On Tuesday morning a headline in The Washington Post read “Southwest Airlines Feeling Squeezed Out at National Airport”. Terry Maxon wrote on The Dallas Morning News blog “Delta, US Airways Maneuver Around Southwest Airlines.” The headline in Business Week read “Delta, US Airways Sweeten NYC-Washington Plan by Boosting Small Rivals.”
As I prepared to write this piece, I began by reviewing the various comments submitted to the U.S. Department of Transportation (DOT) by the air carriers during the comment period set forth following its tentative decision on the proposed Delta Air Lines – US Airways slot swap deal. When I got to Southwest’s, I thought I was in a time warp. A time warp whereby many of the same arguments used in Southwest’s fight to repeal the Wright Amendment were being dusted off and employed again. Another opportune time for poor, little Southwest Airlines to get something on the cheap from the carriers that have invested hundreds of millions of dollars in their respective infrastructures over the past decades. But here’s the thing: Southwest is neither poor nor little.
Background
All of these stories of course pertain to a repackaging of the proposed Delta-US Airways slot swap first announced in August 2009. In the initial deal made between Delta and US Airways, US Airways would receive 42 slot pairs from Delta Air Lines at Washington’s Reagan National Airport and a route authority to Sao Paulo and Tokyo Narita in exchange for 140 slot pairs at New York’s LaGuardia Airport.
In February 2010, the DOT tentatively approved the deal between Delta and US Airways. The caveat was each carrier had to sell 14 National and 20 LaGuardia slot pairs to U.S. or Canadian carriers that have less than 5% of the total slot holdings at the respective airports. This stipulation materially impacted the value of the deal, so US Airways and Delta went back to the drawing board.
Late Monday, the two airlines announced a restructured proposal. Only this time, they included provisions providing slots to competing carriers. Delta concluded deals with WestJet, AirTran and Spirit to transfer up to five slot pairs each at New York’s LaGuardia Airport (LGA). US Airways will transfer up to five slot pairs to JetBlue at Washington Reagan (DCA). The inclusion of WestJet, AirTran, Spirit and jetBlue certainly satisfies the DOT’s requirement that divested slot pairs be provided to a U.S. or Canadian carrier with less than a 5 percent share.
Let’s Get Some Southwest Non-fiction on the Table
In its submission, Southwest complains that at LGA, "instead of an airport balanced among three airlines of roughly equal size, the slot swap would catapult Delta into a dominant position more than twice the size of the nearest competitor." But Southwest does not ever mention anything pertaining to its size within the U.S. domestic market. In 2008 there were only 6 airport markets with more domestic origin and destination (O&D) traffic than LGA. Southwest is the largest carrier in three of those six markets. At the 48 domestic airports where Southwest is the largest carrier of O&D traffic, it is at least twice the size of the next largest carrier in 27.
At Dallas Love Field, Southwest controls 94.3 percent of O&D traffic and the second largest carrier has 2.2 percent. At Houston Hobby Airport, Southwest controls 86.2 percent of O&D traffic versus 5.2 for the nearest competitor. At Chicago Midway, Southwest has 79.1 percent control while the next largest competitor has 8.8 percent. At Love Field, Houston Hobby and Chicago Midway the average fares rose at those airports 36.2 percent, 21.8 percent and 29.4 percent respectively between 2005 and 2008. In each of the 48 airport markets where Southwest is the number one competitor, fares on average increased 17.5 percent between 2005 and 2008.
Southwest would have us all believe that their presence at an airport is the ultimate discipline on fares and they claim it in every regulatory filing and certainly on every advertisement. Despite what Southwest likes to say, it is not the same Southwest that sprinkled the “Southwest Effect” on markets in 1992. The claims of low fares stimulating new demand just do not hold today - because everyone offers low fares.
During the period between 2005 and 2008, wasn’t Southwest enjoying the benefits of a fuel hedging program that provided the carrier with a most significant cost advantage relative to an industry that had largely restructured itself? I assumed that cost advantage benefit garnered from a fortuitous bet on the price of oil was being passed on to the consumer. Instead Southwest was raising fares. In their filing they actually go as far as calculate the cost saving their low fares would bring to each the DCA and LGA markets. The calculation is performed after including a $25 bag fee on top of the fare of the competition.
Fiction Fatigue
If Southwest wants to gain entry to the few remaining slot controlled airports, then it should make the incumbents an offer – one that provides the slot holder a return on that carrier’s prior investment. In a 2006 regulatory filing, Delta described how it took 22 years to build its slot portfolio at LGA. The Buy-Sell Rule is a mechanism in place permitting such purchase.
The filing states, “In sum, Delta acquired the right to operate most of the 243 LGA slots it currently operates at LGA through market-based transactions. Delta acquired them through diligent investment in private market transactions, not by regulatory fiat. Delta has also invested hundreds of millions of dollars in expanding its service at LGA because Delta valued the right to expand its service at the airport, believing it would be profitable to make such investments. Delta’s decisions to acquire slots in market-based transactions and develop its landside infrastructure at LaGuardia over three decades have permitted Delta to grow steadily and to offer greatly expanded services there to meet consumer demand.”
Carriers that purchased slots at the controlled airports did so expecting they would earn a commensurate return on their expended capital. Of course that would mean average fares would more than compensate the cost of operating at those airports. The average fare at LGA in 1990 was $150; by 2005 the average fare had fallen to $136; and in 2008 that fare was $159. A similar trend can be found at Washington National, although fares in 2008 were higher.
Southwest Is Not Special
Southwest’s growth has caused/forced the industry to reduce costs in order to match the fare offerings from it and the so-called low-cost carriers it helped spawn. Today, however, Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers. Low fares to air travel consumers in smaller communities that the Southwest operating model ignores. It is these legacy carriers that have invested hundreds of millions of dollars at slot controlled airports.
If Southwest wants to play, it should have to write the same type of check. They won’t because the low fare structure at either of these airports will not produce adequate revenue streams to justify the investment. Instead Southwest somehow believes it is “entitled” to the slots being divested by US Airways and Delta.
Southwest is no longer the only game in town. It talks about all the money consumers will save as a result of Southwest’s entry into DCA and LGA, subtracting its entry level fares from average fares plus bag fees for the incumbents. Once Southwest is imbedded, there’s a new “Southwest Effect.” As mentioned above, in markets where Southwest is the largest carrier, fares increase the fastest.
Ted Reed at TheStreet.com wrote “Southwest Blasts Revised Slot Deal.” In his story, Reed quotes Southwest, "Allowing two of the country's largest airlines to collude on trading assets in a way to reduce competition while dramatically increasing their market dominance at two of the United States' most important airports is, on its face, an alarming prospect that should not be permitted."
Who is the largest US domestic airline? Southwest.
To me the more alarming prospect is allowing Southwest to get something for free – yet again. Think Wright Amendment and the undoing of a deal because the market had changed and they needed to find a new way to grow. Simply you have to pay to play, Southwest. You have the cash. Make someone an offer they cannot refuse. The rules to do so are in place. I have every confidence that neither LGA nor DCA absolutely needs Southwest. I am confident that JetBlue, AirTran, Spirit and WestJet can do just fine.
It’s On.