If there’s been one constant in the last few years, it’s my general opposition to what the feds have tried to do when it comes to the airline industry. Now, they’re at it once again by suing to block United from leasing 12 slot pairs from Delta at Newark. I can’t say I like the way the Department of Justice (DOJ) is presenting its case, but for once, I don’t disagree with the idea.
Some of the notable government challenges in the past have come during mergers. Sure, DOJ rolled over and approved the United/Continental merger, requiring only the disposition of 18 slot pairs to Southwest. But the department, under new direction from Bill Baer, Assistant Attorney General for Antitrust, took a hard line against American and US Airways by trying to block that merger outright. Yes, that would undoubtedly reduce competition on some specific routes, but on the whole it made American a viable competitor to Delta and United in a way it wasn’t before. Much of DOJ’s concern (including the disappearance of US Airways Advantage fares) has been proven wrong. Then there’s the more recent collusion investigation, which is just silly.
This is Different
But those are primarily about mergers and the aftermath; what we’re talking about here is different. Back in June, United announced it would be pulling out of JFK and consolidating its flights to LA and San Francisco in Newark. As part of the deal, there were two separate transactions that effectively amounted to a slot swap. Delta agreed to lease United’s 12 slot pairs at JFK for $14 million. At the same time, United agreed to lease 12 of Delta’s Newark slot pairs (one of which was only during the summer) for $14 million. These leases were long term and auto-renewing so in effect, it was a slot swap that was done within the rules.
Delta’s lease at JFK was approved quickly, likely because while Delta does have a large position there, it doesn’t dominate. Meanwhile, the clock kept ticking on United’s lease at Newark. It took an absurdly long 5 months for DOJ to basically dust off an old press release and announce it was suing to block the deal in Newark. You can read the entire complaint here.
You’re probably expecting me to get angry and refute everything DOJ has to say. That’s not going to happen. I do think DOJ is making some really stupid arguments that can be easily dismissed. But overall, there is some merit to the overall idea here… that United already has a dominant position at the effectively full airport and other airlines should be able to get access.
Building the Case
The basic rationale for trying to block this is that United has a dominant position at the airport and it already squats on some slots that it doesn’t use. DOJ likes to pick and choose the numbers that make its case look best. In this case, that number is the percentage of slots being held. United currently holds 73 percent of slots and that would go up to 75 percent if the deal goes through.
In reality, United serves a much lower percentage of total passengers at the airport. That’s because it has a lot of regional jets flying around to small cities whereas other airlines are flying big jets to their hubs or overseas. So if you’re talking about passenger numbers, then United has a lower percentage. But yes, it still serves well over half of the airport’s passengers, and it is no doubt dominant there.
What about the second part of that argument? DOJ acts like it has a smoking gun in saying that United “‘grounds’ as many as 82 slots at Newark” every day. That’s just silly. The key there is “as many as.” DOJ isn’t looking at an average number here but is instead cherry-picking the day with the most unused slots, I presume. Every airline operates this way. Schedules vary with demand by day-of-week and by season as well. A Saturday in September is going to have a lot fewer flights than a Monday will. That’s why slots have rules on how often they have to be used. And United follows those rules. (You’ll find this in every airline’s schedule, even that of DOJ golden-child Southwest.)
The Big Question
To me, this just distracts from the main argument. First, what is the consumer benefit here? Unlike when US Airways and Delta swapped slots in New York and Washington, this isn’t a major change in operations. Delta was building a hub at LaGuardia and US Airways was able to add service to a bunch of new cities in Washington. That was a very big change with real positive benefits. In this case, United would simply be able to add 12 flights each day. My guess is that means more frequencies in a handful of markets and not much more; it doesn’t materially improve United’s ability to operate a killer hub in Newark.
On the other hand, there are other carriers that would be interested in getting more access to Newark that they can’t get today. Even 12 departures would materially alter their ability to provide service. The consumer impact would likely be greater than letting United have just a handful more. Of course, this is just rational discussion. None of that matters. What matters is the law, and whether this violates anti-trust rules.
An open market solution is probably not going to change anything here (the slots are worth more to United than anyone else), so that’s why the feds are stepping in to challenge the deal. While I can’t understand why it took DOJ this long to act, I can see the merits of taking this to court. Let the legal system decide what’s right here. Or maybe United will offer to divest a couple of slots to make this go away.
I may not like the way DOJ is building its case, but in principle I don’t object. I’m going to be curious to see if the deal is abandoned, if a settlement comes out of this, or if it goes to court.
[Original SWAT team photo via Shutterstock]
It’s hard to get too excited about an airline having a dominant position in a city with 3 viable airports. Sure, for some people, the drive will be longer, but I suspect EWR has sufficiently viable competition in JFK to keep monopolistic fares in check,
Traffic in the NYC area is pretty brutal. Many people would have to drive or take the train an extra hour or so to get to the further airport rather than the closer one. This isn’t rural America where people think nothing of driving 10 miles to go to Walmart.
Exactly. If you live in the suburbs in Northern NJ, it is probably going to take a lot to get you to fly out of JFK, as the tolls and traffic uncertainty are quite high.
Sorry, but you are wrong. The decision from New Jersey is – do I fly United’s horrible service because its 20 min to the EWR, or do I drive the 1 1/2 – 2 hours to go the 30 miles to JFK for Delta – yes, at rush hour that is how long it can take. The answer is – it depends on where I am going. International to Europe or Asia I will brave the traffic and head to JFK – but for domestic or short international flights, I take the short drive and put up with the horrible product that United puts into the air. Rarely, I can catch a short flight out of EWR to a US destination – but most of the time it’s United or Traffic – and this slot swap only makes that worse.
I see this as a battle between NYC and small town America. So for me up here in Burlington, Vermont I have to layover to travel anywhere except for the airline hubs located in the northeast. If I’m going to Florida, I don’t care if I connect through Newark on United or LaGuardia on Delta. What I do care about is the ability to build a connection that has about a 45 minute layover. I can do this when one airline adds frequency and dominates a hub. So when I have a 3-hour layover, I don’t feel too bad that my city counterpart has to take an hour-and-a-half taxi ride to get to the airport on the other side of town.
Cranky, when one airline dominates a hub, does it have any effect on connecting fares when there are alternate airports to connect through?
My thoughts exactly. If I have to connect somewhere I want that airline to have lots of options for me, i.e. dominate slots. Not that I’m a fan of ATL but I know if I miss a connection there’s another one in an hour or less, that’s nice. For the Atlanta local that wants to get to the Caribbean cheap, well…at least you have a direct flight. BTW, I live in a “fortress” hub city and quite frankly enjoy the flight options and find it worth the extra $$ that the flights cost more often than not.
Jeff Z – No, hub dominance has no impact on connecting fares. The only thing that it can impact is if an airline is well-positioned to make for faster, easier connections. Then that will help an airline get a higher fare vs someone else. But other than that, it really doesn’t matter.
Hub dominance might help an airline make faster, easier connections, because the larger the hub, the more connecting options there will be.
I am not a fan of United and not a fan of the Newark airport. At Newark, just as in Houston United (and before them, Continental) acts as though they are the only game in town, because, in too many ways, they are. Customer service comes last. Convenience is a dirty word. Passengers are regarded as nasty inconveniences, made necessary by the need to collect paychecks and buy aircraft. Regardless of how the DOJ does it, any opportunity to give travelers a United alternative is a good thing.
Just my opinion.
This dispute hasn’t gotten a lot of attention, and I suppose there’s a good reason for it. It’s somewhat of a “who cares” issue and the DOJ suit isn’t outrageous. That said, I think UA has the better legal argument here. Will the swap actually raise fares at EWR and further a monopoly situation? I don’t think so. I think “the market” is NYC and there’s enough competition between the 3 airports. And I agree that giving hub airlines more slots does tend to increase service to smaller markets.
The whole slot system at airports that have them, needs to be overhauled. Flights should only be to markets that have a lot of traffic, and not near airports so an airline can just hold onto the slots.
“Flights should only be to markets that have a lot of traffic”
In other words, if you don’t live in a top-15 O&D Market, kiss your air service goodbye?
Nothing a chairman’s flight or two won’t resolve.
…And if too many people in NJ get ticked and try to take flights out of LGA or JFK, the Port Authority can always create another traffic jam on the George Washington Bridge again!
If the DOJ is interested in promoting competition, why approve WN gaining two gates at DAL? Believe they now control 18 of 20 gates. Now THAT is a dominant position.
The entire time reading this post I was thinking the exact same thing.
You could also argue that in regard to WN at Love Field, the authorities are promoting competition. It’s just that the compettion is with a dominant legacy carrier that operates a “Fortress Hub” a dozen miles west of Love Field.
Not sure you can make the same argument in the NY metro market.
I guess it took Southwest Airlines’ management five months to make up its collective mind that it wanted more slots at Newark. It’s almost as if Bill Bear works for Southwest Airlines (since it benefited most from the DCA divestitures and has a virtual Monopoly at Love Field, which DOJ conveniently ignores).
In the end, I believe there’ll be a settlement. One never knows what a judge will decide, and both sides will come to the conclusion that “the devil you know is better than the devil you don’t.”
I didn’t spell “Baer” correctly. Not good.
Desert, “Baer” is not a common spelling. Before this the last time I ran into that spelling is reading about a radio DJ (ironically at WMCA in NYC) from the early 1960’s. I don’t think anyone will fault you for this particular spelling error.
I think misspelling someone’s name is a sign of disrespect for them on a personal level. I also have a long time friend whose last name is Baer. I should have been more careful.
What happens if the deal is blocked? Does United have any recourse with Delta? It looks as they are two separate deals so the JFK slots are gone? But would there be a contingency if this didn’t go through and would there be a separate slot swat at another airport?
Wbbec – That’s what’s most interesting to me. It would seem that there would be no recourse. So Delta would then have to actually pay $14 million for the JFK slots instead of just swapping. I’m not sure if that ends up being a good thing or a bad thing.
Any idea if that $14 million is a reasonable reflection of the value of the slots? I assume they didn’t pick the number out of the air; I guess $14M allows at least the pretense that these are separate transactions, whereas $1 (for example) wouldn’t. And I assume that, since UA doesn’t want to operate out of JFK anymore, they’d happy enough to take the cash from DL.
Alex – I really don’t know, actually. It would seem to be a fairly arbitrary number if not based in some sort of reality. But then again, this isn’t a liquid market so it’s hard to say what street value would actually be.
I’m curious what the fly on the wall at Delta HQ heard during the strategies of trade.. I wouldn’t put it past DL that structuring this as two separate non-contingent trades for money was a way for them to get a chance at buying some JFK slots on the cheap.
I never saw this as a big deal because both airports are in the same market (NYC). If this improves connectivity though EWR and JFK, I think it has a benefit to most travelers.
UA has a monopoly at EWR. The fares are ridulously exorbitant. It’s the only game in town(EWR) and it should be reigned in. The customer comes first and the DOJ should understand this.
Saying that you should look at total passengers instead of slots is a bit silly, because the airport is slot-constrained, not passenger constrained. Nothing is stopping them from using larger planes.
Jim – I look at it a bit differently. Nobody is going to come in and serve smaller markets with big airplanes. If the goal is to push as many passengers as possible through Newark, then those small cities lose service.
That’s true, counting all passengers equally may not be good for small cities. I know DOT has a soft spot for “small” cities, but giving United extra points for serving small cities doesn’t make sense.
Newark has a limited number of slots, and the best way to maximize their utility is to fly larger planes. Flying little regional jets around just to serve a small city (and its congressman?) is a waste of scarce resources that could be benefiting a larger number of people.
I wonder if the B6, WN, VA of the world even want those slots. It seems they all have their eyes focused other places?
I fly into EWR vs JFK and LGA since traffic from both to NJ adds 2 hours to the commute at a minimum. If LGA had better mass transit to Penn Station, I could take the train to Newark and EWR to pick up my rental car. But time is money so saving a couple hundred on airfare gets wasted by adding 2-3 hours to get to NJ. As bad as EWR is (it sucks since it seems regional flights to CVG and DAY get delayed or cancelled first) it’s the best option if you’re doing biz in North or Central NJ.
If United has 75% of the flights, so be it. CVG used to have 90% DL and the highest originating fares in the country. No one seemed to care that competition was minimal when DL had over 600 flights per day out of CVG.
Airports these days in major markets with few exceptions have a dominant carrier. DFW has AA, ATL has DL, DtW has DL, and ORD has United. Dereg allowed this to happen so why ding United over a gate swap?
BTW, still not a fan of United.
The difference is that CVG was not slot restricted. If another airline wanted to come in and compete with DL’s hub at CVG, they could. At EWR, they can’t, due to the slot restrictions.
To those who are saying they’re all in the same metro, who cares — there are very different catchment areas for EWR and JFK. Sure Manhattan is in both, but there are tons of people in NJ, Long Island, and CT who have strong preferences between the two and are not indifferent.
And once again it looks like Delta got away with murder — well maybe not murder, but at least some minor larceny. Delta may not dominate JFK, but they have a very strong position across JFK/LGA (getting the LGA/DCA slot swap through *was* getting away with murder, especially considering how much new AA would love to have those LGA slots back these days) and were able to add to that position in a meaningful way for what I’d guess they consider a modest price. And unlike the JFK deal, where UA was going to give up the slots no matter what (and so if Delta couldn’t get them the DOJ would likely have steered them to new competition), if the EWR deal gets blocked, those slots don’t go to VX or F9 or NK. They stay with Delta.
Hey DL, now that you have more slots at JFK, how about giving us back our twice-daily to JFK? Schlepping up to CVG for a non-stop is a pain.
In mentioning the benefits of a hub to travelers making faster connections we trust you did not think of Charlote. Now that AA wants to compete with DL at ATL, they seem to overlook the fact that CLT is a most inefficient hub. Too many flights depart from outdoor type gates. You’re exposed to engine fumes, hot and cold weather, rain and difficulty in getting to connecting gates. Used it a few times and will mit go back thru CLT. They need to build more gates with access from the terminal and not having to walk outdoors to reach the aircraft. ATL does that best.
I think DOJ is overstepping here, a lot. United and Delta both make a good business case for the proposed slot swap and both are obviously willing partners. Both are playing well within the rules. United is already the dominant carrier at Newark, so as you note, increasing their share of the available slots from ~73% to ~ 75% is trivial. DOJ is supposed to ‘protect the public interest,’ but I fail to see any genuine harm to the public if the slot swap is allowed to proceed, other than wasting a great deal of the public’s money prosecuting the case. Sadly, using the courts is the only effective way to (possibly) block the swap. I have to believe that DOJ has exceeded its mandate. OTOH, as C.F. again correctly notes, perhaps the judicial system is the only effective way to get DOJ back into its little box. Good post Brett, and IMO fairly presented. -C.
Wonder what exactly DOJ meant by as many as 82 slots (or 41 pairs) are grounded a day. I don’t think DOJ meant UA sits on 82 slots on a particular day of a week (Saturday) because UA operates somewhere 100 less flights on Saturday. I think DOJ used the number as a weekly average, probably at a low season. Out of 902 slots (451 pairs), UA used 431 yesterday (FRI), 326 today (SAT). Given that SUN and mid-week may have lower number than 431, on an average, it might be 410 as DOJ said (41 less than what UA can). UA isn’t fully utilizing its resource but it’s low-demand season anyway. Not against any rule, at least. Even in this situation, DOJ should have said 20 slot pairs are grounded, not 41. Anyway, there will be UA’s response soon and we’ll find out more.
I roughly counted on flightstats website, so my numbers may not be 100% accurate.
I am confused. What will happen if the DOJ gets its way?? I doubt that will happen though. Will UAL open JFK back up?? You would have thought they would have tested the waters to see if there would be any DOJ pushback.
If the end result is all that DL has to do is to “pay” for the JFK slots, then I think thats a win for them………The UAL frontline employees are hoping JFK will open back up as quite a few have been displaced…
Joey – No, the lease at JFK is finalized so that’s not changing.