If Delta and US Airways are forced to give up 34 slots to gain government approval of its LaGuardia/Washington National slot deal, the two airlines said they would drop the whole idea. The news was in response to a tentative decision by the Federal Aviation Administration and the US Department of Transportation approving the slot deal that would help Delta in its bid to dominate the New York market and allow US Airways to focus on Washington National (DCA) and its other top hub markets.
Calls for 34 slot pairs to be divested
However, the hitch is the divestiture of 34 slot pairs at the airports which is a condition of approval, The FAA, in its ruling, stated that is the only way to overcome the market dominance the two airlines would have at the airports. The two airlines would be required to sell the slots to US or Canadian carriers with less than 5% of the slots at either airport and who have no codeshare relationships with an airline with more than 5% of slot interests at the airports.
Saying the proposal was “unique in both scope and scale,” the FAA is requiring the divestiture of 14 slot pairs at National and 20 at LaGuardia for new entrants and limited incumbent carriers. The 14 slot pairs at DCA would limit US Airways’ dominance there to 50.8% of slot interests and increase the new entrant/incumbent share to 6.5%. With the 20 divested slots, Delta’s dominance would be limited to 45.3% at LGA and increase new entrant or incumbent share to 10.3%.
Back to the drawing board for US Air and Delta?
"Delta and US Airways are disappointed in the DOT's decision that, if implemented, would negatively impact the consumer and economic benefits created by the proposed transaction by divesting 16 percent of the transaction at New York's LaGuardia Airport and 33 percent of the transaction at Washington National,” US Airways and Delta said in a statement. “Chief among those benefits is the ability for both airlines to maintain and add new nonstop service between two of America's top business markets and small- and medium-sized communities across the United States.
"Our goal remains to increase access for customers in small communities to LaGuardia and Washington National airports,” they continued. “However, we expect that if this order is implemented as proposed the transaction will not go forward and significant consumer benefits will never be realised. Both airlines will review the DOT's proposed rulemaking to determine our next steps."
The deal cut between US Airways and Delta, calls for a permanent swap of 125 US Airways slot pairs at LaGuardia as well as the lease of an additional 15 slot pairs at the airport with an option to buy. In return, Delta would give up 42 Delta slot pairs at Washington National. Delta would also transfer international route authority to Sao Paulo and Tokyo and exchange its space at LaGuardia’s Art Deco Marine Air Terminal for current US Airways gates at Terminal C. Delta plans to replace the US Airways turboprop aircraft now serving LGA with larger regional and mainline jets. In their petition, the two airlines said the move would increase capacity at LaGuardia by 2.3 million seats or 13% while leaving the number of airport operations flat.
Rather than exacerbating an already congested hub, Delta said it would ensure the success of the points by providing higher frequency that spreads out connecting opportunities throughout the day rather than relying on a few peak traffic period. Delta has used the “rolling hub” concept for some time. US Airways plans to add 15 nonstops and one million seats to its Washington National service improving the number of cities with nonstop service to the nation’s capital.
LCCs to swoop?
If the two airlines change their minds, it is likely that Southwest will be first on tap to bid for additional slots, since its current holdings allow only eight routes. CEO Gary Kelly said he would be interested in more slots during Southwest’s last analyst call. FAA said the incumbents that could benefit from the LGA slot divestiture would also include AirTran, JetBlue and Spirit, while at DCA AirTran and Spirit would benefit. The FAA said Delta and US Airways would sell the slots and keep the proceeds. The carriers will have 60 days to sell the slots or they will be withdrawn by the FAA. The agency is seeking comment on slot sale methods.
FAA said that the Delta/US Airways transaction had the potential to increase market concentration and cause fare hikes. They also have the potential to stymie competition at the two airports by targeting new entrants or smaller incumbents by increasing frequency and lowering fares. It based its decision on the carriers’ past practices, noting that US Airways, with the highest slot concentration at DCA, has fares that are 124% of the Standard Industry Fare Level (SIFL) at the airport. Delta, with a weaker position at LGA than US Airways dominance of DCA, charges fares that are 89% of SIFL.
The Department also found that the three Washington DC airports – Dulles, BWI and DCA – act as a temper to market concentration with the participation of LCCs since yields at the three airports differ significantly. It found the same thing at the three New York airports – JFK, LGA and Newark. However, the FAA said that alternative airports are not a perfect solution to market concentration.
Comment period extends 30 days from the date of publication.