Why the DOJ Wants to Clip Delta's Wings

[traderjake]

"More than anything else, the DOJ is worried about the growing oligopoly of "The Big Three": American, Delta, and United Continental (NYSE: UAL ) . Transferring slots within that oligopoly would not solve the problem."
 
http://www.fool.com/investing/general/2013/11/17/why-the-dojs-clipping-deltas-wings.aspx

 

[USFlyer]

The DOJ should be thinking about the "The Big Four":  American, Delta, United and Southwest.  It's ludicrous to think Southwest (+ Airtran) is not a major and very influential player in domestic markets.

 

[topDawg]

"More than anything else, the DOJ is worried about the growing oligopoly of "The Big Three": American, Delta, and United Continental (NYSE: UAL ) . Transferring slots within that oligopoly would not solve the problem."
 
http://www.fool.com/investing/general/2013/11/17/why-the-dojs-clipping-deltas-wings.aspx

two things. 
 
The government doesn't understand that airlines are a business.
WN is the darling child. They are *the* LCC and it doesn't matter what they charge.   

 

[WorldTraveler]

This article misses the fact that DL intended to preserve small and medium sized city service to DCA and nothing more. DL is and will remain the #1 carrier at LGA and the #2 carrier at DCA unless either B6 or WN wins all of the slots and then uses mostly their largest aircraft on those routes.

DL does have the ability to upgauge its own flights so its overall position on the east coast is not likely to be affected, esp. at DCA where the increased competition will be disproportionately in other carrier's strength markets.


WN may be perceived as the darling of the industry because of their ability to bring down prices in the past but their halo picked up a fair amount of tarnish with the FL merger. WN cut a lot of FL service, far more than much of what the legacy carriers cut in their downsizings post-merger.

WN simply doesn’t have the cost advantage they once had and DL has the closest costs to WN – nearly identical in the most recent quarter. DL is best positioned to compete against WN and DL’s track record vs. other carriers shows that DL has maintained its presence far more often than other carriers have.

 

[robbedagain]

Or so dl says they would maintain service to medium n small cities... but how many of them small cities actually would see service? Look no further than what theve done to mem n cvg

after next yr id bet that wn will come out w an 'A Lat Carte' just like the legacies if wn does do that how many of them politicians n people will b!tch n moan n gripe about that vs the legacies

 

[WorldTraveler]

MEM and CVG aren't small cities, robbed.

They are hubs with multiple carriers operating various kinds of jet service to dozens of cities in the US. Tell me how many cities THAT WERE CONNECTED TO THOSE HUBS have lost air service because of DL's reductions at those two hubs? IN nearly every case, those cities were reconnected to other hubs. That is what the hub and spoke system does.
In many cases because of DL's hub network which is particularly strong in the eastern US, DL is able to put mainline service, including 717s, into markets which haven't had mainline service for years. Sure some cities don't have service to a half dozen DL hubs but they have larger aircraft to the hubs that are most connected to the rest of the world.

The only cities that I know of that have lost service were a handful of small cities in the Midwest that didn't even sustain 100 seats/day. Perhaps you can correct me if I am wrong but most of the cities had not more than 2 flights/day, some on flights shared with another city on a 30 passenger turboprop and some on a 50 seat RJ. They simply weren't big enough to make the cut.

The DOJ could easily require that the slots be used for service to certain types of cities.

I still suspect that AA/US will announce the cities they will cut after all the ink has dried, they have the money in the bank from the slot sales and then there will be all kinds of uproar in Washington after the first of the year about all the service reductions to small and medium sized cities.

Congress will have to dole out new slots at DCA because of political pressure.

Lather, rinse, repeat.

Of course WN is milking their reputation as far as it can take them. They are a legacy airline. I mean, at what age are you considered middle aged instead of an adolescent? WN's costs and size prove they are no adolescent. And then to have the gall to assert that they should be entitled to have 90% of the traffic at "secluded" airports in three of the biggest cities in the US but network carriers who have less 20% market share are greedy.

Oh the nerve.

 

[robbedagain]

Wt while mem n cvg are not small cities they still have large enough traffic but dl angered tn with the pull out of mem they did to cvg what us did to pit n dl did to mem what us did to pit after 3 yrs I would think the new aa will keep say phx but I dont think phx will be as huge as it is now but I think it will be bigger focus city than dca

 

[WorldTraveler]

Communities never want to lose air service but they aren't small cities and there were no guarantees that DL had to serve them at their premerger levels. The market should dictate the service levels for AA as well, but because of the real fear of concentration in the industry, AA/US made guarantees. Some people say those guarantees have all kinds of loopholes that will allow the hubs to be pulled down anyway.

I have heard all of the arguments about why each hub will survive and why it will not but only the future will show what is right.

What is certain is that there are now four big airlines who are all fighting aggressively to retain their place in the market and all are throwing capacity into the market or are invading other carrier's key markets. It should be interesting in the months ahead.

 

[traderjake]

The market should dictate the service levels for AA as well

 
The marker should dicate the service levels for small citites as well.

 

[WorldTraveler]

agree but the DOJ is apparently willing to sell out the small cities in order to gain much more low fare carrier access. And in a limited market such as DCA slots, the market may well say that those cities don't warrant being connected to the nation's capital.

That is all fine but is a significant departure from the concerns that were raised when the AA/US merger was announced and there was substantial concern about preoccupations of losing service to DCA. I do not support having the gov't interfering in the way the market allocates scarce resources but DCA has existed for decades around that very concept.

Either the DOJ has done an outstanding job of reassuring state and community leaders or they don't yet understand what is happening or the settlement agreement really will require AA to continue serving a large number of small cities, even if on much lower frequencies and the few that do lose it will just be "merger casualties."

 

[robbedagain]

Even if dl were to get more slots at dca likelihood of them servicing small n medium cities is about 50 percent given the wacking theyve done at cvg and mem yes time will tell...

 

[WorldTraveler]

DL has and can redeploy from its hubs to other markets... that is exactly how LGA was built.

But the reason why DL is not likely to get slots at DCA is because its focus is on building service to small/medium sized cites and that is not viable to do if you have to bid for the slots against carriers that will use mainline jets to large markets where the cost of the slots can be spread over many more passengers.

Unless the DOJ changes the settlement agreement to require that part of the slots be reserved for service to small/medium sized cities, then DL is not likely to get any. I doubt seriously that B6 and WN will walk away without taking every slot they can get.

There is also a legal issue the DOJ has to consider which is that the government cannot - or at least has not - taken slots from carriers without allowing them to be compensated. The market for slots to service small/medium sized cities (which would almost exclusively be just among DL and UA) is very small. AA/US could countersue if the DOJ forced them to surrender slots without being able to be compensated - which is why every slot divestiture has involved payment and not just a "taking" of the slots by the government.

 

[im back..!!]

This article misses the fact that DL intended to preserve small and medium sized city service to DCA and nothing more. DL is and will remain the #1 carrier at LGA and the #2 carrier at DCA unless either B6 or WN wins all of the slots and then uses mostly their largest aircraft on those routes.DL does have the ability to upgauge its own flights so its overall position on the east coast is not likely to be affected, esp. at DCA where the increased competition will be disproportionately in other carrier's strength markets.WN may be perceived as the darling of the industry because of their ability to bring down prices in the past but their halo picked up a fair amount of tarnish with the FL merger. WN cut a lot of FL service, far more than much of what the legacy carriers cut in their downsizings post-merger.WN simply doesn’t have the cost advantage they once had and DL has the closest costs to WN – nearly identical in the most recent quarter. DL is best positioned to compete against WN and DL’s track record vs. other carriers shows that DL has maintained its presence far more often than other carriers have.

When delta ran from competition in DFW, back in the late 90's. Was that due to there overbearing cost structure, or just inability to compete with an inferior product?

 

[WorldTraveler]

none of the above... if you are capable of expanding your level of choices.

DL's DFW hub had a very high connection rate and low local passenger rate and was overshadowed by AA's much larger hub (one of the very few remaining multi-airline hubs at the time).

More significantly, DL redeployed the assets it was using at DFW to NYC where it has far overtaken AA which was much larger than DL. DL gave up about 7 points of local market share in DFW to pick up far more than that in NYC, a market that is much, much larger. In addition, DL started building out Latin America, also a strong American region.

If swamt is right and Karma is not fun, then DL has already had one set of laughs for being run out of DFW and is about ready to have a few more before the dust all settles.

Since you suggested it, can you tell us what AA and DL's CASMs were at the time the DFW hub was closed and could you also summarize the products each had as well?

 

[700UW]

So what about MCO, CVG, and MEM?