Dear Southwest: Grab Your Bag of Fiction; It’s On

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. 

Is the Proposed NMB Rule Change Wright or Wrong?

I had made up my mind that I was not going to write anything more on National Mediation Board activities, at least until after the scheduled public hearing on December 7 in Washington. Isn’t it interesting that the date for the hearing is synonymous with Pearl Harbor Day?  I digress.

I have heard from many people regarding the two recent NMB pieces I posted on this blog.  Most of the comments have been private and along the lines of:  “How can you oppose something so fundamentally akin to our democracy? “And “How can you possibly be against anything that is so aligned with the Constitution of the United States? “

Negotiation and Compromise Were Wright

As I think about my feelings, I reflect back on the reasons I helped American Airlines a few years back in its campaign against Southwest’s push to repeal the “Wright Amendment.”  After all, Southwest’s CEO Herb Kelleher had made a deal in 1979 (or maybe 1978, or maybe 1977, or maybe earlier)when he agreed to the Wright Amendment’s limitations on Southwest’s flying from Dallas Love Field.  Then, in 2004, for reasons unstated but not hard to figure out, Kelleher wanted to undo that deal and expand his airline’s ability to fly nonstop on new routes from Love to points beyond the eight state limit that had been legislatively imposed. 

The Wright Amendment was negotiated with a purpose and a commercial issue at its core.  The law was largely designed to promote stability in the Dallas/Ft. Worth airline market as a then-fledgling DFW Airport came online.  In my work on the campaign, I was often asked how I could oppose unfettered competition in the Dallas marketplace. My reasoning was simple: I believed repeal would lead to dangerous instability in the airline marketplace, particularly for American at a time when all legacy carriers were on life support.  Southwest's motives were largely intended to take advantage of commercial weakness.   

When I assessed the Dallas market and the potential impact on American if the Wright Amendment was immediately repealed, the tenets of a compromise played themselves out in the analytics. That analysis supported a phased-in repeal that immediately allowed through ticketing for Southwest at Love Field.  It certainly was not my place to suggest that compromise.  That compromise came only after a lot of hand wringing among politicians and senior airline executives alike.  But it assured more stability in the market and will ultimately lead to what Southwest sought:  Come 2014, it will be "free" to fly to any and all domestic points from its home base in Dallas.

A Cram-Down Would be Wrong

Based on what we know today, the National Mediation Board through its Notice of Proposed Rule Making (NPRM) seems to leave very little room for negotiation or even compromise as to how representation elections should take place.  This, despite concerns raised from not only management interests but from other unions with interests as well.  Interesting, and disturbing, behavior for a quasi-government agency with the mandate to reach agreements with parties rather than provoke, and perpetuate, actions that lead to disruption and delay, don’t you think?  

As I wrote in my last blog, as drafted the NPRM smacks of politics, disregard for prior practice and arrogance in its refusal to address key subjects in the labor arena, including the ability of employees to decertify a union and a union’s right to demand the personal contact information of employees they hope to organize known as an Excelsior list.

Let me be clear here:  I have no issue with the rule change per se.   But I have major problems with how it is being done.  In a real world application of NMB mediation cases, doesn’t the Board provide one or both parties “political cover” in reaching an agreement that might otherwise be politically unpalatable? That sure as hell is not the case here. 

The Wright Amendment was a politically and commercially-charged issue between two airlines and two cities that also had national implications because airline activities so often do. Changing the union organizing process under the Railway Labor Act has implications beyond airlines and airline unions as well. I believe that by changing the rule, the NMB will be creating more instability on top of an already unstable airline marketplace.  And that has national implications. How many industries have interdependencies on the airline and railroad industries?  A stimulus question indeed.

The truth is that some at the NMB are looking to do nothing more than change a rule that would initially make it easier for unions to organize a largely non-union airline (Delta) and add/retain thousands of dues-paying workers to union ranks. But the ramifications have much longer-term implications that very clearly favor one side (union supporters) over the other (those who oppose unionization).  That’s one upshot of a draft rule that ignores rail and airline employees’ right to decertify a union or provide their personal contact information to union organizers.

It sounds to me like either the NMB and its proposed rulemaking should be put on ice, or a Presidential Emergency Board be convened in order to make sure that all input be considered.  At least in a PEB, history suggests that neither party will be totally happy. Inside baseball tells us that means a good deal has been reached.

In this case, like Wright, compromise would be right but only after all sides have had their say and issues heard and considered. Because otherwise, something tells me that the outcome will be wrong.

More to come, for sure.