The U.S. Department of Transportation today awarded two within-perimeter slot exemptions to Southwest Airlines for nonstop service from Ronald Reagan Washington National Airport (DCA) to Houston (Hobby). DOTOrder2013-5-6.  In making the award, the Department chose Southwest’s service proposal over JetBlue’s proposal for nonstop service to Jacksonville, Florida, and US Airways’ proposal for nonstop service to Oklahoma City, Oklahoma.  Southwest has until August 5, 2013, to start the new service. 

The Department concluded that the benefits of Southwest’s service to Houston outweighed the benefits of the other carrier-city proposals.  The Department summarized:

[W]e have concluded that the criterion set forth in Section 41718(b)(5) – promoting service that produces maximum competitive benefits, including low fares – carries the most weight in this proceeding and that Southwest’s application best satisfies this criterion. This proceeding presents a unique opportunity to connect the close-in, downtown airport serving the nation’s capital (DCA) with a close-in, downtown airport in the nation’s fifth largest metropolitan area (HOU), and to do so with a low-fare air carrier. . . .

In comparing the merits of the applications under the Section 41718(b)(5) criterion, we find that both Southwest and JetBlue would likely offer low-fare service. Both carriers have affirmatively asserted their intention to offer low fares in their applications and have well-established records of providing competitive, low-fare service upon entering markets. In contrast, US Airways made no mention of offering low-fare service in its application, instead stating that fares would be “competitive with current OKC-Washington and OKC-Charlotte fares.”  In addition, US Airways proposes to operate the route with 99-seat E-190 aircraft. This is the smallest proposed aircraft in this proceeding and would not utilize the available capacity at DCA as efficiently as the Southwest or JetBlue proposals to use 143-seat and 150-seat aircraft respectively.  Moreover, US Airways’ application stated that the route may be operated from time to time by its regional affiliates, which would use even smaller aircraft. Given these factors, we do not believe the merits of US Airways’ application with respect to Section 41718(b)(5) reach those of either Southwest’s or JetBlue’s applications.

Having made this determination, we turned to a comparative analysis of the Southwest and JetBlue applications under Section 41718(b)(5). In comparing the applications, we examined the patterns of air service between DCA and Houston, and DCA and Jacksonville, including the average fares in each market. Our examination led us to find that Southwest’s average fare calculation methodology (removing zero-fare passengers and including an allocation for baggage fees) is logical and produces results within a reasonable margin of error. Based on these calculations, we find that travelers pay a 45% ($98 per passenger) fare premium for travel between DCA and Houston compared to other markets of similar size and distance. By contrast, the fare premium in the DCA-Jacksonville market is only 10.4% ($21 per passenger).

Further analysis revealed several instances in which Southwest’s inauguration of service at HOU has had a positive competitive effect on otherwise-monopoly service from IAH. Southwest began HOU-DEN service in 2006, prior to which the Houston to Denver market was operated on a monopoly basis by United through IAH. After Southwest’s HOU-DEN service began, fares on the IAH-DEN route dropped significantly and passenger usage increased. Similar patterns can be seen where Southwest inaugurated HOU service to Greenville/Spartanburg, SC; Philadelphia, PA; and Jacksonville, FL; as well as the New York City and San Francisco metropolitan areas. Given this history, together with Southwest’s presence at HOU, including the many connecting opportunities, we are confident that the award of these slot exemptions to Southwest will have a competitive effect in the greater Houston market. Moreover, Houston is a much larger market than Jacksonville, providing for a larger pool of potential passengers. When examining current schedules (both on a city-pair and airport-pair level) we found, consistent with the City of Houston’s claims, that, when adjusted for population size, there is less air service between DCA and Houston than between DCA and Jacksonville. HOU also offers more online connecting opportunities for passengers than does JAX.”