None of the combatants in the slot swap war have given up. In 2009, US Airways and Delta Air Lines made a deal to swap slots at LaGuardia and Reagan. The Federal Aviation Administration refused to approve the transaction without divestitures, and the Department of Justice initiated an antitrust investigation. As this goes to press, the carriers have challenged the FAA decision in court, and the DOJ investigation continues. Anticipating some resolution, it may be time to remind ourselves of how this all began.
In August 2009, USAir and Delta announced their agreement that USAir would transfer 125 slots at New York's LaGuardia Airport (LGA) to Delta in exchange for 42 slots at Washington Reagan Airport (DCA) plus operating rights to serve Tokyo and São Paulo. Delta was seeking to expand its presence at LGA to establish a domestic hub to supplement its existing international hub at John F. Kennedy International Airport (JFK).
The proposed transaction required a waiver from a 2006 FAA Order limiting operations at LGA to 75 per hour and prohibiting permanent slots sales. In response to a waiver request from USAir and Delta, the FAA proposed to grant the waiver, but with conditions. The proposed waiver would have required the two carriers to divest 14 slot pairs at DCA and 20 slot pairs at LGA to new entrant and limited incumbent carriers. It proposed to "bundle" the to-be-divested slots "so as to enable an eligible carrier to purchase sufficient slots to operate competitive service, with times spread across the day."
The FAA explained that the divestitures were necessary to avoid competitive harm from the proposed slot transaction: "US Airways would raise its share of departures at DCA from 47 to 58 percent. US Airways' share of slot interests at DCA ... would increase from 44 percent to 54 percent.... Delta would ascend to a dominant position at LGA, raising its share of departures from 26 percent to 51 percent. Delta's share of slot interests at LGA would more than double, growing from 24 percent to 49 percent." The FAA also cited the different fare yields generated at airports in New York and Washington, D.C.
The FAA notice also argued the agency has the statutory authority to consider competition and the broader "public interest" when allocating slots and managing the efficient use of navigable airspace, citing Northwest Airlines, Inc. v. Goldschmidt, 645 F.2d 1309 (8th Cir. 1981).
The DOJ Antitrust Division filed comments supporting the FAA proposal, highlighting its faith in low cost carriers: "The FAA's proposed slot divestiture is necessary to protect consumers from competitive harm. It will open up DCA and LGA to entry by carriers that traditionally have found it extremely difficult to purchase slots. Such entry—particularly LCC entry—will benefit the public by increasing competition at LGA and DCA, bringing lower fares to consumers in New York and Washington."
In response to the FAA notice, Delta and USAir modified their agreement, essentially making a counterproposal to divest some of the bartered slots—but not as many as FAA sought—at DCA and LGA to four low-cost carriers. Under the revised agreement, Delta would have secured an additional 110 daily slot pairs at LGA, but with five slots going to each of AirTran, Spirit, and WestJet. USAir would have received 37 slots instead of 42, with the remaining five going to JetBlue.
USAir and Delta nevertheless filed comments that challenged the agency's statutory authority to even consider competition issues when exercising regulatory powers to manage airspace. They argued their transaction should be approved "because it increases competition, expands output, and creates new service benefits." And they assailed the FAA's competitive analysis on several fronts:
- First, USAir and Delta asserted the FAA could not support its prediction of increased fares, as its analysis was based on "flawed assumptions from outdated data and an inadequate analysis."
- Second, the carriers argued the FAA should not have imposed an arbitrary concentration ceiling: "The FAA failed to articulate the level of airport concentration that causes it concern.... Nor did it explain why it would tolerate a 50.8% share at DCA for US Airways ... while rejecting a 49% share for Delta at LGA."
- Third, they complained FAA's market definition was flawed, based on the "mistaken premise that fares to and from DCA are not constrained by service at BWI and IAD and fares to and from LGA are not constrained by service at New York-JFK and Newark."
- Fourth, they asserted that the proposed remedy was not related to the perceived harm, citing FAA's failure to explain the scope of divestitures at each airport, its failure to identify routes of concern, the lack of connection between the swap and the FAA's goal of increasing slot holdings by new entrants and limited incumbents, and the choice of only LCCs to obtain divested slots.
DOJ again commented, restating its support for the FAA proposal but noting the ambiguity of the counterproposal by USAir and Delta and questioning why the carriers proposed to delay more than two years transferring slots to AirTran, Spirit, and WestJet: "The circumstances and limited disclosed terms of the proposed transfers strongly suggest that the divestitures were structured to minimize the potential competitive effect on Delta and US Airways, and consequently the potential benefits for consumers." DOJ also stated its belief that a "blind, cash-only sales process ... would better ensure that the slots are divested to carriers likely to generate the greatest consumer benefit from the use of the slots."
In May 2010, the FAA rejected the modified agreement and granted the petition conditioned on slot divestitures, reiterating its view on the transaction's competitive effects: "If the transaction is consummated as [the carriers have] proposed, Delta plans to withdraw from a number of DCA routes on which it competes with US Airways, and US Airways plans to withdraw from other LGA nonstop routes on which it competes with Delta. Unless new service is instituted by carriers other than DL and US, these routes will become new monopoly routes for the remaining carrier."
In response, USAir and Delta argued that DOJ had failed to offer evidence that increases in slot ownership at DCA and LGA would increase fares and that the transaction's consumer benefits would be lost with the divestitures sought by the FAA. They also complained that DOJ had in effect anointed Southwest as the "chosen recipient of the US Airways LGA slots" through its call for a cash-only winner-take-all auction that favored "better-capitalized Southwest."
In August 2010, USAir and Delta initiated a challenge to the FAA decision in the U.S. Court of Appeals for the D.C. Circuit. Among the issues that have been briefed there are whether the FAA exceeded its statutory authority in its decisionmaking process, whether the FAA proposal is a taking of property without just compensation, and whether the decision is arbitrary, capricious, or an abuse of discretion.
There is reason to expect some resolution soon. Most recently, the parties in the Delta v. FAA case have indicated that they are discussing settlement. Nevertheless, the FAA has not backed down, and DOJ has not announced it has closed its antitrust investigation