A decade ago this week, JetBlue Airways (NASDAQ: JBLU) and pre-merger American Airlines (NASDAQ: AAL) announced a partnership to bolster their market positions in New York and Boston. An interline agreement enabled customers to book tickets connecting between various domestic markets served by JetBlue to more than a dozen of American's international routes. The airlines also implemented a limited degree of frequent-flyer reciprocity.
That partnership fell apart in less than four years. American Airlines merged with US Airways, which had a massive presence on the East Coast, making the JetBlue relationship seem less vital. Meanwhile, JetBlue announced in the summer of 2013 that it would start offering lie-flat seats on flights from New York to Los Angeles and San Francisco, encroaching on a lucrative premium market where American was a major player.
Now, with the COVID-19 crisis upending the airline industry, American and JetBlue have decided to form a new partnership, again focused on the New York and Boston markets. Will the second time be the charm? Let's take a look.
A new partnership takes shape
Under the deal announced on Thursday, JetBlue and American Airlines will forge codeshare and reciprocal loyalty agreements. JetBlue customers will gain access to 60 American Airlines routes from New York and Boston, while American Airlines customers will gain access to 130 JetBlue routes.
Image source: American Airlines and JetBlue Airways.
Once again, connecting passengers between JetBlue's domestic routes and American Airlines' international routes is the centerpiece of the partnership. With this deal in place, American plans to add three long-haul routes from New York's JFK Airport: new year-round service to Tel Aviv, new summer seasonal service to Athens, and the return of winter seasonal service to Rio De Janeiro. After the COVID-19 crisis passes, American hopes to add more new routes from New York to Europe, Africa, India, and South America.
JetBlue carries nearly three times as much domestic traffic as American Airlines at JFK. Having access to such a large pool of potential connecting traffic to complement local demand in New York could be critical for making American's new long-haul routes viable -- and improving the profitability of its existing long-haul routes.
The new partnership won't be limited to domestic-international connections, though. JetBlue customers will gain access via American Airlines to new domestic markets where the low-fare carrier has little or no presence today.
Furthermore, the two airlines will shift slots around in order to grow in New York's capacity-constrained airports. For example, American Airlines may let JetBlue use slots that it does not need at LaGuardia Airport. In recent years, American hasn't used all of its slots at JFK Airport, either, so there could be opportunities there, too.
Image source: American Airlines.
Why a JetBlue-American Airlines alliance makes sense
The new partnership between JetBlue and American Airlines holds promise for several reasons. First, JetBlue has always been very weak in the middle part of the U.S. It would be hard to justify an aggressive growth push there in the current market environment. Giving customers the ability to access American Airlines flights to that region while still earning JetBlue frequent-flyer points is an easier way to make JetBlue more attractive relative to top rival Delta Air Lines in New York and Boston.
Second, American Airlines has struggled for years to come up with an appropriate strategy for New York. It doesn't have enough slots at LaGuardia and JFK to compete head-to-head against Delta, but it also has been loath to walk away from the largest U.S. market. The JetBlue partnership will give it added heft in this key market. In fact, American and JetBlue claim that combined, they offer more daily flights from the greater New York area than any other carrier.
Third, the American-JetBlue partnership could help the carriers utilize their valuable slots at JFK Airport more effectively. For example, American Airlines' fall and winter schedule calls for it to operate six daily roundtrips between JFK and Boston, including four on tiny 44-seat jets. JetBlue also flies a robust schedule on that route using larger planes, so with the partnership in place, American could potentially use those slots to grow in strategically more valuable markets.
Notwithstanding the benefits of this new alliance between American Airlines and JetBlue, the collapse of their previous arrangement demonstrates how precarious such partnerships can be. The two sides will only cooperate as long as they both feel like the benefits of the relationship outweigh the costs and risks.
One potential pitfall is JetBlue's plan to expand into Europe, beginning with the launch of flights to London next year. JetBlue could disrupt pricing in lucrative American Airlines markets like New York-London, potentially straining the relationship between the two companies. American will also have to balance international growth in New York against the risk of cannibalizing its existing transatlantic gateway in Philadelphia, which has lower local demand but is a more efficient connecting hub.
American Airlines also has to weigh the risk that referring frequent flyers to JetBlue flights on certain routes could backfire if those customers fall in love with JetBlue's extra legroom in coach, free Wi-Fi and satellite TV, and other amenities.
Yet desperate times call for desperate measures. Sticking with the status quo in New York isn't an option for American Airlines anymore. Working with JetBlue to gain scale in New York (and Boston, for that matter) may be the best move despite the risks.
10 stocks we like better than JetBlue Airways
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and JetBlue Airways wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2020
Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways and is long January 2022 $10 calls on JetBlue Airways. The Motley Fool recommends Delta Air Lines and JetBlue Airways. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.