In the immortal words of Dennis Hopper (rest in peace, you crazy bastard) . . . pop quiz, hotshot. Let’s say that you’ve been presented three deals impacting the most dominant airline at a highly-congested airport. You can approve one. Which would it be? Here’s what the airport will look like after the deal is approved:
You’re probably thinking that B looks best, and there’s no chance anyone is going to pick deal A, right? But that’s exactly what’s just happened now that the Department of Justice (DOJ) has given its approval to United and Continental to merge. All Continental has to do is take United’s 18 daily flights and give those slots (or equivalent) to Southwest. Done deal. Those other two deals? Yeah, that would be the rejected slot swap between Delta and US Airways in Washington (C) and New York (B).
I know, I know. These are totally different things and the approvals came from different branches of government. True, but it also shows how screwy it can be dealing with the feds. I should be clear here. I think the Continental and United deal should be approved. I just think the slot swap should have been approved as well.
Let’s start with the Continental/United deal. Apparently, the Department of Justice (which tends to be more strict than the Department of Transportation) had no concerns about this deal outside of Newark. Newark, of course, is a highly-congested airport with no slots available. So Continental agreed to permanently lease 18 slot pairs (the same number of flights United operates today) to Southwest. In other words, United gives up its slots to Southwest and everything else is fine. Here’s the state of the airport after this deal.
I’m sure Southwest is thrilled to be getting in there, but it’s still a pretty small number of flights in the scheme of things. And of course, everyone else is still frozen out for now. Contrast that with the slot swap deal. First, here’s the Washington/National chart had the deal been allowed to go through.
Here you can see an airport with more balance and greater low cost carrier penetration than Newark, but that’s nothing compared to LaGuardia.
When compared to National, there’s a greater transfer of slots here, but the dominant carrier would still have held a smaller position than at the other airport. Note the even higher LCC penetration of 12.7%. That’s more than double where Newark will be after Southwest gets its 18 slot pairs. So what gives?
Well it’s hard to say exactly what’s going on when you’re dealing with political bodies. Making sense is never the highest priority. But in this case, I would assume it’s simply an issue of looking at current versus potential scenarios. Continental won’t grow in Newark with this transaction while Delta and US Airways would have grown at LaGuardia and National respectively in that deal. Really, that shouldn’t be the issue here.
If the feds want to act like they’re sticking up for the consumer, they have the ability to hold airlines over a barrel. The Department of Justice chose not to do that with Continental and United while the Federal Aviation Administration has apparently gone the opposite route with the slot swap. Go figure. One thing we do know is the feds do seem to love Southwest these days.
You’ll remember that Southwest voiced a large number of objections when it came to the slot swap. The feds came back and agreed with the airline. Remember, Southwest actually said that open auctions were the best outcome. Now it’s gone and done a back-room deal. Not bad for Southwest, and certainly not bad for Continental and United. Then again, it probably just frustrates Delta and US Airways even more. Or maybe not.
Maybe this suggests that the better path for US Airways is to get bought (as they’ve been saying for some time anyway). Then it won’t need to get an FAA waiver to give its LaGuardia slots to another airline. It’ll be that other airline, so the FAA won’t get to ruin the party. If this helps build up US Airways’ efforts to get bought, then that’s good news for the airline.
Never a dull moment inside the Beltway, that’s for sure.
Do you think it could have something to do with coterminals? Maybe the DOJ was considering JFK/EWR/LGA one market while the FAA was just strictly looking at DCA in isolation and LGA in isolation? It might be interesting to see what your charts look like if you were to look at it from the coterminal perspective.
It’s always possible, but I can’t believe they’d do that for New York and not Washington. The FAA made it very clear in Washington that National was its own airport and the same was said for Heathrow in London.
great analysis brett, esp from my DCA perspective. i was really bummed about the flushed slot swap. all the “new service” announced by DL is mostly duplicative and involved no new airline entrants. fortunately, B6 was smart enough to do its own deal with AA that the FAA couldn’t stick its nose into. but, under the swap, we would have had westjet, more B6 service, more FL service (i think), etc.
the vagaries of the government should never be underestimated. can’t wait till it ru(i)ns healthcare.
I would argue that it is all about the status quo. There will be effectively NO market share change in EWR. CO will not increase its flights due to this (or its market share). Hence, your pie graph is unchanged. I’m sure many cringe at the thought of a legacy having 74.4% of a slot constricted airport, however that is already the reality and it does not get any “worse” with this deal.
UA’s flights and market share (whoop dee doo 3.2%)will go away and be replaced by WN with 18 flights and a probable 3.2% market share (maybe more b/c UA flies some RJs into EWR).
On the other hand, the US/DL would have taken two relatively fragmented airports (in terms of market share) and created respectable market share shifts.
Don’t get me wrong, I think both should (or should have) been approved. I’m just trying to think like a bureaucrat.
Exactly. and CF hinted at this, “I would assume it’s simply an issue of looking at current versus potential scenarios.”
CO was already that big on their own. So in the context of a merger, the Feds weren’t going to force them to get smaller than they already were; they just weren’t going to let CO get any bigger. If the extra UA slots go to WN, then the merger does no harm at EWR from a competition standpoint.
Seems rather simple to me.
Sounds like EWR is a difference matter compared to LGA/DCA as was mention, CO is already the largest user at EWR, so nothing gained.
Nice analysis, Cranky.
Speaking of DCA, the DOT announced yesterday that they are accepting applications for 7 slots formerly controlled by Midwest. The criteria they listed are as you would expect, designed to let only the LCCs (Read: Southwest) have a legit shot at them. JetBlue has already announced that they want them, so let the fun begin.
Southwest’s plan all along. Surround the NYC area. ISP, LGA, nearby PHL, BOS, get into the shuttle market and now EWR. And, now open slots in DCA? Couldnt have played out better. (I’d be surprised if they dont get them).
interesting. i don’t care WHO does it, i just want SOMEBODY to fly DCA-MDW again. since WN would be the most likely airline to fly that, bring ’em in! i can’t believe i still miss ATA (for that and only that).
Good work Brett, I wonder… did DL & US not pay enough to play, while CO & UA did?
I really don’t see the need for US Airways to be bought. They seem to be turning things around quite nicely on their own, and had the highest margins of any legacy carrier last quarter. I realize that one quarter doesn’t mean much in the grand scheme of things, but the trend looks good.
US Airways has been beating analysts estimates rather consistently over the last two years or so. If you compare US Airways’ financial condition with American’s, it seems to illustrate that bigger doesn’t always mean better. If the trends continue as they have been, it may be US Airways doing the acquiring, not American. That is, if there’s a transaction at all.
Maybe this is all about which airline does the complaining or which complains the loudest. Southwest management is being really hypocritical when it calls for “open bidding” on the one hand and does a backroom deal on the other.
Just my 2 cents worth – and you got it at a 2 cent discount. You get what you pay for, huh?
The hypocrisy argument, to me, is hollow. You are going to try to do what is in the best interest of your organization at the time. Maybe a good analogy is that when you buy a house, you want the seller to pay the closing costs. But when you sell the house, do you want the seller to pay the closing costs? No, and I don’t think it makes you hypocritical, it means you are working for your best interests.
I think this is a little different. It’s like you saying publicly that it’s in everyone’s best interest to have the seller pay the closing costs but then when you actually are the seller, you don’t want to do it that way. It obviously works out best for Southwest, but it does make the airline sound hypocritical as well because of the way they trumpeted their stance on National.
Ted, As a long time former real estate agent, your house transaction analogy is rather weak but you’re quite correct in your overall ananlysis from a pragmatic perspective. I wasn’t referring to the wisdom of the transaction or the idea of getting a good deal, only the double standard exercised by Southwest’s management in advocating for its positions.
by Ed on August 31, 2010.
Reply I really don’t see the need for US Airways to be bought.
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This airline is being positioned for a sale. Just watch.
I don’t see the need for US Airways to get bought either, but that’s what they’ve publicly stated they expect to happen and it’s what they think is best for the company. So this could make them a more attractive partner.
Written by CF on September 1, 2010.
Reply I don’t see the need for US Airways to get bought either, but that’s what they’ve publicly stated they expect to happen and it’s what they think is best for the company.
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BIG DIFFERENCE between what they “expect” to happen, and what they’re currently up to to make it happen. They’re actively working to negotiate contracts with labor to set them up for a sale.
A thought occcurred to me after I left my last post. As I listened to US Airways’ last earnings call, it seemed to me that CEO Doug Parker was rethinking his position on mergers. He still thinks the industry is too fragmented (although the idea of three huge legacy carriers plus a huge Southwest strikes me as just the opposite – but I digress) he really doesn’t seem to be as anxious to merge. It could be his prospective “bride” is a pretty “ugly girl” with labor costs and cultural items that don’t jibe with US Airways’ business model. Alaska airlines is about the size of the old America West, yet they seem to be doing quite well without being huge. JetBlue doesn’t seem to be in a hurry to merge, nor do AirTran or Hawaiian.
As I wrote, above bigger doesn’t automatically mean better. Look at railroad history is you want a parallel. The merger of the New York Central and Pennsylvania Railroads was supposed to have all of the attributes of these airline mergers being touted today. But what happened? Penn Central – the largest bankruptcy in history up until that time. Many of the issues, labor being number one, are similar to airline mergers.
I wouldn’t go as far as Rep. Oberstar, but I do believe that a merger between American and US Airways would turn out like the Penn Central – an unmitigated disaster.
I also don’t understand why people think US can’t go it alone, but AirTran and jetBlue can.
Speaking of Newark, jetblue just announced 4 daily EWR-BOS. Who knows where the slots came from. Just in case Southwest was even thinking about it?
I think I can describe how it’s all coherent, from the government point of view.
– You’re allowed to have a big hub at a non-slot airport. So CO can do its thing at IAH, or UA at IAD, or DL at DTW.
– But the feds will actively try to stop you from getting that high a concentration of the market at a slot-controlled airport. This is because the barriers to entry at these airports are higher than at others, so you must be more watchful to ensure that healthy competition is possible.
– That said, if you already had a big hub at such an airport (like CO at EWR), the Feds won’t force you to dismantle it. But they won’t let you get any bigger, either.
“I know, I know. These are totally different things and the approvals came from different branches of government. True, but it also shows how screwy it can be dealing with the feds”
But that is like saying someone should be able to breathe on Mars. I know, I know, these are totally different planets and the atmospheres are completely different. But the planets are so similar.
The two agencies are not even in the same cabinet departments. Mergers and acquisitions have different rules than slot swaps, it is that simple. DoJ has different duties than DoT/FAA, simple. To compare the two is stupid. If you want to say that the slot swap should have happened under the FAA guidelines and statutes, fine, but do not use CO/UA as an argument for it. They are quite different.
Interesting, but missing in this analysis is the alliance factor. At Newark, the “other legacy/niche” and “foreign flag” categories also contain a hefty amount of additional Star Alliance carriers. The dominance situation there is even worse than you present.
I like this blog, but you took a big swing and a miss here. Continental (aka the new United) will have the exact same marketshare at EWR before and after the merger. This is totally different than the DL and US situation. Nice try on this, but get ’em next time.