s aims to stop burning cash and, at some point, begin generating profits again.
Not everyone is as optimistic about business travel. A December survey by Atmosphere Research only found 1% of corporate travel managers and buyers anticipating a full recovery in travel spending this year. Another 37% expect to be back by 2023, though that percentage has risen steadily during the last months of 2020.
“They’re not as concerned about the flight, they’re more concerned about the employees’ journey to and at the airport, and where they’re going,” Atmosphere co-founder and travel industry analyst Henry Harteveldt said. These concerns are outside the control of Delta and other airlines.
IATA and Airlines for America (A4A) do not expect a full travel recovery until at least 2024.
Wherever corporate sentiments lie does not change the fact that airlines face a tough winter. Travel demand remains at record lows, having fallen during the first weeks of January from a pandemic peak over the Christmas and New Year’s holidays. Data from A4A shows U.S. traffic numbers down 63% year-over-year during the week ending January 12.
Carriers have pulled back on flights since the beginning of the year. Delta plans to fly as much as 6% fewer seats in January and February than it did in November and December, airline President Glen Hauenstein said during the earnings presentation. And while Delta maintains broad flight connectivity over its “core” hubs — Atlanta, Detroit, Minneapolis/St. Paul and Salt Lake City — operations at its coastal hubs in Boston and New York remain a fraction of what they were prior to the pandemic.
Delta expects 2021 to play out over three distinct “phases,” as Hauenstein put it. The first as a continuation the “choppy” travel demand that dominated 2020 through the winter. An “inflection point” when customer confidence begins returning will mark the second phase sometime in the spring. And a dramatic pick up in travel — the pent-up demand airlines repeatedly say they see in the market — accompanying the broad availability of Covid-19 vaccines sometime during the summer.
“I think in the next 90 days we’re going to see the green shoots we need to see,” Hauenstein told Delta staff during an employee town hall last week.
This trifold outlook differs slightly from that held by many Wall Street analysts and other airlines. They talk of 2021 as a year of two halves: The first half marked by dampened demand through the winter and spring, and the latter a dramatic recovery accompanying the broad availability of vaccines sometime mid-year.
“We expect a disappointing [first half of 2021] before seeing a leap forward in demand” late in the third quarter or in the fourth quarter, wrote Cowen analyst Helane Becker in a report. She added that, while optimistic for the vaccination roll out and reopening of some international travel, she has “little hope” of a sizable recovery in business travel this year.
While the consensus is that 2021 will be defined by two distinct periods, some analysts align more with Delta on the tipping point occurring sometime in the spring.
Whenever that inflection does occur, flyers should not expect Delta to quickly return to its pre-pandemic schedules. The airline plans to steadily add seats back to its operation by both unblocking middle seats, which it has kept empty since at least April, and returning larger jets to its schedule. In other words, travelers are likely to see more planes like the Airbus A321 — a large narrow-body jet with seats for 191 passengers — flying at Delta before its pre-crisis flight frequencies return on busy routes.
For the many travelers who have enjoyed an empty middle seat, Delta has made no decision on when it will end the practice, Hauenstein said during the earnings call. Blocks are in place through March 30 and will only be lifted as customer confidence and travel demand returns.
Delta reported a $755 million net loss on nearly $4 billion in operating revenues in the final quarter of 2020. Critically, it halved its daily cash burn to an average of just $12. However, owing to the choppy outlook, Delta expects comparable cash burn numbers in the first quarter. Liquidity stood at $16.7 billion at the end of December.
The carrier expects revenues to be down 60-65% percent in the first quarter of 2021. It plans to fly roughly 65% of the capacity it flew a year ago.
For the full year, Delta posted a $12.4 billion net loss in 2020, a dramatic reversal from its $4.8 billion profit the year before. Revenues fell 64% to $17.1 billion and expenses 27% to $29.6 billion. The airline shrank by more than half, with capacity down 51%, and passenger traffic plummeted 69%.
“It’s a year for the record books for all the wrong reasons,” Bastian told staff of 2020 during the town hall Thursday.
Norwegian Ends Longhaul Dreams and Dreamliners
Just a few years ago, Norwegian Air was launching new subsidiaries in Ireland, the UK, and even Argentina as it planned to remake intercontinental travel. Today, the struggling airline admitted its wings have been clipped. It will now focus on its core market in the Nordic region and operate a handful of short-haul European flights and eliminate long-haul routes.
It also will return its fleet of Boeing 787s, central to its international expansion plans, to lessors. Irish media report 787s have been arriving at Shannon Airport for their eventual return. Norwegian grounded its 787 fleet in March last year, due to both issues with their Rolls-Royce engines and as demand for international travel began to evaporate because of the pandemic.
As part of its restructuring, Norwegian also said it will cut its 140-aircraft fleet to 50 Boeing 737 aircraft, with plans to expand that to 70 narrowbodies by 2022, the company told Norwegian regulators. The company also plans to raise as much as $600 million in new capital.
Norwegian has been in administration in Ireland since November. The company got an infusion of state aid from Norway last year, but the Norwegian government turned down its request for a second round of aid in November.
Low-cost international flights, particularly across the Atlantic, have been a tough problem for airlines to solve. In the last decade, several airlines have tried, and some explicitly copied Norwegian’s model. It didn’t end well. Iceland’s Wow Air similarly tried to break into the low-cost transatlantic market and failed, liquidating in 2019. And Icelandair, which also tried flying to secondary markets, struggled to make the model work. Norwegian had been the lone survivor, before the pandemic, but now even it is exiting the market.
In a statement, Norwegian said it has already begun shuttering what overseas operations remain. Norwegian laid off most of its staff last year, and the new business plan will require more layoffs, although the company has not specified how many. British media report that as many as 1,000 employees at Gatwick could be let go. “Our focus is to rebuild a strong, profitable Norwegian so that we can safeguard as many jobs as possible,” CEO Jacob Schram said in a statement.
Norwegian did not specify which routes it will serve in Europe, but said it will focus on the Nordic region and a “shorthaul” European network. “Our shorthaul network has always been the backbone of Norwegian and will form the basis of a future resilient business model,” Schram said.
Norwegian’s downsizing likely could free up slots in the London area, as the airline operated a significant longhaul and European operation from Gatwick. These slots will be a valuable commodity when the airline industry eventually recovers.
It remains unclear what the effect Norwegian’s news will have on the 787 market. Boeing has cut production of the type, and last year delivered only 53 Dreamliners, compared with 158 in 2019. Now, presumably, several dozen more 787s will be available from lessors.
Norwegian was struggling financially even before the pandemic, strapped from its ambitious expansion plans. And those plans were really ambitious. It had established Irish and UK subsidiaries for low-cost longhaul (at one point offering transatlantic fares as low as $69). The airline offered transatlantic flights to secondary cities, including Hartford, Conn. Although the flights were popular and provided transatlantic connectivity to cities that had never had it, the airline posted often staggering losses.
Along the way, Norwegian got into a multi-year fight with U.S. labor, which alleged the company was flouting Norwegian labor laws with its Irish subsidiary and violating the terms of the EU-U.S. open skies agreement (a fight it eventually won by getting Transportation Department permission to fly to the U.S.). It launched a subsidiary in Argentina to operate both domestic and longaul routes. That business struggled from its inception, and eventually Norwegian sold it to JetSmart at the end of 2019.
Elsewhere in the Skies
- Transat has confirmed that its shareholders approved Air Canada’s takeover offer. The company said it rejected a rival bid from MTRHP, run by a Quebec businessman, Pierre Karl Peladeau. The rival offer would have preserved a more robust competitor to Air Canada and given customers more choice, Peladeau argued to the government of Prime Minister Justin Trudeau. Although Transat supports the Air Canada takeover, the European Commission may rule that the merger is anticompetitive, which could strengthen Peladau’s bid.
- SAS CEO Rickard Gustafson is leaving the company after 10 years at the top. He is expected to step down “no later than” July. Gustafson said he is leaving the company to helm one of Sweden’s “largest industrial groups,” without elaborating further. The airline has been rocked hard by the Covid-19 pandemic, although its competitive landscape looks a little better with rival Norwegian on the ropes. SAS now begins the search for a new leader, Chairman Carsten Dilling said.
- The U.S. now is requiring all incoming international passengers to present a negative Covid-19 test taken within 72 hours of departure for the country. Airlines had lobbied for increasing testing as a way to ease travel bans for European, Brazilian, and British travelers. The testing requirement is expected to go into effect on January 26.
- Virgin Atlantic is hoping to raise as much as $230 million from a sale-and-leaseback deal with Griffin Global Asset Management. The funds raised from two Boeing 787s would go toward paying back a loan the troubled carrier took last year.
- Will Canada’s Porter Airlines ever come back? The airline, which made its name through its quirky marketing (and raccoon spokescreature), has extended its grounding till March 29, or more than one year after it first suspended operations in response to the Covid-19 pandemic. It laid off or furloughed almost all of its 1,500 employees when it shut down, and has delayed its restart several times. Porter plans so far are to operate its entire fleet of 29 Q400s when it resumes operations, a spokesman told Airline Weekly. A decision on which routes will return first has not been made, he added.
- NO MORE PEACOCKS! United joined the growing number of U.S. carriers that no longer allow emotional-support animals on board. (These are animals, not pets, whose owners claim keep them calm or serve other medical needs. These are not guide dogs for the blind. And yes, a peacock once was involved in this menagerie, as have miniature horses, all sorts of dogs and cats, and, if rumors are to be believed, a goose.) American, Alaska, and Delta already have banned the creatures from flights. The U.S. Transportation Department recently changed its guidance to require airlines to continue flying guide dogs but allowing them to deny emotional support animals.
— Madhu Unnikrishnan
Airbus handed over 566 commercial aircraft in 2020 even as the coronavirus pandemic hit the airline industry hard and leaves the outlook uncertain for 2021.
Overall deliveries dropped 34% compared with 2019 with Airbus’ widebody programs hit the hardest. Deliveries of A330s fell by 64% to 19 aircraft, A350s by 47% to 59 aircraft, and A380s by half to four aircraft. Comparatively, deliveries of A220s only fell by 20% to 38% and A320s by 30% to 446 aircraft.
The drops fit with the tough situation airlines faced as Covid-19 ravaged air travel. Long-haul flying is down far more than short-haul routes owing to border closures and travel restrictions. This has greatly reduced the demand for new widebody jets that fly longer routes, especially as many carriers face the question of what to do with idled aircraft parked at airports around the world. Questions remain whether some planes, like the superjumbo A380, will ever return to the fleets of many of its pre-crisis operators (Emirates excepted).
“There’s still a high-level of uncertainty and volatility in 2021,” Faury told reporters on January 8. With that said, he declined to forecast deliveries for this year. Any increase in production rates will not occur until at least the second half of 2021 dependent on market conditions, he added.
New orders are also expected to return slowly. Airlines have deferred — and some cancelled — commitments for new jets, with many still evaluating how travel demand returns amid the global ramp up in vaccination campaigns. IATA does not expect a full recovery to pre-crisis demand levels until 2024.
“Most airlines are not on a spending spree,” said Christian Scherer, chief commercial officer for Airbus. The planemaker expects orders to pick up for narrowbodies before they do for widebodies, he added.
Development of the long-range A321XLR, an updated variant of the popular A321neo, continues apace with no Covid-related delay to the 2024 entry-into-service target, said Faury.
Boeing Deliveries Tumble
Boeing reported it delivered just 157 commercial aircraft in 2020, compared with 380 in 2019. Airbus (see above), by comparison, delivered 566 aircraft last year.
Of course, Boeing was hampered by the grounding of its most popular aircraft, the 737 MAX. Deliveries of the type resumed in December after regulators cleared its return to service. The airframer delivered 31 737s in the fourth quarter, compared with just nine in the fourth quarter of 2019. For the year, Boeing delivered 43 737s of all types.
Rounding out deliveries for the year were: five 747s, 30 767s, 26 777s, and 53 787s. The company has slowed its 787 production rate and is consolidating manufacturing of the type at its facility in South Carolina.
Boeing came under fire last year from Congress over missteps in the 737 MAX certification process that lawmakers said resulted in the two fatal accidents of the type. The Justice Department earlier this month ordered the company agreed to pay more than $2 billion in fines and other levies.
“In 2021, we’ll continue taking the right actions to enhance our safety culture, preserve liquidity and transform our business for the future,” Chief Financial Officer Greg Smith said.
Boeing reports its fourth-quarter and full-year 2020 results on January 27.
In Other Fleet News
- The Boeing 747 program got a needed bit of good fortune when cargo operator Atlas Air placed an order for four 747-8Fs. Boeing announced last year that the B747 program is winding down. The airframer notched only five orders for the type last year, compared with seven in 2019. Only a handful of airlines, including Lufthansa and Korean Air, operate the passenger version of the -8. Atlas did not disclose terms of the deal, but it did praise the -8’s capabilities, noting the type offers 20% more cargo capacity than the -400F with 16% lower fuel consumption. Atlas has 10 -8s in its fleet, in addition to 34 -400Fs and five passenger 747-400s, making it now the largest 747 operator in the world.
- Congo Airways has added to its Embraer order, with two E195-E2s. The carrier earlier last year had ordered two E190-E2s. The new E195s will be configured with 120 seats, and deliveries are expected to begin in 2022. The new Embraers will join Congo Airways’ four-aircraft fleet, which includes two A320s.
— Madhu Unnikrishnan
Travelers will have to wait a few more weeks for United Airlines‘ much-awaited return to New York’s John F. Kennedy airport.
The Chicago-based Star Alliance carrier is delaying its return to JFK after a five-year hiatus by a month, United told staff in an internal communiqué viewed by Airline Weekly. Flights to Los Angeles and San Francisco will begin on February 28 instead of February 1.
In addition to the delay, United will shrink its initial schedule to just five-weekly flights between JFK and both Los Angeles and San Francisco. The airline previously planned up to twice-daily service on both routes. It plans to increase frequencies to that level by the end of March.
United cited “new travel restrictions and the continued impact of Covid-19 on customer demand” for the four-week delay. Parts of both California and New York remain under stay-at-home orders as the states face high coronavirus infection rates.
“Throughout the pandemic, we’ve been a leader in nimbly reshaping our schedule,” the carrier told staff on its decision to delay flights.
United exited JFK in October 2015 and focused its premium transcontinental flying from the New York area at its Newark Liberty hub. However, it ceded certain business — particularly in the entertainment sector — to competitors that continued to fly between JFK and the West Coast.
In 2017, United’s then-president — now CEO — Scott Kirby told staff that leaving JFK was the “wrong decision.” However, the airline did not have an avenue to return to the slot-controlled airport at the time.
The coronavirus pandemic proved the opening United needed. The airline plans to begin flights using slots idled by other carriers, particularly foreign airlines that have suspended much of their long-haul operations, until the end of March. United is working with regulators to continue service permanently after March.
United plans to fly Boeing 767-300ER aircraft with an expanded Polaris business-class cabin on the route.
In Other Airport News
- The FAA has extended its minimum slot-usage requirements at New York’s John F. Kennedy and LaGuardia airports and at Washington Reagan National through October 30. The waiver was expected to expire on March 27, but the agency extended it due to the ongoing Covid-19 pandemic.
- Vinci, which operates airports in Europe, Asia, and the Americas, reported 2020 traffic was down 70% from 2019 to 77 million passengers across its network of airports. The fall-off was most pronounced at the company’s airports in Europe, including London Gatwick. Its Brazilian and Caribbean airports reported traffic starting to return in the summer.
— Madhu Unnikrishnan
The U.S. Transportation Department (DOT) is requiring airlines that take federal stimulus money to maintain service at all the airport they operated to before March 20, 2019. Congress authorized further financial support to airlines late last year, extending the CARES Act funding that expired on September 30, 2019.
The new funds support the airline industry through the end of March. Like with the original CARES Act, the new funding allows airlines to request exemptions to mandated service. The exemptions allowed airlines to halt service if, among other reasons, an airport was well served by several airlines or if a city was served by multiple airports. Several airlines requested and were granted exemptions last year, but given the short, two-month window of the current funding, it remains unclear if any airline will exercise the option.
When the CARES Act expired on September 30, airlines were free to make route decisions to match market conditions. In the months intervening the end of the CARES Act and the enactment of the new stimulus, four cities lost all air service: Destin, Fla., Morrisville, Vt., Worcester, Mass., and Meyers Chuck, Ark. These cities can petition for service to be restored, DOT said in its show-cause order. Once again, given the short period that the new mandates are in force, it remains unclear if any of the four airports will start the process of petitioning for the restoration of service.
DOT notes that traffic has improved from the low point of the pandemic, to about 60% of pre-pandemic levels. Given this, it acknowledges the new mandates will be “minimally disruptive” to airline schedules between now and March 27.
- The Canadian government’s new travel restrictions are taking their toll on the country’s airlines. Following WestJet’s plans to temporarily close 13 stations, Air Canada will slash planned capacity by 25% in the first quarter. These cuts include the temporary suspension of service to Fredericton, Gander, Goose Bay, Kamloops, Prince Rupert and Yellowknife from January 23.
- Allegiant Air continues its pandemic expansion with plans to add Portland, Ore., to its map in April, and Jackson Hole, Wyo., and Key West, Fla., in June. The discounter will connect Portland to Monterey and Santa Maria, Calif., and Idaho Falls, Idaho.; Jackson Hole to Las Vegas, Los Angeles, Phoenix Mesa and Reno; and Key West to Nashville and Orlando Sanford. Allegiant also plans four new routes from Baltimore/Washington, Charleston, S.C., and Peoria, Ill. Eight previously delayed new routes from Boston, Louisville, Myrtle Beach, Nashville, Newburgh and Norfolk begin by June.
- While others expand, JetBlue Airways is suspending four more stations amid low demand. Flights to Albuquerque, Burlington, Minneapolis/St. Paul and Portland, Ore., will cease for much of February and March. This is the second suspension for all but Burlington, which the airline has served uninterrupted through the crisis. The airline also extended suspensions of all Baltimore/Washington, Burbank, Oakland and San Jose, Calif., flights through June. JetBlue has exited Long Beach, Oakland and Worcester, Mass., during the crisis.
- In other JetBlue news, the airline unveiled its first routes for the Airbus A220. The aircraft will begin flying on an ad hoc basis this spring before entering regular service between Boston and Fort Lauderdale in mid-June.
- Emirates will resume flights to Dallas/Fort Worth, Seattle, and San Francisco, although at a reduced schedule. Seattle and San Francisco flights will operate four-times per week, and Dallas flights thrice weekly. The carrier will add another daily frequency each to Los Angeles and New York from February 1. São Paulo will go up to five-weekly flights from the current four.
- American Airlines is making a rare pandemic expansion. The airline will add new daily service between its Charlotte hub and Alexandria, La., from April 2. The route complements its existing service to Alexandria from Dallas/Fort Worth.
U.S. airlines taking federal payroll support must recall furloughed employees or pay them with the new federal funds, but few airlines and their trade groups have been clear about what their plans are in recalling furloughed workers.
The U.S. Congress approved another round of airline support in December that offered hope to the 30,000 U.S. airline workers sidelined because of the pandemic. Still, the confusion over recalls has many doubting whether it’s been false hope.
Granted, some airlines are moving ahead seamlessly.
Take American Airlines. It took payroll support funds, reinstated its furloughed employees pay and benefits, with payment reaching them prior to the holidays, said spokesman Matt Miller. Employees will be brought back based on operational needs and as they go through their administrative process, including training.
Labor unions are keeping close watch.
“Airlines have begun the recall process as a result of PSP2 — American, United, Hawaiian, PSA Airlines and more. The process varies by airline, but most have received recall letters and have responded. Back pay for December 1 has begun to hit workers’ paychecks,” said Taylor Garland, Association of Flight Attendants-CWA (AFA) spokesperson.
While airlines are complying with reinstating pay, part of the uncertainty in how many workers are being recalled is due to Congress failing to dictate the terms requiring U.S. airlines to handle the recall process. Each airline with furloughed staff is working at its own pace and based on their operational needs.
“Bringing nearly 19,000 team members back to work is a complex process and will take time. While pay and benefits will be restored right away, people will be asked to return to the operation in phases,” said American CEO Doug Parker and President Robert Isom in a letter to employees in December.
United, which is also accepting the aid, said it intends on offering temporary employment to its thousands of workers affected by the lapse in aid last September.
Airlines have to follow the collective bargaining agreements, which generally take a month to bring people back on the line, Garland said.
“So, for example our members at United will be largely back on the line by February,” she said. “That said, a small amount of flight attendants will need to go through training again before they can come back online.”
“Airlines must follow their FAA approved training program for crewmembers used in the operation, not for crewmembers on furlough,” Ian Gregor, a spokesman for the FAA, said.
“Airlines may not use pilots who have not completed at least three takeoffs and landings in the preceding 90 days in the type of aircraft they are to fly,” Gregor added. “Any pilot who fails to make the three required takeoffs and landings within any consecutive 90-day period will require retraining,” Gregor said.
Of the four major U.S. airlines, Southwest and Delta managed to avoid furloughing employees, although Southwest sent out WARN Act notices to employees in December.
Delta throughout the pandemic had 40,000 employees taking voluntary leaves of absence of one to six months, essentially an unpaid leave, with a very defined start and end dates, whereas furloughs don’t have a clear end date. Combined with about 18, 000 employees who opted for early retirement with the assurance of a retirement medical option or early separation, Delta was able to avoid involuntary furloughs, Delta spokesperson Morgan Durrant said.
“The road to recovery will be a rocky one, and the PSP extension will allow us to maintain a seamless operation from now; a time when Delta continues to operate at historic lows and operate essential services – to being able to support the recovery of air travel and the economy as a whole,” Durrant said.
In its latest airline employment statistics release on Thursday, the Bureau of Transportation Statistics (BTS) said U.S. airlines employed over 678,000 part-time and full-time workers in the middle of November, just 5,000 more than in mid-October, but almost 77,000 fewer than in March. Mid-November total number of 366,750 full time employees is the lowest full time employee total for any month in BTS records in three decades dating back to January 1990.
Aeromexico Seeks to Void CBAs, Air Canada Makes More Cuts
- Aeromexico has asked Mexican regulators to let it terminate its agreements with its flight attendants (ASSA) and pilots (ASPA) unions. The carrier, currently in bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, has until Jan. 27 to meet certain financial obligations in order to access funding. Part of these obligations include cutting its workforce or reaching an agreement with its unions. Both ASSA and ASPA have balked, although talks are ongoing. Both unions rejected earlier concessions requested by Aeromexico.
- Air Canada is cutting its workforce by another 1,700 employees. Another 200 employees from its regional partners also will be let go. The carrier is slashing its network by 25% in the first quarter in response to Canada’s more stringent Covid-19 restrictions; the country earlier this month started requiring negative tests for all incoming passengers while still requiring 14-day, government-approved quarantines. “We regret the effect this difficult decision will have on our employees who have worked very hard during the pandemic,” said Chief Commercial Officer Lucie Guillemette. The carrier has laid off or furloughed more than 20,000 employees since the pandemic began. The government has not provided fiscal aid to Canadian airlines, although laid off employees are eligible for a wage-support program.
— Madhu Unnikrishnan
American Airlines and JetBlue Airways got some rare good news this month. Amid the fallout after the deadly riots at the U.S. Capitol, the outgoing Trump administration signed off on the carriers’ proposed northeast alliance.
The pact gives American and JetBlue broad purview to collaborate on flights in the Boston and New York markets under what they call an “enhanced bilateral codeshare relationship.” The carriers plan to begin implementing the alliance, ranging from a new codeshare to slot transfers at New York’s JFK and LaGuardia airports, in the first quarter. By the end of the year, American says it will only fly dual-class aircraft — large regional jets or mainline planes — to and from New York.
This certainly is not your parents’ codeshare.
“It feels like a pseudo-merger,” a Spirit Airlines executive told Airline Weekly. Southwest Airlines and Spirit both raised red flags over the competitive implications of the tie up during the first days of January. However, it appears too little too late — the alliance was unveiled in July — with the Trump administration approving what the two carriers claim is tantamount to a domestic joint venture less than a week after they lodged their complaints.
Central to their concerns is access to New York’s slot-controlled JFK and LaGuardia airports, and to a lesser extent Boston Logan — where gates and ground facilities are limited — and Washington Reagan National. Spirit argued that approval would create what amounts to a “legacy carrier duopoly” at JFK and LaGuardia between the duo of American and JetBlue, and hub carrier Delta Air Lines. Boston is also a Delta hub, while Washington National is an American hub.
American, Delta and JetBlue operated nearly 75% of flights at JFK, and more than 78% of flights at LaGuardia in 2019, according to Bureau of Transportation Statistics data via Cirium. In Boston, the three carriers operated nearly 64% of flights. Southwest and Spirit both had a mid-single digit share of flights at Boston and LaGuardia, while neither served JFK.
Southwest’s and Spirit’s concerns did not land on entirely deaf ears at the Department of Transportation (DOT). The regulator is requiring American and JetBlue to divest seven slot pairs at JFK and six pairs at Washington National. They will have to relinquish up to another 10 pairs at the New York airport if they do not meet annual growth commitments. In addition, the DOT barred the partners from coordinating flights on certain Boston and New York routes where there is little other competition.
Asked whether the slot divestitures and carve outs were enough, the Spirit executive said they do not think it comes “anywhere near overcoming the competitive disadvantage.”
Not everyone agrees. Unveiled amid the coronavirus pandemic — the worst crisis to hit the industry in its history — industry experts largely view the American and JetBlue pact as an innovative solution to address each carrier’s competitive disadvantages. The former gains a much stronger competitive position in the northeast where it is at a disadvantage to Delta and United Airlines. And the latter gains additional access to some of the most sought-after airports in the country plus broad international feed at its two largest bases.
“I think this is a brilliant partnership,” said Saikat Chaudhuri, a director at UC Berkeley’s Haas School of Business and College of Engineering who studies the airline industry. The alliance addresses strategic shortcomings at both American and JetBlue, while doing so without the challenges of a merger.
Asked about Southwest and Spirit’s concerns, Chaudhuri said he does not see the partnership creating “de facto monopoly positions. He cited robust competition in both Boston and New York. Delta has hubs in both cities, and United a New York-area hub at Newark Liberty airport. The slot divestments are a good remedy for the concerns, he added.
Raymond James analyst Savanthi Syth described American as having “gotten smart” with the combination of both its new Alaska Airlines and JetBlue partnerships. The Alaska pact is more a traditional codeshare with reciprocal frequent flyer and loyalty benefits. The Seattle-based carrier will also join the Oneworld alliance at the end of March. If the tie ups are successful, American could achieve the benefits of mergers without the risks, she added. The jury is still very much out on whether the partnerships will succeed.
Domestic codeshares and alliances have often stumbled in the past. Without the shared benefits of a joint venture, partners often end up competing with each other. One only has to look as far as Seattle where Alaska and Delta were close partners for years until the latter decided to turn the Puget Sound city into its main Pacific gateway. Delta’s new international routes beget new domestic feeder routes — many competing directly with Alaska — until the once close friends became frenemies and ultimately severed ties in 2017.
Could the same happen with American and JetBlue? Only time will tell with implementation just now getting underway. One question many pose is whether the pact is a precursor to a possible merger. Chaudhuri thinks it could be though he added that the government would likely to seek more concessions — for example, divesting slots and gates — than were required under the American-US Airways combo in 2013 for such a deal.
However, Cowen & Co. analyst Helane Becker does not think the partnership is a precursor to any consolidation given the poor state of airline balance sheets. Both American and JetBlue have racked up billions of dollars in debt to weather the pandemic. In addition, it is as-yet unclear how the new Biden administration would view any potential airline combos, she added.
Many questions remain on what the American and JetBlue alliance will look like. The carriers declined to comment on how many slots will change hands at JFK and LaGuardia, and how their route maps could change. American has already announced plans to serve Athens and Tel Aviv from New York as part of the tie up. JetBlue is expected to expand into more of a feeder role at the airports, taking over some of the routes American flew with small regional jets prior to the crisis.
In January 2020 before Covid-19 related cuts, American served nine U.S. cities from JFK and 15 from LaGuardia with small jets, Cirium schedules show. These destinations included places like Cincinnati, Indianapolis, Norfolk, Pittsburgh, Richmond and Savannah.
“By having this partnership with Alaska in the west and JetBlue in the northeast, now we have a complete customer proposition,” American chief revenue officer Vasu Raja said in July when the JetBlue pact was unveiled. “[It’s] something that can meaningfully improve the financial performance of American Airlines as and when demand comes back.”