JetBlue/American Airlines interline and slot swap a watershed for US airline evolution

It is a little more than a week since Delta and US Airways announced the latest iteration of their LaGuardia/Washington National slot deal, which sent Southwest boiling over because it was shut out. Now American and JetBlue have done their own slot deal, as American strengthens its position in New York and JetBlue embeds in Washington. American's action in New York is in response to manoeuvres by United, Continental and Delta.

In exchange for trading 12 slot pairs at New York's JFK to American, JetBlue gets eight slot pairs at Washington National Airport and one slot pair at White Plains, N.Y. all transferred from American. All are subject to Department of Transportation approval. JetBlue can then add these eight to the five slot pairs it is set to receive as part of the Delta/US Airways deal, assuming that gains government approval.

American and JetBlue set the new direction for US airlines

Either the Capulets and the Montagues have made up, or these are star cross'd lovers who will end in tragedy; the greater likelihood is that the American and JetBlue partnership will survive and indeed provide a model for the future shape of the US industry, as many low cost airlines and full service operators blend into a similar form.

Admittedly, the arrangement provides only for interlining. "This agreement is not a codeshare agreement," American spokesman Tim Smith told CAPA. "It is a simple interline agreement in which we and they will be able to offer, and sell, the customer one ticket for the connecting itinerary, as well as checking any bags just once for the entire itinerary.

"The interline agreement covers specific markets into, and out of JFK and Boston with all of the JetBlue domestic markets connecting from cities that do not currently offer American or American Eagle service into JFK or Boston. There may be other elements to the agreement going forward, but none of that has been officially decided at this stage. Since it is an interline and not a codeshare, still it is a unique partnership."

Mr Smith also pointed out that, even as an interline agreement, both carriers will benefit from incremental passengers and revenues. The interline service in non-overlapping markets will offer passengers "more choices and convenient connections".

And, significantly, the companies are also exploring "other commercial cooperation".

But not everyone will be happy….

However, amid the rejoicing, there is more to the story. To continue the Romeo and Juliet metaphor, there is another player in this particular scene. In Shakespeare's play it was, ironically, Count Paris, who was a competing suitor for Juliet's hand. In this airline affair, he becomes Count Frankfurt.

Just over two years ago, Lufthansa acquired what is now a 19% stake in the US low cost airline. The German flag carrier was looking to use JetBlue to distribute Star Alliance traffic beyond New York, where domestic connections on Star partners are few and far between. JetBlue's website today highlights the global network of Lufthansa and displays the connections possible through that partnership.

The problem here is that American is the US leader of oneworld, currently seeking anti-trust immunity to allow the smaller global alliance to compete more effectively with Star Alliance carriers on the North Atlantic.

In those circumstances, JetBlue risks upsetting its relationship with Count Frankfurt. Lufthansa is hardly likely to be impressed. Partially underwriting an expansion of American's network is not what it had in mind when investing in JetBlue. It is not a fatal flaw, but it does highlight the shortcomings of minority shareholdings by foreign airlines (who might prefer to gain controlling interests).

And, on the other side of the coin, it makes other investors more wary of sinking funds into the unpredictable and "protected" US airline industry, where only minority holdings are permitted. That is precisely why the European side of the Atlantic was decidedly less enthusiastic last week about the compromised US-EU agreement.

But the US carrier of course has its own bottom line - and the deal with American includes an important new strategic opportunity, the nation's capital.

JetBlue's new venture into the nation's capital

Long wishing to establish a presence at Washington Reagan, the slot swap part of the deal provides JetBlue with eight of American's current slots. As noted above, additionally, the carrier is pursuing US Airways for another five and has petitioned the FAA for currently unused slots in the early morning and late evening.

JetBlue is clearly looking to be a noteworthy presence at DCA, as its press release points out: "Capital-area travelers who prefer the ease of traveling from Reagan National have waited far too long for JetBlue's award-winning, low fare service," said Robert Land, JetBlue's Senior Vice President of Government Affairs and Associate General Counsel. "We are thrilled to finally be entering the DCA market, injecting high-quality competition into this centrally located airport."

Strengthening American's New York and Boston hubs through JetBlue connections

The AA/JetBlue slot swap is part of a broader commercial agreement between the two airlines at both JFK and Boston, under which JetBlue will offer simple connections to American's international flights and new domestic flights at both airports.

JetBlue has spent the last year building a substantial and successful presence in Boston in the wake of US Airways' departure. On domestic routes where the carriers don't currently compete, American customers are now able to book nonstop JetBlue flights from JFK and Boston to 18 domestic markets, including Portland, Maine; Nantucket; and Burlington, Vt.

The partnership will focus on routes into and out of JFK and Boston Logan International that extend and complement each other's networks. None of the routes on which the airlines will cooperate overlap current flights served by the other. The agreement will provide connections for more passengers at JFK and Boston to American's international destinations in Europe, Asia, and South America.

It also will generate more traffic and support for American's planned joint business with oneworld partners British Airways and Iberia between North America and Europe, and with Japan Airlines between North America and Asia.

"This new agreement with JetBlue complements our domestic and international network and will bolster our partnerships with other oneworld members. It will provide important opportunities to grow international traffic flowing into and out of the United States for American," American CEO, Gerald Arpey said. "That ultimately strengthens our operations, network, and customer feed at JFK and at Boston Logan. And, while we bolster American's own network, in turn we will help solidify oneworld as the premier global alliance with the finest airline brands and networks worldwide."

And Southwest Airlines will not be happy either

Southwest is unlikely to be impressed with the proposed slot swap; the largest domestic airline contends that only the government can transfer slots. The problem with this argument is, once airlines gained slots in the first place, they invested heavily in the service they provided with them. They are consequently counted as assets and the argument has largely become moot.

But the largely fiercely independent low cost carrier is steadily seeing its strategic foundations being shaken as a host of new developments shift the goalposts in the US domestic system.

Although it may be sometime before Southwest announces its codeshares with United, the JetBlue/American announcement represents in many ways a watershed in the evolution of America's airline system.

After 40 years of separate existence, the houses of Montague and Capulet are irreversibly coming together. Granddaddy Capulet risks being the only standout.