United and Delta’s Slot Exchange To Hamper Competition In Newark

by Trefis Team
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While a majority of the airlines are flourishing in the low commodity price environment, United Continental’s (NYSE:UAL) struggle doesn’t seem to be ending. Earlier this year, the Chicago-based airline’s Chief Executive Officer (CEO) had to step down due a federal investigation charging him of trading favors with the officials of the Port Authority of New York and New Jersey. Now, the airline’s plans of acquiring takeoff and landing slots at the Newark Liberty International Airport from Delta Air Lines (NYSE:DAL) in exchange for slots at the John F. Kennedy (JFK) Airport, have been put under the scanner. The US Department of Justice’s (DOJ) antitrust division has sued both United and Delta for entering into an agreement which would hamper competition in Newark, and is likely to lead to higher air fares for the passengers. In this note, we will discuss the rationale behind the deal, and DOJ’s lawsuit, and how will it impact the two airlines.

See Our Complete Analysis For United Continental Holdings Here

Why Did United Move West?

Due to direct competition from American Airlines (NASDAQ:AAL), Delta, and JetBlue (NASDAQ:JBLU), United has been unable to make profits on its transcontinental flights operating from the JFK Airport over the last seven years. Further, the airline has been unable to leverage the passenger traffic from Kennedy airport to feed into Newark network. Finally, in June, United decided to shift its premium flights to San Francisco and Los Angeles, from the JFK Airport, to the Newark Airport, by October of this year. The world’s second largest airline by traffic would acquire 24 slots at the Newark Airport from Delta in return for United’s slots at the JFK Airport. This move would enhance the airline’s profitability over the long term, while strengthening its presence at the Newark Airport. This would also make economic sense for United, since the airline has invested more than $2 billion at the airport to build a world-class gateway, including new restaurants and luxury lounges to provide premium services to their elite clientele. In addition, the Newark Airport is much closer and better connected to Manhattan, the financial and cultural center of New York. This would allow the airline to attract more passengers and improve its top line growth. Thus, shifting its transcontinental flights to the Newark Airport is a well-grounded strategy for United.

 

What Made DOJ Block The Deal?

The US DOJ has reasons to believe that the United-Delta deal will prove to be detrimental for the passengers. Firstly, the DOJ is of the opinion that United is not fully utilizing its existing slots at the Newark Airport. With the existing slots, United has a capacity to operate more than 450 round-trip flights from the airport as opposed to the 386 daily round-trips currently operated by the airline. Hence, it would not be optimal to allot further slots to United as long as the existing slots are not completely operational. Secondly, the Newark Airport serves close to 35 million passengers annually and had the highest average fares among the US airports at the beginning of this year, according to the Bureau of Transportation Statistics (BTS). United currently controls 73% of the takeoff and landing slots allocated by the Federal Aviation Administration (FAA) at this airport, which is 10 times higher than its closest competitor. Thus, the acquisition of the proposed 24 slots from Delta is expected to further fortify the airline’s monopoly at the Newark Airport and enable the airline to manipulate air fares.

Lastly, the DOJ received a complaint from five smaller US airlines – Alaska Air Group (NYSE:ALK), Allegiant Travel Company (NASDAQ:ALGT), Frontier Airlines Inc., Spirit Airlines Inc. (NASDAQ:SAVE), and Virgin America Inc. (NASDAQ:VA) – stating the lack of access to the three main New York City-area airports – JFK, Newark, and LaGuardia Airport. The smaller airlines alleged that the three legacy carriers namely American Airlines, United, and Delta, of colluding to block competition, particularly in the New York City-area, which is resulting in higher airfares for the passengers. At present, these smaller carriers have access to less than 2% of the slots at the three airports while the three large airlines collectively control 91%, 88%, and 63% slots at the Newark, LaGuardia, and at JFK Airport respectively. Since the legacy carriers already hold a large chunk of the slots at these coveted airports, it is extremely difficult for smaller and newer airlines to venture into these markets and spur competition to bring down air fares. Thus, this lawsuit comes as a follow-up to the US DOJ’s previous probe on the top four US airlines for unlawful colluding to restrict capacity and control air fares.

See Our Complete Analysis For Delta Air Lines Here

Impact Of The Lawsuit

Despite the US DOJ lawsuit, United and Delta continue to defend the competitiveness of the deal. The two airlines maintain that the transaction would be beneficial for the customers as well as the airlines. Consequently, the airlines have decided to go ahead with the transition of the slots as per the transaction regardless of the federal suit. United flew its last JFK flight on 25th October, and Delta began using the JFK slots from 1st November.

We believe that the concentration of operations at the Newark Airport will enhance United’s profitability over the long term, but is largely dependent on the outcome of the lawsuit. Similarly, the increased slots at the JFK Airport will strengthen Delta’s position in the highly competitive New York market, subject to the federal decision. Since the US antitrust department is closely scrutinizing the operations of the larger airlines, we expect to see more lawsuits and/or regulations which will discourage airlines from monopolizing US air travel.

 

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