Let's review. Last August, US Airways and Delta reached an agreement to swap slots at LaGuardia and Reagan National airports. It would allow each airline to consolidate operations between the two airports. The plan called for US Airways to give Delta 280 slots at LGA (that's 140 additional flights in and out) along with it's beautiful terminal (the newest and by far the nicest at LGA). In exchange, Delta would give US Airways 84 slots at DCA and some international route authority. As part of the deal, both promised to start new service from their newly consolidated cities -- thereby expanding non-stop service into the two airports, especially DCA. Delta also promised to upgrade all of the US Airway's current turbo-prop service to regional jets.

Why do US Airways and Delta even have to "ask" the DOT for permission to do this? Surely there could be anti-trust repercussions, but that's not the DOT's purview, that's the DOJ.

It dates back to a rule called the LGA Interim Order (or "Order" for short) which the FAA published in December of 2006. It set limits on operations at LGA to prevent even further congestion and delays -- effectively freezing how many slots were available. The idea was to do that temporarily, giving the FAA time to figure out a more sustainable and fair way of allocating slots, an admittedly scarce resource. But the FAA punted on a real solution, extending the "Order" several times, most recently in fall of 2009 with a new expiration of October 29, 2011. DCA is under it's own restriction, called the High Density Rule, or "HDR".

The problem here is that the Order is set to expire in 2011, so that any transaction an airline makes now effectively becomes moot at that point under the current regulation. That freezes transactions, since no airline wants to buy or sell slots with an expiration date looming. Hence FAA permission is required to "waive" the Order and make a complete transfer that will transcend the expiration date of the current regulation.

It's relatively straightforward to see the benefit of the swap to US Airways and Delta. Each gets to shore up a new "hub" where they have lots of market power, cost synergies, and connecting abilities. US Airways LGA operation is hemorrhaging cash and this allows them to get out of it and for a huge benefit at DCA. There is also benefit to a handful of new cities that have been promised service as a result of the swap, places like Islip, Ithaca, Pensacola, Tallahassee, Birmingham, and Little Rock (to name a few). All have been promised regional jet service to DCA and connecting power all over the east coast.

The DOT, however, was a little more skeptical. In their ruling earlier this week, they stated that while there were some pro-competitive benefits to the deal by opening new service and competition on certain routes, there was also A LOT of anti-competitive possibilities resulting from massive concentration increases at both airpots. The swap would give Delta at LGA and US Airways at DCA very large market share leads. At LGA, Delta would then own 49% of all slots, as compared to 24% today. At DCA, US Airways would go on to own 54% of slots, as compared to 44% today. The resulting market shares would make the two airlines 2-3x bigger than the #2 player at each airport -- dominant market share, especially at LGA where US Airways, Delta, and American all are in a near-tie for market leader today.

The DOT has a clear mandate to keep the air transport industry competitive, hence its jurisdiction to rule based on competitiveness. They cited many studies showing how increased market concentration leads to higher average fares, and already cited LGA and DCA as high-fare airports. They also refuted US Airways' and Delta's claim that the market is defined by all metro-area airports together by showing how massive fare differences between the airports (JFK vs. EWR vs. LGA, and DCA vs. IAD vs. BWI) prove they are NOT the same market, otherwise you would expect a leveling of fares between airports. They also refuted the notion that the particular cities to be served would make the market power increase moot. The DOT stated that the airlines are not bound to follow any current route plan and could shift capacity at will. The DOT has to use its jurisdiction over slots, it cannot legislate which routes airlines fly.

In summary, the airlines said it was all happy and good for the airlines and the consumer. The DOT was skeptical. So they approved the slot swap, but only provided they give some up. Basically they have to sell some of the slots (14 at DCA, 20 at LGA) as a tax for increasing market power. And even worse, they have to give it up to airlines who are new to the airports or currently have less than 5% of slots -- leaving only LCCs in the game. They go on to explicitly say that LCCs bring low cost, innovation, and better operations (yes, they even say that!) to airports, which are all good for the consumer. So in order for the swap to go through, US Airways and Delta have to let airlines like Southwest, Spirit, or AirTran get more slots at LGA and DCA. Remember, the only reason they want to swap is to PREVENT airlines like those from getting any slots! In a previous post I mentioned how airlines will hold onto slots just to keep others out, even if it means they lose money. This is EXACTLY what US Airways is doing at LGA today -- running turbo-props to Philadelphia just to hold onto the slots, at their own peril. So what makes the DOT think that suddenly they'll be okay with selling slots to Southwest?

Is this politics? or good policy? I believe it's a little of both. On one hand, the DOT's ruling is pretty sound. There is reason to believe that the market power increases will translate to higher fares, and there is definite reason to question the motives of the airlines. If the airports weren't capacity constrained, then natural market powers would counteract monopoly fare increases by enticing new entrants. But since there cannot be any new entrants at either of these airports, there's no protection and the DOT has a mandate to use its control over slots (an airline privilege, not a right) as a way to install some checks.

However, I do believe that lower cost options at nearby airports (JFK, for example) does mitigate this issue quite a bit. LGA attracts higher willingness to pay passengers and is slot-contrained, so it has higher fares. If fares go up even more, passengers will likely switch to JFK.

But the requirements for the swap are arbitrary. Yes, they've justified the number of slots each would have to sell and to whom in a reasonable way, but the punishment doesn't fit the crime. At least allow them to sell slots to whatever airline they want, not just new entrants. The problem here is that the FAA has been unable to find a way to allow new airlines access to LGA and DCA because it can't win any political fights with the network carriers. This is a back-handed way of getting back at them by forcing them to acquiesce on that effort in order to get what they want. And yes, the DOT must know this is tantamount to killing the deal -- there is no way they'll go through with this swap if it means selling slots to LCC competitors. But perhaps the DOT doesn't care, it is sending a message loud and clear: If you're going to block us from doing our job, we're going to make it hard for you to manipulate the system to your benefit. Tit for tat. A bit of good politicking, but perhaps a bit of good policy also.

Finally, you might be interested to know who voiced support or criticism of the slot swap during the last few months. US Airways and Delta got many folks to send letters to the DOT and FAA in support of the swap, among them: Mayors, City Councils, Chamber of Commerces, and Airport Authorities from 11 cities with proposed new service, over 30 members of congress, 4 senators (New York and Arkansas), Governor Patterson of NY, and 22 Delta employees. Noteworthy is that while all 4 senators are democrats, the members of congress span both parties.

And who voiced concerns about the plan? Only 3 letters: Syracuse Chamber of Commerce (afraid of competition on flights to upstate NY from Rochester, Ithaca, and Buffalo), a group of 4 from congress (including Oberstar, the chair of the Committee on Transportation and Infrastructure, and Costello, the chair of the Subcommittee on Aviation), and a lengthy letter from Spirit Air Lines' lawyer, detailing how the plan hurts them at LGA and recommending the plan they eventually adopted, leaving an opening for Spirit to perhaps acquire new slots.

The letter conspicuously absent? The one from Southwest, or perhaps AirTran. The ruling reeks of their involvement as they stand to benefit the most from the DOT's new entrant requirement. You can bet there were phone calls -- why send a letter and make things messy?

Next steps: Another public comment phase on the ruling, but unless it changes dramatically, it's pretty much dead in the water.

The score in this battle: US Airways / Delta - 0. FAA - 1.

Read all the documentation yourself at: http://www.regulations.gov/search/Regs/home.html#docketDetail?R=FAA-2010-0109