Apparently the US Department of Justice has figured out the magic number to define a monopoly. Earlier this week the feds filed a lawsuit to block a proposed slot swap between United Airlines and Delta Air Lines in the New York City area, mostly because the Newark portion of the move would grant United control of more than 75% of the slots available at the airport. It seems that the 75% number is the trigger here, causing the DoJ to take action.
The lack of competition at Newark cited by the DoJ is an interesting argument, particularly as it approved of the many recent mergers which has the industry where it sits today. Indeed, at one point in the filing it admits to being part of the problem, “the significantly smaller slot holdings of low cost carriers and other domestic competitors at the airport are almost entirely the result of government intervention.” Then again, the Feds did require divestiture at Newark when the original United/Continental merger was approved so there is a history of caring about such, though that history is a bit shaky.
United says that the additional slots to add frequencies and destinations. The DoJ believes that “United’s existing cache of excess slots would allow it to add flights at Newark if that were its true goal.” Specifically, the DoJ notes that “United ‘grounds’ many of its slots each day, essentially taking them out of service while not opening them up to competition.” While it is no doubt true that United does not operate every available slot every day I’m not so convinced that this approach is to the detriment of the traveling public. The NYC airspace is notoriously busy and operating at a full 81 movements per hour is not especially common for Newark. This is essentially the airport equivalent of padding a schedule, holding extra slots to ensure that the flights which are scheduled have a chance to operate. And even with the extra slots it does not necessarily manage to do that very well.
The 75% number is also an interesting one as there are other hub airports which see similar dominance by one carrier. American operates a similar percentage of flights at its Miami, Charlotte, Philadelphia and DFW hubs. Delta does the same in Atlanta, Detroit and Minneapolis. But none of those airports are slot constrained. This is where the admission of the Feds that it is mostly their fault comes into play.
Finally, my favorite part of the filing:
Indeed, airfares at Newark are among the highest in the country and service ranks among the worst.
It is not clear what metric is being used to describe the service ranking as so awful but I love that the Feds brought that bit of color into the story.
The Feds also describe consumer benefits of more than $140mm in savings on annual airfares based on the entry of Southwest and Virgin America to Newark. That’s a lot of cash saved through fare drops and the increased frequencies added to compete definitely help consumers in those 7 specific markets (STL, HOU, PHX, CHI, DEN, LAX, SFO). There are also likely additional savings when looking at connecting travel beyond those 7 newly competitive destinations. But it is also reasonable to consider the costs of delays – something Newark has far too much of – in the total cost picture. The US Airlines trade group pegs that number at $81/minute of delay which seems high to me. Still, balancing out those costs against the fare savings should be part of the overall math, and United’s reducing the total flights would help on that front, while simultaneously pushing fares up on the other side of the ledger.
My guess is that the Feds will win on this one. That is complicated by the fact that Delta already has the JFK slots United gave up in trade; I’m not sure how that will play out. But I can see these slots being reverted to Delta or divested elsewhere rather than ending up in the United portfolio.
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