Topic of the Week: Should American Have to Give Up Slots in Washington?

Jun 21, 2013

More Reading on This Topic: American, Mergers/Finance, US Airways

American and US Airways leaders were on Capitol Hill this week talking about the virtues of the merger. One area where there has been speculation that the airlines might have to make concessions is at heavily-restricted Washington/National airport. US Airways already holds a majority of slots, and now with American it will hold more. If the airline is forced to give up slots, they will likely go to new or limited current entrants who will undoubtedly fly to cities that already have service. Fares will go down, but many small communities that US Airways serves today will lose their service.

Which is better?

Brett

31 responses to “Topic of the Week: Should American Have to Give Up Slots in Washington?”

Gary Leff

Jun 21, 2013 at 4:16 am

It seems almost inconceivable that the government WON’T make the two carriers give up slots. US Airways could have all of Delta’s slots when they did their DCA/LGA swap. Hard to imagine the combined AA/US gets to keep all that both currently have. Even if it makes sense, agencies doing reviews have to extract something for their quiescence.

Plus other airlines are lobbying for it, they won’t stop the merger but they can extract this tax.

But there are really valuable network effects. Hubs have increasing returns to scale, so there’s real economic loss in redistributing slots. Fares go down potentially only on those limited new routes that gain additional service from new market entrants. Fares go up out of cities losing service, and convenience is lost as well.

Should they be forced to give up slots? No. If there’s a more valuable use for their slots then the new entrants should buy those slots at a price that earns more for AA/US than flying the slots, but at a price lower than the incremental economic profit the new entrant would earn from the routes. If such a price doesn’t exist that’s evidence that the new flying isn’t actually more valuable than the current flying.

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1. Noah Kimmel
  
  Jun 21, 2013 at 9:33 am
  
  Speaking strictly economically, if Jetblue can profitably sell 150 seats and stimulate lower fares with a slot US uses to fly 15 people on a Dash, the net economic benefit is positive (profit for airline, consumer surplus in lower fares for a lot of people).
  
  US is trying to hold small cities hostage. If a new entrant comes in and lowers fares to a large city, maybe US will upgauge equipment and redistribute one or two slots. But to complain that small communities will be hit, even when the larger cities become less attractive to fly with high frequency and low seat count is a load of BS.
  
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2. Ron
  
  Jun 21, 2013 at 12:45 pm
  
  Gary, I have to take issue with your last point about the value of the slots. US/AA may be getting high value from certain slots precisely becuase they stifle competition: for example, it may be that the route to Charlston WV (just an arbitrary example) is losing money, but is still highly valuable because holding the slot prevents a competitor from flying the highly profitable Providence route. This is exactly what anti-monopoly laws are designed to prevent. So anti-monopoly, competition-promoting policies are expressly intended to reduce the value to the business (by your metric), for the benefit of the consumers.
  
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Abeflyer

Jun 21, 2013 at 5:01 am

The government seems to want competition, but only from the larger cities. The smaller cities that combined make up larger populations than many of the bigger cities at least this time see the handwriting on the wall and are lobbying to allow the new AA/US keep slots at DCA. A hub is the only way they will continue to have service to the nation’s capital as economically it doesn’t make sense to serve them without both O&D and connecions. What US Airways developed in DCA, the government seems to want to discourage.

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1. Noah Kimmel
  
  Jun 21, 2013 at 9:34 am
  
  Many of these cities have service to IAD. I know its not the same, but c’mon. Airlines need viable pax and fares to keep service!
  
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  1. Sanjeev M
    
    Jun 21, 2013 at 8:27 pm
    
    And many of the markets have ample service to BWI on WN/FL. Yes, US still has many of the small markets to itself at DCA.
    
    I think that there should be slot divestment on the two overlapping routes: BNA and RDU. Similar to how pmUA let go of its slots at EWR, either AA or US’s current BNA/RDU service (I believe that’s only about 5-6 dailies on RJ’s) should be up for grabs. There is no reason for US to have to divest anything else.
    
    I’m sure WN would love to fly BNA/RDU. Maybe DL also given the RDU buildup? Let Sun Country try something random?
    
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ChuckMO

Jun 21, 2013 at 6:39 am

AA/US compete on 2 n/s routes out of DCA, BNA and RDU. I could see DOJ take slots pertaining to those two markets, leaving AA with say 3 pairs for BNA and 4 pairs for RDU, putting the rest up for auction or to be sold to WN provided they operate the BNA/RDU segments for a specified period of time. If there’s a hint of slot divesture from DOJ, AA might go ahead and do a deal like UA/CO did at EWR where WN ended up with 18 slot pairs, if I remember the amount correctly.

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MeanMeosh

Jun 21, 2013 at 7:06 am

I agree with what Gary and ChuckMO have said. The DOJ will extract a slot divestiture as the price of admission to the merger dance. But while I’m not the biggest Doug Parker fan in the world, he seems smart enough to proactively find a partner for a slot swap and offer that up as a concession. Given that AA and B6 have been cozying up lately, if every so slightly, it wouldn’t surprise me if they ended up as the swap partner. Otherwise WN seems like a good bet. That gives USAA the benefit of both acting in good faith, and encouraging “low fare” competition in the market.

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David SF eastbay

Jun 21, 2013 at 7:23 am

Do those smaller markets really need service to DCA in the first place. It’s been talked about before how some of those flights are mostly empty as the majors use these markets to hold slots until they need them for something else.

Some slots should be taken away from a combined AA/US and any carrier to get them must continue to fly to any market AA/US drops or to any city not already having DCA nonstops, but only if there is really a market for service and not some Senator or Congressperson just wanting service to a city in their state where it really isn’t needed or for an airline to just hold the slot(s) until they have another use for them.

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DesertGhost

Jun 21, 2013 at 7:47 am

The GAO testimony at that hearing was another example of Mark Twain’s famous observation that “There are three kinds of lies; lies, damned lies and statistics.”

On page 23 of the written testimony, Table 7 shows that United has 81% of the slots at Newark, while the new American will have 68% of the slots at Reagan National before any divestitures.

If United can have 81% of the slots at Newark, why should American have to divest slots at National? The reason: Politics. But, in fairness, United did give up some slots to Southwest at Newark.

I do think the “new” American will have to divest some slots. As others have written, the duplicative slots between Raleigh/Durham, Nashville and DCA represent a fair starting point for negotiating the number to be divested.

In the end, I think the number of divested slots will be somewhere between 12 and 16 slot pairs. I don’t see it going above 24. But I could be wrong.

It’s also possible that American could work out deals with Southwest and / or jetBlue as a preemptive measure if it senses that some kind of divestiture is going to be ordered.

I can see American selling 6 to 8 pairs to Southwest, possibly including its beyond perimeter slots to Las Vegas, no longer a US Airways hub.

I can also see a slot swap with jetBlue; 6 to 8 slot pairs at Reagan for 2 to 4 at JFK.

Both transactions could represent a “win-win” scenario for all interested parties.

To answer the question directly:

Do I think American should be forced to give up slots? No.

I think a case can be made to keep the all of the Reagan National slots, based on these arguments: 1.) United has 81% of the slots at Newark, another slot controlled airport; and 2.) the merged American’s market share at Reagan will be only 49%. But that’s not always how the real world works, at least not in Washington.

Do I think the merged American will divest some slots at DCA one way or another? Yes.

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1. Ben G
  
  Jun 21, 2013 at 10:07 am
  
  United and Continental only had to give up 18 slot pairs at EWR, so I would tend to doubt that they would require a divestiture of that many or more. I tend to think that they will give up a token number of slots, probably 10 or less, to a chosen partner.
  
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2. Ben
  
  Jun 21, 2013 at 10:19 am
  
  I would also argue that EWR is not the most desirable of the three airports in New York. Although I don’t agree, the standard seems to be LGA as “the” New York airport. In DC, DCA IS the desirable airport. People in Maryland and DC act like IAD is on the moon, and people in Northern Virginia don’t want to drive all the way up to Baltimore. DCA is the common ground they all share. So to have one carrier control nearly 70% of a slot controlled airport is a big deal. Even if the new AA/US were to divest ALL of AA’s assets at DCA (something that won’t happen), they’d still be the dominate carrier at DCA. Lowering fares on some of the bigger markets out of DC is a greater benefit than making sure people in small east coast cities have non-stop flights to the prime airport in DC. If the route is that popular, up gauge the service or let those passengers fly to IAD or BWI
  
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  1. DesertGhost
    
    Jun 21, 2013 at 11:00 am
    
    Ben — Good point. That’s why I think there will be some divestures. It’s only a question of how many.
    
    But many of the “smaller communities” in question are state capitals (like Jackson, MS, the subject of a recent slot battle). Unlike Arizona, Minnesota, Colorado, Indiana, Oklahoma and a few others, most state capitals are located away from the largest population centers in their respective states. Sacramento is far from the largest city in California (although it’s rather large). Jefferson City, MO, Springfield, IL, Lansing MI, Madison, WI, Carson City NV, Santa Fe, NM, Olympia, WA, Baton Rouge, LA, etc. are more of the norm.
    
    To me, the key is balance. You don’t see Southwest and jetBlue serving small to medium sized cities. That’s done by legacies at hubs. People in small towns pay taxes, too.
    
    P.S. You wrote, “Even if the new AA/US were to divest ALL of AA?s assets at DCA (something that won?t happen), they?d still be the “dominate” carrier at DCA.” I’m being picky, but you made a very common grammatical error. The word you want in this sentence isn’t “dominate” (a verb) but “dominant” (an adjective). If you’re the “dominant” carrier, you “dominate” the market.
    
    In any event, you did raise a valid point.
    
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  2. Shane
    
    Jun 21, 2013 at 1:10 pm
    
    Another reason why the EWR and DCA is not a totally equal comparison is that there are a lot more EWR slots as well as a lot more carriers at EWR with the international routes. That means fewer slots to go around to the non-dominant carrier at DCA (having a hard time finding the slot number – maybe somebody can help). At Newark there are basically enough slots for all airlines to serve their hubs. At National, that is not the case, especially if the perimeter rule was removed.
    
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eponymous coward

Jun 21, 2013 at 8:04 am

“I can see American selling 6 to 8 pairs to Southwest, possibly including its beyond perimeter slots to Las Vegas, no longer a US Airways hub.”

You can’t sell beyond-perimeter DCA slots.

And DCA is a hub for US, which is why they fly to LAS and SAN beyond-perimeter.

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1. DesertGhost
  
  Jun 21, 2013 at 10:28 am
  
  eponymous coward — I was merely suggesting possibilities.
  
  Theoretically, the new American can sell a beyond perimeter slot if Congress passes legislation authorizing it. And that could be done. Southwest seems to have a lot of clout in Washington …
  
  US Airway’s Las Vegas slot pair, and its 3 pairs to Phoenix, are former America West slots. HP had virtually no presence at DCA before its merger with US. So the DCA hub argument is not terribly persuasive to me.
  
  But as I wrote above, I could be wrong.
  
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  1. DesertGhost
    
    Jun 21, 2013 at 10:38 am
    
    eponymous coward — Another quick point, you’ll also note the use of the word “possibly” in my original post.
    
    My larger point: It might be wise for US Airways and American to do what United and Continental did at Newark. Be pro-active. Cut the best deal you can, especially if it looks like DOJ is going to require divestitures.
    
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Darkwater

Jun 21, 2013 at 8:25 am

Has US changed the time of its LAS-DCA flight so that it’s actually possible to connect at DCA? Back when I would occasionally take it, it seemed to be timed to allow connections from the west at LAS’s midday bank and would arrive in DCA too late for its evening bank.

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Janet

Jun 21, 2013 at 10:16 am

I can see Southwest quickly starting service from DCA to both Nashville and Raleigh/Durham.

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Larz

Jun 21, 2013 at 11:36 am

Slightly off-topic…..
DCA has perimeter restrictions that were slightly eased a year or two ago. Might that ever happen at LGA? I would love to see transcontinental from LGA.

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Steve Forsyth

Jun 21, 2013 at 11:45 am

My guess; Southwest will want 10 or 12 slot pairs for Midway service alone first and foremost. There is no MDW-DCA service now.

Dallas Love Field opens to non-stop service sans Wright Amendment in Oct. 2014 and Southwest will want a few slots there as well.

Plus a second HOU-DCA pair for a second daily flight in that new Southwest market. Southwest will open an international hub in 2016 or 7 at Hobby feeding Latin America.

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Don

Jun 21, 2013 at 12:06 pm

I don’t think that they should be forced to give up any slots. They are right. The medium smaller cities would not benefit from this no matter what carrier it goes to.

I do think there is a 50-50 chance it will happen though. What I think will happen is that they will be forced to give up a small number of slots (with maybe concessions from the recieving airline, be it cash or slots from another place). I believe WN would wind up getting those slots. Jetblue would be my second guess. But I can’t see WN not getting them.

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Eric

Jun 21, 2013 at 5:39 pm

The LAS flight at DCA has been retimed. I’m connecting onto it next week.

The argument is pretty strong. Do the senators and congressman want to connect or trek out to IAD to go back to their districts. If the answer is no, they should vote for not divesting DCA slots. That extra DCA flight to FLL is not going to help them if it costs them 2+ hours each week.

Also, DCA is a very profitable hub for US. Washington has been relatively unaffected by the financial crisis and government spending is way up. Lots of lobbyists flying back and forth and lots of contractors. DC is booming while the rest of the country is hurting.

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Million Miler

Jun 21, 2013 at 7:20 pm

When it comes to slots at National, Congress will decide, not the DOJ. Based on past performance it is unlikely that any city will lose service unless their local representative is totally on the outs with the congressional leadership. What is more likely is that some slots will be redistributed to provide service to new or “underserved” markets based on the current pecking order in Congress. (And definitely not based on rational economic behavior)

Right or wrong, like it or not, Congress is the ultimate frequent flyer, with most every member under pressure to be home in his or her district every weekend. The ultimate perk of office is to obtain a pair of slots at National that allow a 3pm Friday flight home and an early Monday return. And a sure sign you are on the outs with the leadership is a long drive at rush hour to Dulles.

I am not a political junky by any means, but just looking over the Aviation sub Committee lists, the Pacific Northwest has some high ranking members and Portland has only one pair of perimeter slots… Texas looks to be well represented on both sides of the aisle …

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1. Bill from DC
  
  Jun 21, 2013 at 7:31 pm
  
  and portland just received that slot pair in the last expansion of beyond perimeter slots.
  
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  1. Sanjeev M
    
    Jun 21, 2013 at 8:35 pm
    
    Well some markets (Montana, New Mexico out of perimeter) require connections no matter which airport. And some markets like OKC, Nebraska are served nonstop from BWI/IAD on WN/UA.
    
    I don’t buy the argument that small markets to DCA only work cause of the US hub because if these markets are mainly O&D senators and such, who cares what the connections are? Anyway these connections are better served by our more efficient and spacious hubs (namely things like DTW, CLT, ATL, DFW, DEN, SLC, PHX, ORD, IAD, IAH)
    
    I agree with requiring divestments on BNA/RDU equal to one of the airlines’ current operation. Either WN/DL/Sun Country would be glad to take them.
    
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Bill from DC

Jun 21, 2013 at 7:38 pm

aren’t most of the slots also destination controlled? in other words, i don’t think USAA can just reallocate their slots for the one daily to Jackson MS and replace it with another flight to DFW. if that’s the case, the small city argument is completely irrelevant.

how the slots came about is also meaningless to the discussion. yes, HP got 3x to PHX and 2x to LAS as outside the perimeter slots many years ago largely (solely?) due to sen. mccain. does that matter now? not really.

the most recent allocations of slots have been pretty pro rata among most applicants, i.e., each got 1 or 2.

AA and B6 did have that transaction where B6 picked up (i believe) AA’s JFK slots.

i would suggest a common sense approach. USAA should seek to proactively divest a small but still somewhat meaningful number of slots, using the DLUS slot swap at DCA/LGA and the UA slot dispersal at EWR as precedent. i personally hope these divested slots go to WN (for restoration of our sorely missed MDW service) and B6 (for just more creamy jetbluey goodness).

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1. CP
  
  Jun 23, 2013 at 8:25 am
  
  AA still flies DCA-JFK. When B6 happened, they stopped flying DCA-LGA and DCA-BOS.
  
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  1. Bill from DC
    
    Jun 23, 2013 at 11:54 am
    
    yes, that’s right, thanks for the correction.
    
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Robert

Jun 24, 2013 at 11:39 pm

Wow. AA and US blowing smoke up our asses and saying its candy and perfume. Another colossal mistake of a merger. I miss the truly legend air carriers of the past. This is just another mega cattle car with wings with this merger.

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1. Consumer Mike
  
  Jun 25, 2013 at 6:43 am
  
  I totally agree with you Robert. This proposed merger is a disaster for Consumers. Less competition, probable loss of service to more cities, more “take it or leave it” decisions by the surviving airlines. The government needs to do whatever it can to protect and encourage competition where ever possible.
  
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