American Airlines and US Airways must divest assets at seven US airports to low-cost carriers, including 52 slot pairs at Washington Reagan National Airport and 17 slot pairs at New York LaGuardia airport, as part of a deal with the US Justice Department (DOJ).
The DOJ says that the new slot divestitures will allow LCCs to be more competitive at key airports and resolve concerns about the new American holding 69% of the take-off and landing slots at National. However, some concerns have been raised about how smaller markets will be impacted by the merger and to what extent the divestitures will enhance competition.
"Service to larger destinations such as Raleigh/Durham and Minneapolis may ultimately suffer, so that discounters can add service to places like Orlando," writes Jamie Baker, an equity analyst at JP Morgan, in a research note.
The largest number of slots will be divested at Washington National, with the resulting carrier operating 44 fewer flights - about 250 - than both airlines operate from the airport today.
JetBlue Airways now leases eight of the 51 slot pairs that American holds at National in exchange for 24 of its slots at New York JFK. The low-cost carrier will have the opportunity to purchase them under the new merger agreement.
Dave Barger, the JetBlue’s chief executive, told Flightglobal on 31 October that the carrier would be “active in that process” of competing for new slots.
“We're very happy with the outcome, and are interested in growing our presence at DCA [National],” JetBlue says in a statement. “We'll be looking through court documents and awaiting DOJ guidance on how slots will be divested.”
The new American will also operate 12 fewer flights from LaGuardia compared to the 175 departures the two carriers operate today.
American leases five of the 17 slot pairs to Southwest Airlines at LaGuardia and controls the remaining slots that will be divested.
Washington National and LaGuardia are by far the two airports that will be most affected by the slot changes, however American and US Airways also must give up two gates and support facilities at Boston Logan International, Chicago O’Hare International, Dallas Love Field, Los Angeles International and Miami International airports.
Southwest says it would be interested in these additional gates that could open up at its Dallas base. Love Field is not slot controlled but limited to 20 gates—16 of which Southwest currently occupies.
“We haven't yet seen the details but certainly would be interested in utilising additional gates at Dallas Love Field to benefit consumers with more low-fare competition in North Texas,” says the low-fare carrier.
Under the divestiture process, Southwest and JetBlue would have the opportunity to take the slots that they are now leasing from American at each airport before other carriers would have a chance to act on them. These slots must be offered to the airlines within 90 days of the merger or from the period that the carriers receive a list of the potential airlines that could acquire the slots, whichever comes first.
Any slots that the two carriers do not act on will be offered to other low-cost carriers in “slot bundles”, which will be packaged depending on the time of day the slots are offered. The National slot bundles must be divested to at least two different airlines, says the DOJ’s proposed final judgment. That provision does not appear to be in place for the LaGuardia slots.
American and US Airways do not expect to award any legacy carriers with the newly-available slots, says Steve Johnson, US Airways’ executive vice-president of corporate and government affairs, during a 12 November call with media.
The DOJ has stated a clear preference that LCCs are first in line to acquire the slots under the settlement in order to increase competition on fares and allow LCCs to increase capacity in markets where slots or gate space is hard to come by.
“What this settlement is designed to do is increase competitive opportunities in a way that will provide more seats available to more travelers and increase the competitive dynamic on fares as well,” says Bill Bear, assistant attorney general for the DOJ’s antitrust division, during a call with reporters on 12 November.
Past entry of LCCs into these competitive airports have caused “dramatic” increases in traffic and lower fares, DOJ data shows. On flights from Boston to Newark, JetBlue brought a 151% increase in passengers with a 56% drop in average fares a year after entering the market. On Boston-National flights, JetBlue drove down average ticket prices 39% and added 99% more passengers on the route year-over-year.
Past antitrust measures in other mergers have also increased competition for carriers, says the DOJ in its competitive impact statement. After gaining 36 slots and three gates at Newark, Southwest drove down average fares 27% and 15% on flights to St. Louis and Houston, respectively.
But Virgin America, one of the LCCs that could have more opportunities to bid for gates, warns that a new airline merger could end up having negative long-term effects on consumers.
“As the last successful airline launched in the US, we fought to get access to key airports, and have seen first-hand how, when one to two big airlines dominate a market, consumers often lose, with less competition, poor service and higher fares,” says the Burlingame, California-based carrier. “Mergers can be good in the short term for existing players in the industry, in that they improve balance sheets and often result in capacity reductions, but longer-term, further consolidation will likely have a chilling impact on any future new entrant airlines. The costs of this decrease in competition will ultimately be borne by consumers in the form of higher fares and fewer choices.”
Virgin America says that it will not object to the merger but plans to raise these concerns with the US Department of Transportation (DOT).
Ultra LCC Spirit Airlines sees further consolidation as a plus.
"As we have said before, allowing continued consolidation will help the airline industry, as it promotes rational pricing," says the Miramar, Florida-based carrier.
Under the divestiture agreement, American and US Airways have agreed to continue to use all of their commuter slot pairs at National to service small and medium-sized markets, as well as maintain its hubs at Charlotte, Chicago O'Hare, Los Angeles, Miami, JFK, Philadelphia and Phoenix for at least three years.
The airlines have said that they will announce which cities will lose service after the divestitures so that the new airlines can consider starting service there.
But Delta Air Lines says that these communities could still lose service with the divestitures and is urging the DOJ to consider all carriers for the new slots.The Atlanta-based carrier is specifically pushing for a seat at the table to bid for new slots at Dallas Love Field and Washington National.
“Small- and medium-sized communities nationwide could experience a reduction or elimination of flights to key airports if the divestiture is limited to low-cost carriers, which typically do not provide service to small communities,” says Delta.