Slot Swap Deals Sweep The East Coast

Two slot-swap deals were announced recently with significant consequences for routes on the east coast, pending their likely approval by the DOT. The larger of the two deals will allow US Airways to obtain 42 slot pairs at Reagan National Airport and two international route authorities from Delta (Sao Paulo and Tokyo) in exchange for giving up 125 slots at New York LaGuardia. The deal is good for both carriers, it will allow them to concentrate on their strengths and improve yields, and perhaps most significantly, it will prevent slots at these valuable airports from getting into the hands of low-cost competitors. This latter point should not be taken lightly. Given that Southwest and JetBlue are chomping at the bit to enter DCA and to get more slots at LaGuardia, this deal will enhance the utilization of slots at the airport, giving the legacy carriers involved less reason to sell to an LCC who would erode yields.

While the deal means a draw-down of many US Airways operations at LaGuardia, particularly its prolific (and often money-losing) regional flights to small and medium-size communities in the east, the airlines are saying that most communities won't lose service (although US Airways will end LaGuardia service from 26 cities). Instead, Delta will "add new flights to more than a dozen cities not currently served by US Airways [though these may very well be served by other carriers]. In every slot where US Airways operates small turboprops today, Delta will operate larger jets." But the thing is, many US Airways markets from LaGuardia, especially the ones with low load factors and revenue per available seat mile, are flown by 50-seat regional jets due to distance. Turboprops only operate routes within a few hundred miles of NYC, but this still leaves many cities, such as Bangor, Charleston, Dayton, or Roanoke, that could lose nonstop service from LaGuardia entirely. This is something the regulators may consider when discussing whether to accept this deal or not.

The deal will help US Airways consolidate its market power at Reagan National, where it is already the leading carrier. US Airways will add flights to fifteen cities, including eight which currently lack nonstop service from DCA. Similarly, Delta will expand to a number of new markets from LaGuarda, vaulting the carrier into the top spot in terms of market share at the airport.

Although Delta promotes the transaction as allowing it to create a "hub" at LaGuardia, it will have very limited east-west connectivity, instead focusing mostly on point-to-point traffic as well as New England-Florida traffic. But the problem here is that having large operations at two New York City airports could create problems for Delta. Only one of those airports, JFK, has high-yielding international service, and Delta needs to connect its regional markets to JFK in order to help fill international flights. Adding flights to LaGuardia may be able to help the carrier win over some business traffic, but it really won't help much with connectivity and could cannibalize some point-to-point traffic to JFK. Instead, service from cities such as Syracuse could be split between LaGuardia and JFK, providing the same (or even slightly more) capacity to New York City, but with less overall connectivity. However, while there may be some problems, and some frequencies could go underutilized due to split traffic, Delta will likely find a way to make it work.

Both carriers will stand to benefit tremendously from this deal if departure perimeter restrictions are loosened, allowing these carriers to start lucrative business routes between these airports and the west coast. Yields on a nonstop San Francisco-LaGuardia flight could be astronomical, and additional slots puts Delta in a great position to commence those flights if such perimeter restrictions were lifted.

The other, smaller deal announced yesterday involves AirTran relinquishing all its slots at Newark Liberty Airport and giving them to Continental in exchange for additional slots at LaGuardia and Reagan National. This deal won't hurt AirTran too much, the company only had service from Newark to Atlanta, and the carrier continues to serve the market in the region well, with flights to Allentown, LaGuardia, and White Plains. Continental will gain valuable slots at the airports that will allow it to expand further, while AirTran will gain slots at airports which it already has existing service (and a loyal customer base) upon which it can build.

While both deals may elicit some controversy, especially from Southwest and JetBlue, it is unlikely that the DOT will revoke them. Even with the completion of the deals, neither Delta nor US Airways would have much more than a third of the market at LaGuardia or Reagan National respectively, and Continental's dominant position at Newark would grow only slightly. Moreover, two other airports serve both regions which have a different balance of carriers. Given the trouble the industry has been having, these deals will help consolidate market share and hopefully increase yields on flights catering primarily to business travelers. But they should also (ideally) do something which may be even more valuable from the regulators' perspective. These deals, particularly the Delta/US Airways deal, will increase the number of passengers who will travel through these congested airports without increasing the number of aircraft since the slots are presumably being more efficiently allocated for flights that will attract more passengers (and maybe even larger planes). This is very good, considering how popular these airports are, and how slow the FAA has been in upgrading our ATC infrastructure to accommodate more planes. More passengers will get to use these airports, which are arguably the most convenient in their respective regions.

The competitive response to these deals will be interesting. For instance, Southwest may get into Reagan National through its potential purchase of Frontier, and this might give the carrier greater leverage when negotiating with other carriers for slots to compete with US Airways. One will have to watch closely, but Southwest and/or JetBlue may try and obtain slots from Republic (now the proud owner of Midwest Airlines and its slots) or Spirit, since it's unlikely that any of the legacies will relinquish theirs anytime soon.