2 Major Airlines Run Afoul of the Antitrust Cops (Again)

By Adam Levine-WeinbergFool.com

In recent years, it seems like the Department of Justice has been constantly hounding the biggest U.S. airlines over antitrust concerns. That trend continued this week, as the DOJ sued United Continental and Delta Air Lines over a slot swap in the capacity-constrained New York market.

Cooperating to competeUnited and Delta are archrivals in the New York market. Both airlines operate more than 400 daily departures across the region's three major airports -- LaGuardia, JFK, and Newark -- offering nonstop flights to numerous cities in the U.S. and dozens of international destinations.

Continue Reading Below

United predecessor Continental Airlines had been dominant in the New York area since the late 1980s, building up a large hub at Newark Airport. Delta is a more recent challenger -- beginning around 2000, it has gradually created an international gateway at JFK Airport. It then used a 2012 slot swap with US Airways to gain more slots at LaGuardia Airport and create a domestic hub there.

Delta Air Lines has become one of the top two airlines in New York.

Thus, while United and Delta compete vigorously with one another in New York, they do so from different airports. Newark is United's stronghold, while Delta focuses on LaGuardia and JFK.

Up until a few weeks ago, United Continental continued to operate a handful of flights from JFK to its West Coast hubs in San Francisco and Los Angeles. These flights used United's premium "p.s." configuration to appeal to business travelers, but faced tough competition from Delta and several other carriers that also offer more luxurious planes for these two routes.

United wisely decided in June that it would make more sense to operate its p.s. flights at Newark, where it is the dominant carrier, rather than JFK, where it's an also-ran. It therefore agreed to lease its JFK slots to Delta -- allowing Delta to add more flights there -- while Delta agreed to lease some of its Newark slots to United. That's what raised eyebrows at the DOJ.

Not so fast, says the governmentUnited and Delta shouldn't have been surprised by the DOJ's decision to challenge this slot swap. The government wasn't concerned about Delta getting more slots at JFK, where there are other strong competitors like JetBlue Airways. However, United holds more than 70% of the slots at Newark Airport. That gives it a near-monopoly there.

Assistant Attorney General Bill Baer stated, "Allowing United to acquire even more slots at Newark would fortify United's monopoly position and weaken the ability of other airlines to compete."

The government's objection was spurred in part by recent complaints lodged by five smaller carriers regarding slot management at congested airports. It is virtually impossible these days to add even one or two flights at any New York-area airport. These smaller carriers want a way to get more slots in New York in order to expand there and compete with the entrenched incumbents.

It's not quite so simpleThe DOJ's complaint noted that United was the monopoly nonstop provider for 139 of the 206 destinations served from Newark Airport. But despite United's vast slot holdings in Newark, it's doubtful that this slot trade would have a meaningful impact on competition.

United Airlines has a dominant position at Newark Airport.

The slot swap wouldn't give United any more monopoly routes. That's because Delta only flies a handful of nonstop routes at Newark. All of those flights serve Delta hubs -- and on virtually all of them, Delta remains the market share leader even after the slot swap.

That makes this swap a lot different from one executed in 2009 in which AirTran gave its 10 slots at Newark Airport to Continental Airlines in exchange for slots at two other airports. This earlier deal clearly reduced competition by removing a low-cost competitor from Newark while concentrating more slots in the hands of the market leader. (It was still approved by regulators.)

Furthermore, looking at the broader New York air travel market, this swap could be helpful. Each airline is getting more slots at its hub. That should allow Delta and United to launch new routes in the future that weren't possible with their existing slot portfolios.

More competition is good -- more capacity is betterPart of the DOJ's argument against the United-Delta slot swap is that Newark Airport already has the highest fares in the U.S. As of Q1 2015, the average roundtrip domestic fare at Newark was $473.

That is a lot higher than the average for the U.S. as a whole. But notably, it's only $34 higher than the average fare at JFK, where Delta is the top carrier with just 31% of the slots. (Furthermore, $5 of that difference is due to higher airport costs at Newark.)

Thus, United's vast slot holdings at Newark Airport aren't the only reason for high fares there. While travelers in New Jersey don't have a good alternative to Newark, United has to compete with all the airlines operating at LaGuardia and JFK for customers coming from New York. To the extent that there is a problem, it's mostly at the regional level, impacting all of the New York-area airports.

From this perspective, the DOJ's complaint seems quite clever. A simple trade between Delta and United wouldn't appreciably worsen the existing high-fare environment. However, getting even four or six additional Newark slot pairs into the hands of low-cost carriers would help bring down fares on whichever routes they chose to serve. The DOJ would probably accept a settlement along those lines.

Even this would just be a Band-Aid solution, though. What's really needed is a big increase in New York-area airport capacity that could enable larger-scale expansion by low-fare airlines.

The article 2 Major Airlines Run Afoul of the Antitrust Cops (Again) originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $17 calls on JetBlue Airways and long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.