In yet another installment in the saga of domestic airline consolidation, the U.S. Department of Transportation (DOT) has blessed a proposal by Delta and U.S. Airways to swap takeoff and landing slots at two critically congested airports – La Guardia (LGA) and Reagan Washington National (DCA). The swap, perhaps best viewed as an agreement between the two U.S. carriers to divide up slots and markets, rockets Delta to dominance at LGA and U.S. Airways at DCA, putting consumers at risk for higher fares, service cuts, and fewer choices in airlines.
When the Delta/U.S. Airway slot swap was proposed in 2009, the DOT required that the two airlines divest additional slots to restore some semblance of competition. But since then, the DOT has backed off, particularly at DCA where it slashed required divestitures by over 40 percent. The outcome at the capital city’s most convenient airport is a weakened Delta and a supercharged U.S. Airways. DCA already sports higher-than-average fares and fare increases that have doubled the national average since 2000. The flying public should ask: How is the DOT protecting competition and consumer interests?
Slot swaps at congested airports like LGA and DCA can have enormous competitive impact. The Delta/U.S. Airways proposal is no exception. Slot availability limits the number of carriers at an airport and controlling a critical mass of slots can determine a carrier’s competitive position. Swaps may be more attractive in light of the recent rash of mergers (Delta/Northwest, United/Continental, and Southwest/AirTran) that could make further consolidation difficult. Moreover, many international alliances – which allow airlines to coordinate on fares, routes and scheduling if granted immunity from the antitrust laws – may be reaching saturation.
The Delta/U.S. Airways swap proposal would transfer 265 U.S. Airways slots to Delta at LGA and 84 Delta slots to U.S. Airways at DCA. Both the DOT and DOJ took a closer look at the likely effects of the swap. But while the DOJ evaluates airline transactions with an eye to whether they will harm competition, the DOT takes a broader view. Its public interest standard captures competitive effects, but also invites a host of other factors, including network- wide effects and safety. Based on these differences, the agencies could reach very different conclusions about the swap deal.
To assuage fears that Delta and U.S. Airway could abuse their slot-enhanced dominant positions, the DOT’s initial reaction to the swap was to require the airlines to divest additional slots – 40 slots at LGA and 28 slots at DCA – to small entrants or existing carriers such as LCCs. The DOJ, which was also investigating the deal, stood by the DOT. But Delta and U.S. Airways, unhappy with the outcome, appealed the DOT’s decision to the D.C. Circuit. That case is still pending but in the interim, DOT proceeded with a final order in October, requiring the carriers to divest fewer slots than originally proposed – to be exact, 20 percent fewer (32 slots) at LGA and a whopping 43 percent fewer (16 slots) at DCA.
The DOT’s change of heart at DCA has been particularly controversial. And it is not clear that the DOJ will stand by the DOT’s decision. A DOJ statement released around the same time as the DOT order explains that the agency will “continue its investigation with a focus on the increase in US Airways’ share and use of slots at Reagan National and the resulting decrease in Delta’s share of slots at this slot-constrained airport.”
DOT’s decision to back off on the number of slot divestitures hinges on the agency’s claim that low-cost carriers have established a “competitive beachhead” at DCA. In other words, while the slot swap will create a dominant U.S. Airways, low-cost carriers will be there to save the day. The agency heralds the facts that since the swap deal was proposed, low-cost carriers have increased their slot holdings at DCA from 3.3 percent to 8.6 percent; that a merged Southwest/AirTran has the potential to expand at DCA; and that fares came down in the DCA-Boston market after JetBlue entered in 2010. The DOT explains that while these factors do not map perfectly over to fewer required divestitures, the swap deal also brings benefits, and the public interest is therefore served.
The problem with the DOT’s decision to slash required slot divestitures at DCA is the lack of compelling evidence to support it. This has probably left the DOJ in a quandary.
For example, the order reflects some “horse trading” that is common among regulators, by taking more slot divestitures than needed at LGA in exchange for fewer than needed at DCA. But horse trading does not resonate with antitrusters, who take the approach that possible harm at DCA should be prevented by getting the number of slot divestitures right, regardless of what happens in LGA.
The DOT’s additional slot divestitures at DCA also come from the wrong airline (Delta), exacerbating the effect of the slot transfers to U.S. Airways. A more muscular U.S. Airways, and a substantially weaker Delta, lessens the competitive pressure that likely drove the carriers to offer new service from DCA to a number of mid-size cities. Those routes may be in jeopardy of cuts after the swap.
Finally, what the DOT believes Southwest could do at DCA is speculative at best, and while JetBlue has made inroads at DCA, most of that service involves DCA and Boston.
Should the DOJ choose to press its case for a larger number of divestitures at DCA, it would not be the first time the agency and DOT have clashed on airline competition.
Recently, the DOJ has taken a number of bold moves to protect competition by suing to block the mergers of AT&T and T-Mobile and H&R Block and TaxACT. These enforcement actions directly benefit consumers by preventing price increases and capacity cutbacks, maintaining choice and quality, and promoting innovation. Like those cases, the slot swaps at DCA call for vigorous competition advocacy, something that the DOJ may be better able to deliver than the industry regulator.
–Diana L. Moss
Vice President and Director, American Antitrust Institute, and a frequent congressional witness on the airlines and other regulated industries.
FTC:WATCH No. 797 • December 15, 2011 page 10
(reproduced with permission)