Delta, US Airways trade slots in New York, Washington

Posted by: Dean Foust on August 13, 2009

U.S. airlines have laid off employees, extracted huge pay cuts from the remaining workers, fobbed off their pension obligations on the federal government, scaled back their routes structures and…they’re still losing money. So what do they do? They could merge with other carriers to cut costs further, but there aren’t many attractive options—at least options that would pass muster with anti-trust regulators. So what do they do? Swap slots, that’s what.

The announcement by Delta Air Lines and US Airways that they agreed to swap slots at New York LaGuardia and Reagan Washington National airports was an elegantly simple solution: US Airways’ offer to give Delta 125 pairs (meaning, one inbound and one outbound flight) of its Express slots at LaGuardia in exchange for 42 pairs of Delta’s slots at Reagan National in D.C.—as well as rights to fly to Tokyo and São Paulo. (US Airways keeps its New York shuttle service.) In a note to clients, Daniel McKenzie, an analyst at Next Generation Equity Research wrote:

In contrast to deteriorating fundamentals at some other legacy carriers, (US Airways) fundamentals are improving. Less NYC flying & more international flying a good move for LCC, which lacks the frequent flyer loyalty to make NYC work as it should. Delta strengthens its brand, size and scale in NYC, and conversely bolsters corporate loyalty at the expense of (American) & (Continental).

The Smart Airline Industry People I talked to say the trade is a “win-win” deal since it allows each carrier to shed routes that probably weren’t money-makers—and pick up routes in markets where they’re already strong. US Airways said that the trade will probably boost its profits by $75 million (or at least reduce its losses in the current year (analysts expect US Airways to lose $607 million this year). Delta and US Airways each say they’re going to replace the turboprops that the previous carrier was using with larger jets, so it’s good for passengers who hate flying turboprops, and will give them access to more markets.

Delta didn’t provide numbers on the effects on profitability, but is now referring to New York as a hub—though, in my view, an imperfect one, since they’ll have a lot of its domestic feed coming into LaGuardia and its international flights coming in and out of JFK. (Ever book an international flight on Delta that would go through New York, and realize that it wasn’t clear until—sometimes after the fact—that while you were coming into New York via LaGuardia, you were flying to Europe out of JFK?)

But the trade-off will likely be higher fares, since by consolidating power at hubs where each are already strongest, Delta and US Airways will gain some pricing power that will allow them to raise fares. I know there are a number of folks who will raise cain over that, but at the risk of sounding like an industry apologist, the U.S. industry is expected to lose another $1 billion this year.

Is this slot swap a harbinger of things to come? The folks I talked to around the industry were mixed. Michael Boyd, an industry consultant in Evergreen, Colo., says no. Boyd says there aren’t that many gate-constrained airports where any airline craving more flights couldn’t get them through relatively easy means—particularly given that most airlines have been cutting flights at most airports (and Boyd predicts that airlines will cut capacity further by December, or roughly 10-11% below the capacity levels of last December. Boyd notes that “even Southwest will have cut capacity at 90% of the (airports) they serves in 2008.” In general, airlines are “starting to pull out more capacity than the drops in traffic.”). “I think these are separate moves that don’t relate to each other,” he told me.

But Robert W. Mann, an industry consultant, thinks we could see more slot swaps. Even earlier this week, there was news that AirTran plans to swap its remaining 10 slots (as well as a gate and jetway) at Newark with Continental, who in turn will give AirTran four slots at LaGuardia and six slots at Reagan National in Washington. Airlines “are going to play to their strengths, and if they can’t play in whole airlines (i.e., mergers) they’ll swap gates.”

Mann thinks “it’s conceivable we see more consolidation at LaGuardia,” with United Airlines looking to swap some of its gates in New York for some assets elsewhere, and maybe ink a deal with Continental to have the Houston-based carrier fly some of its connecting routes for United in and out of Newark. Mann also believes that AirTran wants more gates at LaGuardia, as does JetBlue. He also believes that we could see some slot swaps at international airports that are gate-constrained.

Mann says we might see some pushback from Congress over the Delta-US Airways slot swap, from lawmakers grouchy that their small district might lose feeder service in the transaction. But he doubts there will be much crabbing from within the industry: Continental already has all the capacity it wants out of Newark, and American pared back its New York capacity earlier this year, “so it would be hard for them to say ‘We wanted that,’ “ Mann notes.