DOT Attaches Foolish Conditions to US Airways and Delta Slot Swap in New York and Washington

The DOT has decided that the proposed Delta/US Airways slot swap in New York and Washington is perfectly acceptable . . . as long as the airlines agree to sell off a bunch of the slots to new entrants first. I will be shocked if the airlines go for it, and that means that basically nobody wins. Way to go, DOT. (You can read the full ruling here.)

First, The DOT Loves Low Cost Carrierslet’s refresh our memories on the details of the plan. US Airways will give up 125 slot pairs at LaGuardia along with terminal space. In return, Delta will give up 42 slot pairs at Washington/National and route authorities to Sao Paulo and Tokyo/Narita. The idea was to let each airline play to its strengths in its largest markets.

Delta has been focused on “winning” New York, as we all know by now. This was going to let them serve more cities from New York than they do now, and they said it would also let them move some flights from JFK to LaGuardia in order to focus on the international hub operation at JFK. They were going to maintain flights to the markets which US Airways was leaving but they would use regional jets instead of turboprops.

Down in DC, US Airways was much more detailed in its plans. It was going to pick up the markets that Delta left, but it was also going to add service to 8 cities that don’t see nonstop service from National today. The Tokyo and Sao Paulo flights were independent, but important for them to grow their international presence in markets that are highly restricted.

The plan seemed very smart to me. There are a lot more US Airways loyalists in DC and Delta loyalists in New York, so they likely would have been happy to have the additional service from their preferred carriers. Also, additional cities would have seen nonstop service to LaGuardia and National that they don’t see today.

But now, my guess is that this plan blows up unless Delta and US Airways figure out a way to sway the DOT’s opinion. Why do I say that? Well, the DOT was fine with the plan as long as the airlines sell off some slots first. They had the biggest concern in Washington where they required Delta to sell a full third (14) of the 42 slot pairs first. US Airways will have to sell off 20 slot pairs in New York.

And these aren’t just slot sales. They are sales to airlines that hold less than 5% of the slots at each airport. No cheating allowed – the sales can’t be to any airline that is owned by Delta/US Airways or even one that codeshares with them. That pretty much means it has to be to a low cost carrier.

If you’re US Airways, would you agree to give up 14 slot pairs to an airline that is likely going to compete with you head-on just to get 28 slot pairs? I think not. What’s worse is that the low cost carrier would undoubtedly just add service on routes that already have flights today. The smaller communities would lose out.

So if this holds, I imagine it means that deal is off. In fact, they’ve said as much. US Airways President Scott Kirby said in a letter to the troops,

At this point, while we are still analyzing the DOT’s proposed ruling, we expect that if the DOT’s order is implemented as proposed (there is a 30-day public comment period before the ruling becomes final) the transaction will not go forward.

That means that pretty much everyone loses, except for the DOT which can continue to try to claim that it has saved the traveler from paying high fares, something that I think is questionable. They seem to rest on that fact that higher carrier concentration automatically means higher fares, even if most of the routes will continue to see service by one carrier, just a different one than before. (See my review of competition on these routes.) Is there any salvaging this? I hope so.

One of the complaints the DOT raised in its response is as follows:

While the carriers have made public some of their new intended services, including new service to small communities, they have not released all intended service changes.

However, it is apparent that is the proposed transaction is approved, the carriers will increase the number of markets they serve on a monopoly or dominant basis. As the two carriers reposition at LGA and DCA, there is no assurance that all markets currently being served by the departing carrier will be maintained by the new carrier.

Maybe if Delta and US Airways came out with specific service plans and included a guarantee to serve the smaller communities for a certain amount of time, the DOT would look at this differently. That would be the last gasp that I can imagine. Otherwise, it looks like the deal is dead, and nobody wins.


27 Responses to DOT Attaches Foolish Conditions to US Airways and Delta Slot Swap in New York and Washington

  1. JM says:

    Let’s see…

    This deal was opposed by US Airways’ unions and we have a pro-union Obama Administration running USDOT.

    Delta is a largely nonunion carrier– and it would have benefitted them, too– so….

    Nah. Purely coincidence.

  2. David SFeastbay says:

    At first glance you would think that it makes sense since it would give to much power to DL in New York and US in Washington. But there are other carriers in the metro markets so wouldn’t it balance out? No one seems to care that CO dominates EWR or UA IAD. So it’s not like no other carriers fly to the smaller markets from each metro area. Also did anyone care when US dominated BWI.

    Not everyone from these smaller cities just flys to NYC or WAS, but a large number I would guess would connect via LGA or DCA just like they do now via EWR/IAD/PHL/JFK/etc.

    I can see them having to sell off slots to allow new carriers to have access to LGA and DCA, but those numbers seem high. And we can’t forget that air travel to/from LGA/DCA is the only method people use, trains could be faster then air travel in some cases so there are other options to travels going just to NYC/WAS.

    You are correct that if both DL and US were to give a written plan for service over a certain time period it could help their causes. Or even to guarantee level service and if they reduce it after a certain time, then they would have to sell some slots but only to other carriers to those same markets….or something like that.

  3. Ed Casper says:

    I tend to agree with your assessment.

    Are you going to comment to DOT?

    I hope this is simply part of a negotiation process and a reasonable compromise can be struck. I can see a smaller slot divestiture as one way out. It seems to me as an uninformed (as least as to the nitty-gritty of airline regulatory practices) observer, that US and Delta made an initial offer and DOT has made a counter offer. Now it’s time to get down to finding a deal everyone can live with. I hope that happens.

    I could be mistaken, but I read the report a bit differently than you did. I read that the slot sales would have to be completed 60 days after the implementation of the order and if they were not sold, the slots would be “held in abeyance” to determine what would happen to them. I can see US and Delta’s problem with this.

    It’s interesting to note that even with the US divestiture per the tentative approval, they would still control over half the slots at DCA. That’s a big percentage by any measure.

    From US’s perspective, I have to wonder which is less bad: a bit more competition at DCA or a losing proposition at LGA kept in place only to keep out LCC competition. The same can be argued about DAL. The legacy strategy to stifle LCC competition certainly hasn’t worked in the past. This initial reaction seems like more of the same. Short term gain; long term disaster. I hope a good long term solution can be found that strikes the proper balance between competition and pricing power. The only thing at stake is the survival of an entire industry.

    This whole airline situation isn’t unlike what happened to the rail industry after WWII. Lots of bankruptcies, and a shrinking industry. Like the railroads before WWI, the airlines grew too big and they now have to “right size” the industry. If past is prologue, there will be a lot more suffering before things stabilize.

  4. Greg R. says:

    The benefits to the consumer are murky at best and replacing turboprops with regional jets isn’t necessarily an improvement at all.

    Concentrating the market power of those two airlines in those two markets doesn’t really have a substantive argument behind it with respect to ensuring greater value to the consumer in dollar terms. More connections, different planes isn’t a cry that is even being heard in those markets now.

    Just because previous governments have ignored that kind of concentration doesn’t make it right. And government isn’t there to represent corporations over individuals. Anti-trust issues have long been ignored and it is somewhat gratifying that the goal seems to be to remove some barriers to access for newer non-legacy airlines in those two particular markets.

    The argument that fares wouldn’t necessarily go up because of the swap isn’t exactly a stunning endorsement of the proposal.

  5. Zack Rules, Albany, NY says:

    I think that the DoT’ requirements are more than reasonable. DL and US aren’t utilizing their existing slots to the maximum (IE using larger plane) and the DoT’s trying to get them to do this. Instead of DL providing three daily flights to Greensboro on 50 seat jet, they may have to shrink to two on 76 seat jets. Otherwise, they’ll just sit on slots as they do now, serving place like Buffalo and Albany with excessive numbers of turboprop flights and in effect keeping out competition from carriers that would use full size jets. DoT isn’t asking for the farm, just to release a few slots to carriers that wouldn’t otherwise have the opportunity to acquire them.

    One condition I would add to help those who are loosing their jobs with US in New York is to give everyone an opportunity to interview (not a guarantee to hire) with DL’s people.

  6. CF says:

    JM wrote:

    This deal was opposed by US Airways’ unions and we have a pro-union Obama Administration running USDOT.

    Only US Airways pilots opposed the slot deal and the Delta pilots supported it. I don’t buy your theory.

    David SFeastbay wrote:

    No one seems to care that CO dominates EWR or UA IAD. So it’s not like no other carriers fly to the smaller markets from each metro area. Also did anyone care when US dominated BWI.

    It’s different with IAD and BWI because there are no slot controls. Anyone could go in there if they so chose (and get slaughtered). But I get your point.

    Ed Casper wrote:

    Are you going to comment to DOT?

    Not sure. I just write about this stuff – it’s for others to get involved in the politics of it.

    Zack Rules, Albany, NY wrote:

    I think that the DoT’ requirements are more than reasonable. DL and US aren’t utilizing their existing slots to the maximum (IE using larger plane) and the DoT’s trying to get them to do this. Instead of DL providing three daily flights to Greensboro on 50 seat jet, they may have to shrink to two on 76 seat jets. Otherwise, they’ll just sit on slots as they do now, serving place like Buffalo and Albany with excessive numbers of turboprop flights and in effect keeping out competition from carriers that would use full size jets. DoT isn’t asking for the farm, just to release a few slots to carriers that wouldn’t otherwise have the opportunity to acquire them.

    It depends what you mean by utilizing to their maximum. Your argument would say that everyone should use a 757 or 767 on every route because that’s the biggest plane that can be handled, but then the smaller cities would never have service. Delta would add seats in LaGuardia by moving up from smaller props to bigger jets. US Airways would move from regional operations to Airbus aircraft on most of the flights. The DOT can’t take the existing slots away, but approving this would certainly improve the utilization of those assets.

  7. chrish says:

    I think the DOT requirement is more than fair considering what is being requested. First, there is already a process at both LGA and DCA for airlines to rid themselves of routes that at not profitable. They discontinue to flight or route and hand the slots back for reassignment. DL & US are attempting something significantly out of the norm that will make them both significantly more dominant at their chosen airport. At LGA many smaller NE cities will go from 3 airlines down to 2 or 2 down to 1. DL shifting flights from JFK to LGA will also eliminate Intl’ options as well. I concede that you could make the argument that some of these routes could indeed have too much competition but then I would go back to the process already in place….reassign the slots to a different route. Problem is that DL & US want their cake and to eat it too. Don’t want the added competition but want to retain the slots.
    The second point I’ll make is that it appears each airline would have the power to select whom they sell the slots too. So, take DL at DCA. They are handing over slots to US going to places like GRR and MSN. Do you really think that US desires to enter these 2 new airports with the 1-2 flights a day to DCA only? Prob not likely they are going to develop service to other hubs otherwise they would have done it by now. DL has already negotiated the divestiture of its ownership in YX to Republic. YX/Republic could easily represent an airline that does have 5% of the market and they could simply choose to not codeshare with DL on these new routes. Now as for new competing service, I would never assert that airlines are in collusion, however, when YX suddenly came into E90’s that could get it from MKE to LAX again, guess what happened to the daily NW flight that was on that route….discontinued. Enough said.
    Fact is, both airlines can become significantly more dominant in their perspective markets and evade the inevitability of handing slots back to the govt for reassingment. These slots are a minor concession that I believe will ultimately not derail this unprecedented swap.

  8. tharanga says:

    How often do voluntary sales of slots occur? Is there a list someplace, with prices?

    New entrants were able to just buy their way into LHR. Why is it so much harder at LGA? Or is it?

    Where exactly did B6 get its LGA slots from? Did US ever pay for its existing slots, or were they just given away and grandfathered in when slots were introduced?

  9. Simon says:

    American Airlines wins, that’s for sure.

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  11. Hrm. The government is standing in the way of ratioalizing servichatEhat if the DOT stated that the airlines buying these slots had to serve airports of the same population in their MSA as US and DAL would have to stop serving? No one would want the slots.

  12. CF says:

    chrish wrote:

    First, there is already a process at both LGA and DCA for airlines to rid themselves of routes that at not profitable. They discontinue to flight or route and hand the slots back for reassignment

    Actually, they don’t need government approval to do this at DCA – they’re allowed to sell the slots. But at LGA, there is an order that was there temporarily to block slot changes. I believe that went into effect when they reinstated slot restrictions there. It was supposed to be a temporary order but no final order has ever been issued with how this would be handled long term. That’s why they’re looking for the waiver.

    chrish wrote:

    At LGA many smaller NE cities will go from 3 airlines down to 2 or 2 down to 1. DL shifting flights from JFK to LGA will also eliminate Intl’ options as well.

    That’s not true. US Airways will stop serving 26 routes. Of those, 21 are not served by anyone else today from LaGuardia. So Delta will just keep the status quo in those markets. Of those 5 remaining markets, 3 will go from 3 competitors to 2 while 2, Savannah and Charleston, will go from 2 to 1. Of course, those do have ample service from Continental at Newark.

    tharanga wrote:

    How often do voluntary sales of slots occur? Is there a list someplace, with prices?
    New entrants were able to just buy their way into LHR. Why is it so much harder at LGA? Or is it?

    That’s a good question and I don’t know the answer to it. They don’t happen at LaGuardia without a waiver, as mentioned above, so that answers that question, but I don’t know how often they’ve happened at DCA. I seem to recall during a US Airways bankruptcy that they sold slots to Republic to be used for US Airways. Anyone else recall that?

    tharanga wrote:

    Where exactly did B6 get its LGA slots from? Did US ever pay for its existing slots, or were they just given away and grandfathered in when slots were introduced?

    The JetBlue slots came as part of a rule that gave slots out for competition. I don’t think anyone had to pay for slots when they first got them.

  13. tharanga says:

    If what they want is competition, they should encourage a healthy and active market for slots. They can still block any sales that would create too much consolidation. My impossible proposal is to have all slots expire every 10 years, with the new slots to replace them being auctioned off.

    In that model, an airline would be more motivated to sell off slots it isn’t using well (like US at LGA). Get some money for them, while they’re still worth something, before they expire. They can always try to gain them back at the next auction, if their fortunes change.

  14. Ron says:

    Isn’t this just a case of DOT trying to capitalize on an opportunity that happened to come their way? They would probably be happy to redistribute slots to new entrants on a regular basis, but they can’t force slots away from existing carriers. Well, now they can, so they do.

    Regarding DCA, I think the right thing to do is just get rid of the airport. It’s a security and safety risk, and it sits on land that’s potentially very valuable. Redeveloping the land should raise enough money for providing true high-speed access to both BWI and IAD; at least with BWI, most of the infrastructure is already in place.

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  16. Gary says:

    @ Ron:
    You’re right on target. Any other place in the nation would already have closed the downtown airport like Kansas City did, but the senators and congressman overlook the incremental increase in safety for their own convience of getting to the airport from their offices in 10 minutes.

  17. Ron says:

    @Gary: Move the BWI rail station into the terminal and you’ll get there in 20 minutes from Union Station, which is 4 blocks from Capitol Hill.

  18. chrish says:

    “At LGA many smaller NE cities will go from 3 airlines down to 2 or 2 down to 1. DL shifting flights from JFK to LGA will also eliminate Intl’ options as well.”

    CF
    That’s not true. US Airways will stop serving 26 routes. Of those, 21 are not served by anyone else today from LaGuardia. So Delta will just keep the status quo in those markets. Of those 5 remaining markets, 3 will go from 3 competitors to 2 while 2, Savannah and Charleston, will go from 2 to 1. Of course, those do have ample service from Continental at Newark.
    ******
    If you are considering LGA by itself you are absolutely correct. However, if you look at NYC collectively(LGA, JFK & EWR) you are not. Take BTV as an example….today served by DL from JFK, US from LGA and CO from EWR. If the slot swap were to go through DL would assume the LGA-BTV route and drop its own route from JFK. Thus moves this market from 3 to 2 competitors.

    As I stated, you could make the case that 2 competitors is plenty in the NYC-BTV market, It is clearly, however, less choice and fewer seats for consumers.

    A government which has oversight authority of a public,open access asset(airports) to allow the largest airline in the world to become an even more dominant carrier within a market and to not have to offer up concessions like take-off and landing rights(competition) to small competitors, To conclude otherwise is rediculous and would be a complete misinterpretation of what the DOT is tasked to do.

  19. CF says:

    Ron wrote:

    Isn’t this just a case of DOT trying to capitalize on an opportunity that happened to come their way? They would probably be happy to redistribute slots to new entrants on a regular basis, but they can’t force slots away from existing carriers. Well, now they can, so they do.

    Yes, but the problem is that the deal is highly unlikely to go through in this form. So the DOT seems to be miscalculating here, because instead, they’ll just end up with the status quo and that’s where people are worse off.

    chrish wrote:

    If you are considering LGA by itself you are absolutely correct. However, if you look at NYC collectively(LGA, JFK & EWR) you are not. Take BTV as an example….today served by DL from JFK, US from LGA and CO from EWR. If the slot swap were to go through DL would assume the LGA-BTV route and drop its own route from JFK. Thus moves this market from 3 to 2 competitors.

    You’ve forgotten JetBlue from JFK in there, so if you want to look at the market on the whole, then you’re seeing 4 go down to 3.

    You seem to be trying to have it both ways here. It’s a single market for some purposes but not for others? If you count the entire metro area as a single market, then there isn’t one single monopoly market being created that isn’t a monopoly today.

    Here’s another interesting thing to consider. This move will actually increase competition in some places. US Airways would start service from DC to 8 cities that don’t have service today. Tallahassee, for example, will get service to the northeast that it doesn’t have today. For flights south, Ithaca today has US Airways to Philly or LGA while Continental has Newark. With this switch, US Airways will move LGA to DCA and Delta will enter with LGA. They currently only fly there from Detroit today. So there is a benefit.

    chrish wrote:

    A government which has oversight authority of a public,open access asset(airports) to allow the largest airline in the world to become an even more dominant carrier within a market and to not have to offer up concessions like take-off and landing rights(competition) to small competitors, To conclude otherwise is rediculous and would be a complete misinterpretation of what the DOT is tasked to do.

    The DOT’s mission is:

    Serve the United States by ensuring a fast, safe, efficient, accessible and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people, today and into the future.

    Sick airlines that find themselves in danger of not being sustainable companies are a big problem. The DOT may want to force these airlines to cough up slots, but I can’t imagine the airlines doing it. So the DOT needs to decide if it’s more important to stand its ground and keep the status quo or give up something and move to something that’s better than what we have now.

  20. dan powers says:

    for delta…it could be a blessing in disguise- having a split hub=jfk/lga usually does not work well

  21. Tom says:

    Let’s see, these airlines will be closer to having a monopoly at the respective airports,which means that travelers will have higher fares and less choices. They may get a few more non-stop destinations, as long as they are willing to pay a small fortune for that opportunity. Overall, I am not sure how consumer travelers benefit from this situation. If they were not slot restricted, I would see less problem, but making this exchange with the restrictions would prevent competition. Overall, the relatively low number of slots lost still seems like a good deal for these airlines, although the penalty at DCA is twice what it is at LGA, which seems odd.

  22. Columbo says:

    When is the last time you saw anything that made sense come out of Washington?

  23. BJ says:

    Is there any way we can voice our opinion to the DOT?

  24. CF says:

    BJ wrote:

    Is there any way we can voice our opinion to the DOT?

    Sure can. Just go here:
    http://www.regulations.gov/search/Regs/home.html#submitComment?R=0900006480a90300

  25. Andrew says:

    From the article…

    “And these aren’t just slot sales. They are sales to airlines that hold less than 5% of the slots at each airport. No cheating allowed – the sales can’t be to any airline that is owned by Delta/US Airways or even one that codeshares with them. That pretty much means it has to be to a low cost carrier.”

    Continental has not initiated any codesharing with US Airways and they seem to not really want to; they are only reaping the benefits of being in the same alliance. Since CO definitely has less that 5% of the slots at DCA, wouldn’t they be able to purchase the slots there? The DOT only specified that it couldn’t be a codeshare partner. CO may want these slots for now, so later it can use them as bargaining chips.

    Just a thought…

  26. CF says:

    Andrew wrote:

    Continental has not initiated any codesharing with US Airways and they seem to not really want to; they are only reaping the benefits of being in the same alliance. Since CO definitely has less that 5% of the slots at DCA, wouldn’t they be able to purchase the slots there?

    The DOT specifically calls out the airlines currently serving the airports that are eligible on page 18 of the ruling. At National, it’s only AirTran and Spirit. At LaGuardia, it’s AirTran, JetBlue, Southwest, and Spirit. The only reason I can think of why Continental isn’t allowed to play is that they own more slots than they use. It’s entirely possible that they sublease slots out to other carriers.

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