U.S. challenges American-JetBlue alliance as antitrust trial begins

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By Nate Raymond, David Shepardson and Diane Bartz

BOSTON (Reuters) - The U.S. Justice Department on Tuesday urged a judge to force American Airlines (NASDAQ:AAL) and JetBlue Airways (NASDAQ:JBLU) to scrap their U.S. Northeast partnership, calling it an anticompetitive deal that would worsen if JetBlue acquires Spirit Airlines (NYSE:SAVE).

At the start of a three-week trial in Boston, Justice Department attorney William Jones said the Northeast Alliance, unveiled in July 2020, is a "de facto merger" of American and JetBlue's operations in Boston and New York. That has allowed them to coordinate flights and pool revenue in and out of Boston and New York's John F. Kennedy, LaGuardia and Newark airports.

"The loss of the competition will cause prices to rise and quality to fall at those four airports," Williams said in his opening statement.

He said the deal eliminates incentives for American to cut prices to lure customers from JetBlue, a "historically disruptive" rival with often better fares, and gives the airlines a more than 80% market share in flights from Boston to Washington and six other airports.

But lawyers for the airlines said the hypothetical pricing and competitive harms that the Justice Department and six states that sued alongside it claim do not exist in the real world, where the alliance had been in effect for 18 months.

They argue that the alliance allowed them to become a viable competitor to the dominant airlines in the region, Delta Air Lines (NYSE:DAL) and United Airlines, by increasing capacity and flights.

"More output like we're seeing here is highly competitive and leads to lower fares," Richard Schwed, JetBlue's lawyer, told U.S. District Judge Leo Sorokin.

JetBlue Chief Executive Robin Hayes, the first witness, was asked about instances when JetBlue moved into a market, such as the Boston-Washington Reagan route, and prices charged by legacy airlines dropped.

Hayes noted that JetBlue had been a target of rivals' push-back efforts, when asked by Justice Department attorney John Davis about measures such as predatory pricing to drive low cost carriers out.

Hayes acknowledged that he had been critical of previous joint ventures similar to the Northeast Alliance.

"All of these joint ventures were being approved by regulators with very few safeguards," he said, without specifying them.

The trial started after a week in which U.S. judges ruled against the government in two antitrust fights: sugar and insurance.

Airline mergers in recent years have led to a highly consolidated industry, in which American, Delta, United and Southwest Airlines (NYSE:LUV) control over 80% of domestic travel, the government argues.

JetBlue is pursuing a $3.8 billion acquisition of low-cost rival Spirit Airlines, subject to antitrust review.

American would benefit if that merger proceeds, Williams argued, as it would be able to "co-opt two disruptive airlines for the price of one."

Hayes has said that no matter how the fight over the Northeast Alliance ends, it would be good for JetBlue's effort to buy Spirit.