Remember the Northeast Alliance (NEA) between American and JetBlue? Of course you do. It was going to create a strong third competitor in the northeast until a judge shot it down. After extolling the virtues of this unique partnership for years, American is now trying to reverse course and say it’s not all that important in the scheme of things. At the same time, it is still appealing the decision and saying that it still wants the NEA. This is a tap dance like no other as the airline tries to tell different groups what they all want to hear.
When the NEA was first launched, American readily admitted it had a problem in New York that it needed to fix, and JetBlue was the answer. As Chief Commercial Officer Vasu Raja said on the airline’s Q1 2021 earnings call, JetBlue was already delivering big numbers shortly after the partnership began.
So March was our first month in which we turned on the codeshare. We only had about three weeks’ worth of bookings. And at least for JetBlue on AA, that was only about 25 to 30 markets. But JetBlue has already become our largest global codeshare partner.
…we look at not just the total revenue production on us, but how much of that revenue is really incremental that is coming in higher fares than what we — what AA is organically booking or coming in periods where the flights were light. And we’re finding that somewhere between 30 and 40% of that is incremental…
This is exactly what American had hoped would happen. American felt it just couldn’t get big enough in New York on its own thanks to slot controls. Vasu explained the problem in an interview with Simple Flying in September 2021.
…figure American Airlines in a peak time has something in an order of magnitude of 100 slots in JFK. That’s not enough to really go and create an an international operation out of. Furthermore, those 100 slots are spaced throughout the day. It’s not like there’s a big chunk from two in the afternoon to seven at night where we have a ton of slots and can go fly everything, and make the airport go to sleep in the other times. So, we were never big enough there.
Why does it matter if American can’t get big enough? In that Simple Flying interview, Vasu continued:
Customers used to love us in New York because they love the transcon product on JFK-LA. But, if we couldn’t get them to Seattle or San Diego or Sacramento or Atlanta or any place like that, then they’re going to fly somebody who could. No matter how much they love the the transcon product, they would end up always going with the other guy. So, at best we were always somebody’s number two. We were never a number one carrier for any single customer who is there, unless that that customer only flew to Heathrow, DFW, and Los Angeles.
With JetBlue, American could cover all those bases for its AAdvantage loyalty program members. The revenue-sharing and network coordination meant American could remake its network, pushing slots to JetBlue at LaGuardia, upgauging regional flights to larger airplanes (and actually filling them), and adding significant long-haul flying. This was no small feat, and at least based on those early opinions from the airline itself, it was working.
By that summer, things were cooking nicely. To put some numbers around that, Vasu said this in the airline’s Q3 2021 earnings call.
For us, as we see it, in New York, historically, we might have been a 25% player. But we were competing for something which was actually like 10% to 15% of the available business travel market at large, not just the corporate market. And so — in large part because, though we had a really great product in Heathrow or in the transcon market, if we couldn’t get you very effectively to Toronto, at some point, customers, especially larger accounts or power travelers, business to our customers, just stop flying us. And now as we see it, we have the best network between AA and JetBlue.
…And when we get to compete for it, we see in New York whose RASMs instead of underperforming the system by 10% to 15% can perform in line with the system.
This wasn’t just something American talked about in the early days of the alliance either. It has had a consistent message about just how important the NEA is. Then the judge shot down the partnership and the message changed. Oh sure, the NEA was still important and should stand, but it’s not “material.”
Here’s what CFO Devon May had to say at the Wolfe Research 16th Annual Global Transportation & Industrials Conference as he tried to thread that needle and bridge the two messages.
And the NEA has been great for us in New York. It’s been great for our New York strategy overall. But just for perspective on the NEA and what it means to investors. New York is important to us. The NEA is very important to us. But New York is a pretty small fraction of our overall capacity. American Airlines runs a really significant network. We create a lot of O&Ds. And so yes, New York is important. But if you think about earnings, it is not a meaningful impact to our earnings.
Devon went on to explain, “so New York, excluding the flying we do to our other hubs and to our partner hubs, it’s about 5% of our total capacity.”
That’s some cherry-picking right there After all, the NEA isn’t just New York but also Boston. And I don’t see why you’d exclude flying to other hubs — including partner hubs — when JetBlue can still have a meaningful impact on how that flying performs. Maybe it’s not as significant of an impact, but Vasu had said that New York unit revenue would go from underperforming by 10 to 15 percent to being up at system average, so… let’s do some math.
If you look at Boston, JFK, LaGuardia, and Newark for the first half of 2023, Cirium data shows that nearly 15 percent of American’s available seat miles (ASMs) touched those cities. If American was able to improve performance to system average from a 10 to 15 point deficit, that should add more than a point to unit revenue to the system. That’s a lot, and you’d think it would be material. But maybe I’m overestimating.
Maybe Vasu’s comments were truly only referring to New York and not Boston. Maybe he was really only talking about New York-originating traffic and not the whole system. Maybe it is a lot less… but that whips us back to the other thought… why bother if it doesn’t notably impact the bottom line? Maybe it just hasn’t reached its potential yet, but all that bullish talk above suggests that it was performing as advertised.
CEO Robert Isom backed that up at Bernstein’s 39th Annual Strategic Decisions Conference 2023 a week after Devon’s comments. He echoed what Devon said but also noted “…we entered into [the NEA] for all the right reasons, and I think it was producing all the right benefits….”
Fast forward to the airline’s recent Q2 2023 earnings call where J.P. Morgan analyst Jamie Baker asked “why shouldn’t I assume New York reverts to being a meaningful margin drag from this point forward?”
Vasu tried to explain it away saying, “the circumstances that gave rise to the NEA have changed.” Specifically, two things are now different.
One, our slot holding didn’t match with demand. That is the majority of demand in New York was for short-haul day trip business markets. Our slot portfolio is better matched to mid-continental, transcontinental, and transatlantic markets. Well, that’s changed. Short-haul business demand hasn’t recovered to its historical level, but those other markets are much greater.
It wasn’t long ago that Vasu said it was important to serve markets like Atlanta, Sacramento, San Diego, Seattle. American served all of those via JetBlue. In fact, it pulled out of Atlanta so that JetBlue could fly it instead. With the exception of Atlanta, these are not short-haul day-trip types of markets that American seems to think no longer matter. It’s hard to see how American’s position has changed that much in New York just due to those shifting trends.
Even though I don’t put much stock in the first reason, the second one is really out there.
But also our expense base, especially in New York Kennedy has changed. Through co-locating partners and any number of fleet changes, our enplanement expenses in JFK are materially advantaged to what any other carrier is in New York.
Here Vasu is saying that Jamie shouldn’t worry about American’s margin in New York, because its expense base is lower and that will help. That may make American’s margin look better than it would have when expenses were higher, but in terms of the NEA itself, this is irrelevant. The margin would still be better with a JetBlue agreement that produced better revenue performance. Costs don’t change.
While these may help the northeast’s margin look less bad, it’s still going to well underperform where it could have been with JetBlue. Or will it? Vasu went on…
And so far, since the NEA has been announced, we’ve seen that. New enrollments in the Advantage program continue to rise. Credit card acquisitions continue to rise, spending continues to rise. So though this chapter is closed, another one might open, but we don’t expect any material change to our financial outlook.
Because of the NEA, American has attracted new AAdvantage members and credit cardholders, so that’s going to help American’s performance in New York. But isn’t the issue that without the kind of coverage that American had with JetBlue, it will have trouble retaining those cardholders? It’s better to have those cardholders than not, but the reason they weren’t cardholders before may be the reason they walk away again with JetBlue out of the picture.
Lastly, Vasu tries to downplay the important of the alliance in the opposite way in which he crowed about its success just two years ago.
Look, the NEA was a great outcome for customers who got to go and experience our product who weren’t there before. But actually, when you look at those international flights, roughly, as things have settled out and markets recover, roughly 35 to 40 points of the load factor that’s on them is actually being generated by international partners. Our partnership within the NEA was actually a very small amount of the onboard load factor that’s there.
With all of this, Vasu says of the airline, “we believe that we can go and really replace a lot of the demand, especially now that we’ve got such a larger New York City originating customer base than what we had before.”
It’s a tortured argument. It may be so that this isn’t going to be considered “material” for an airline that’s this large, but if the NEA was performing as hoped, math suggests it should have been. Maybe it was underperforming, or maybe American really is just bullish about its standalone position today compared to pre-pandemic. Either way, the loss of the NEA hurts. American’s comments just make it hard to find out exactly how much.