Antitrust Law Daily Wrap Up, ANTITRUST—1st Cir.: Ban on American and JetBlue’s Northeast Alliance affirmed, (Nov 12, 2024)

By Martin A. Steinberg, J.D.

There was no error of law in the district court's application of the rule of reason to conclude that the NEA violated the Sherman Act.

In 2020, American Airlines and JetBlue entered into a joint venture called the Northeast Alliance (NEA), where the carriers agreed to effectively operate as a single airline with respect to most of their routes in and out of Boston and New York City. The U.S. Department of Justice along with several states filed suit to enjoin the carriers from proceeding with this venture for allegedly violating the Sherman Act as an unreasonable restraint on competition. After an extensive bench trial, the district court agreed and entered judgment for Plaintiffs. American Airlines appealed. Seeing no reversible error of either fact or law, the First Circuit affirmed the judgment (U.S. v. American Airlines Group Inc., No. 23-1802 (1st Cir. Nov. 8, 2024).

Background. American is arguably the largest airline in the world and one of four airlines that collectively control around 80 percent of domestic air travel. It is one of three "global network carriers" (GNCs) operating in the U.S. along with Delta Air Lines, and United Airlines. JetBlue is the sixth largest airline in the U.S., and has historically operated as a "disruptor" that aggressively competes with older legacy carriers, with documented procompetitive effects.

American's domestic hubs as of 2019 included Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York City, Philadelphia, Phoenix, and Washington, D.C. Jet Blue operates what could be considered a regional hub-and-spoke network out of the Northeast, with six "focus cities" as of 2019: New York City (its headquarters), Boston, Fort Lauderdale, Orlando, Los Angeles, and San Juan. Around 75 percent of JetBlue's routes fly in or out of New York or Boston.

Through June 2020, American and JetBlue competed with each other across all markets both airlines served. In the Northeast, American and JetBlue were leading competitors being two of the four largest carriers operating in New York, and two of the largest three in Boston. In Boston, JetBlue and the three GNCs controlled more than 80 percent of the domestic air travel market in 2019, and in New York the four carriers' combined market share exceeded 70 percent. In this northeast region, American and JetBlue competed to provide nonstop service on 29 routes to and from New York and Boston, with significant market shares on many of those routes. Domestic cooperation among carriers in the U.S. historically have only engaged in small-scale arrangements, unlike the extensive cooperation between GNCs and various international carriers to expand service to outlying destinations through commingled itineraries.

On July 15, 2020, American and JetBlue announced the NEA, which included "code sharing, schedule coordination, revenue sharing, reciprocal loyalty benefits, and joint corporate customer benefits." Both carriers' short-haul services, as well as American's long-haul services touching Logan, JFK, LGA, and Newark ("the NEA airports"), were included. Though the agreement stated that each carrier will continue to operate independently as to pricing, capacity, and network management decisions, the NEA's process of creating a joint schedule necessarily involved cooperation regarding capacity allocation decisions, both generally and with regarding individual routes. The NEA provided for the carriers to pool airport infrastructure, including slots and gates.

The carriers' contract sets out a complex process to split their revenue pool annually, where each carrier receives a base amount of passenger-related revenue based on their respective performance during the most recent year, after which the carriers divide the remaining incremental revenue in the pool based on each carrier's proportion of total NEA capacity for that year. The NEA was set to last for at least seven years and would continue indefinitely unless terminated by either party.

Trial court proceedings. On September 21, 2021, Plaintiffs filed suit to enjoin American and JetBlue from further implementing the NEA by alleging that the NEA violated section one of the Sherman Act, which prohibits contracts, combinations, or conspiracies, in restraint of trade or commerce. The court held a month long bench trial in September 2022 and on May 19, 2023, the court issued its opinion enjoining American and JetBlue from continuing the NEA by ordering them to cease all coordination of schedules, routes, or any effort to allocate markets. It also prohibited the carriers from entering into any arrangement substantially similar to the NEA and required them to provide notice to Plaintiffs prior to entering into any such arrangement.

By the time of trial, the NEA was approximately eighty-percent implemented. Shortly after the injunction entered, JetBlue exited the NEA pursuant to its terms of cancellation. American, the only remaining defendant, appealed. Though the NEA was no longer in effect, American requested that the appellate court vacate the permanent injunction prohibiting it from pursuing similar arrangements in the future, as well as subjecting it to a notice requirement prior to entering into any such arrangement.

Quick look. First, the court rejected American’s contention that the district court erroneously subjected the NEA to "quick look" condemnation rather than applying a full-blown rule-of-reason analysis. The district court found as fact that the joint venture reduced output while garnering no competitive benefits that could not otherwise be achieved. While most joint venture restrictions are subject to the rule of reason, the level of scrutiny required under that standard exists along a competitive spectrum. The rule of reason is merely a fact-specific assessment, which varies based on "the circumstances, details, and logic of a restraint," Cal. Dental Ass'n v. FTC, 526 U.S. 756, 781 (1999).

Though the district court formally found that the NEA merited a less "deep and searching analysis," it nonetheless made extensive and reasoned findings regarding the NEA's effects on competition after conducting a monthlong bench trial and reviewing a mountainous record. Under these circumstances, the court refused to classify the district court's “herculean efforts” in analyzing the NEA as a mere "quick look." Rather, tailoring its examination to the specific transaction at issue, the trial court received evidence and made findings sufficient for a confident and reliable assessment of the actual and likely effects of the NEA's adoption.

Substantial anticompetitive effects. American made no showing of clear error that the district court’s findings that the NEA "led to decreased capacity, lower frequencies, or reduced consumer choices on multiple routes, including some that are heavily traveled." The district court found that (1) In at least 13 markets that American and JetBlue both previously served, the NEA allocated the route to one carrier and caused the other to exit. (2) The evidence suggested that the carriers would continue to allocate more markets between them. (3) In markets the carriers both continued to serve, the NEA caused American and JetBlue to cease directly competing on "wing tip" flights in those markets. (4) The NEA's "spirit of partnership" undermined any claim that the carriers would continue to compete on the routes the NEA carved out from its joint schedule.

Based on these findings, the district court concluded that the NEA in fact "reduced total frequencies or capacity in certain NEA markets." American had argued that the NEA actually resulted in increased capacity in the form of "more flights, more seats, more routes, shorter connections, better frequent flyer benefits, and more choices." But the district court expressly rejected as unreliable the evidence American offers in support of these claims. The mere fact that airline capacity overall increased between 2021 and 2022 -- just as the industry began to recover from the Covid-19 pandemic -- did little to show that the NEA itself increased American or JetBlue's capacity in any meaningful way.

Horizontal agreements allocating markets between substantial competitors have generally been treated as per se illegal. See Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57, 61 (1st Cir. 2004). The district court found, and American did not dispute, that JetBlue and American's agreement to optimize their route schedules and thereby allocate markets within the NEA region was central, not ancillary, to the NEA. Thus, the district court's finding that the NEA's market allocation resided near the anticompetitive end of the spectrum rested on stable footing. By reducing output without producing procompetitive benefits that were not otherwise achievable, the NEA failed to survive a rule-of-reason analysis.

No clear error. American failed to convince the court that the district court committed clear factual errors or an error of law in finding that the carriers did not carry their burden to justify the NEA's restraints with evidence of procompetitive benefits. The district court found that the only colorable "procompetitive rationale" for the NEA's restraints established by American and JetBlue was more flexible loyalty benefits. Despite American's argument to the contrary, some of its asserted procompetitive justifications were simply not cognizable. For example, any defense of a restraint based on the notion that competition itself is "inefficient, unreasonable, or confusing" is insufficient as a matter of law.

The district court rejected on factual grounds the notion that American and JetBlue were "two small companies" seeking to collaborate so that they could "compete more effectively with larger corporations dominating the relevant market." Because American did not directly challenge this finding on appeal the court found that there was no error in the district court's rejection of American's argument that the NEA generated a procompetitive benefit in that it better allowed the carriers to compete with Delta – the NEA's principal purpose.

American also failed to show that the district court clearly erred in rejecting Defendants' remaining asserted procompetitive justifications as factually unsupported. American nowhere challenged the district court's finding that the NEA was not necessary "to create a new product or market that could not otherwise exist," or that American and JetBlue's pooled assets were not "complementary" in a way that would -- with collaboration -- enable them to innovate in a way neither could alone.

American's perfunctory claims regarding the NEA's purported effects on capacity and output withered under even the slightest scrutiny. For example, American boasted that the NEA's efficiency gains caused the carriers to increase their capacity at NEA airports by "more than 200%" in the form of nearly 50 new nonstop routes, increased frequencies on more than 130 routes, and increased capacity on 45 New York City flights. For support, American cited only to trial exhibits consisting of its own internal slide decks and charts reiterating these very claims, bereft of any primary source support. The district court found this very evidence to provide "no objective or helpful corroboration" of the carriers' claims regarding the NEA's successes.

WCIA. The West Coast International Alliance (WCIA) between American and Alaska Airlines made Alaska a member of American's "oneworld alliance" with international carriers, and continued the two carriers' code-sharing partnership, and established "capped and non-reciprocal revenue sharing" between certain complementary markets. Importantly, the WCIA did not include any coordination between the carriers regarding capacity, scheduling, network planning, or market allocation on direct overlapping routes. In fact, the two carriers were effectively not direct competitors prior to the WCIA, which instead was meant to leverage their complementary networks. The WCIA, which American described as a success, is still in effect today.

The district court explained that a "more limited WCIA-style arrangement" complete with "some degree of code sharing and loyalty reciprocity," similar to the agreement between American and Alaska Airlines on the West Coast, would have sufficed. This finding was undisturbed on appeal.

The Case is No. 23-1802.

Judge: Kayatta, W.

Attorneys: Maisie A. Baldwin, U.S. Department of Justice, for the U.S. Rachel S. Brackett, Florida Attorney General's Office, for State of Florida. Oseph Stephen Betsko, Sr., Pennsylvania Office of Attorney General, for Commonwealth of Pennsylvania. Olivia Bona (Lewis & Llewellyn LLP) for American Airlines Group Inc. Matthew L. Craner (Allen Overy Shearman Sterling US LLP) for JetBlue Airways Corp.

Companies: American Airlines Group Inc.; JetBlue Airways Corp.

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