Shifting global airline puzzle raises question about how travelers benefit

By:  The Business Journals - Joe Brancatelli
Source: The Business Journals

The airline landscape is gyrating wildly again, and business travelers are facing a more potent Delta Air Lines while the proposed merger between US Airways and American Airlines has run into a patch of political turmoil.

The wave of international airline consolidation washed over us again Monday as Delta completed a deal to buy a 49 percent stake in Britain's Virgin Atlantic Airways.

In the global airline game, Delta (NYSE:DAL) needs Virgin Atlantic to plug a hole at London's Heathrow Airport and to give Delta heft on the crucial New York-London run. The deal, which goes into code-share mode next week, "transforms our ability to compete on transatlantic routes," explains Delta president Ed Bastian.

The Delta-Virgin tie-up, and a joint-venture deal in the works, cleared two of its three regulatory hurdles last week after both the U.S. Justice Department and the European Community gave their bureaucratic blessing. The U.S. Department of Transportation is expected to sign off before the end of the year.

But another big piece of the global airline jigsaw puzzle has taken at least a temporary hit. The planned reverse merger that will see the smaller US Airways (NYSE: LCC) gain control of the much larger, but bankrupt, American Airlines (OTC: AAMRQ) has run into resistance from Congress. Although the House and Senate technically have no say in merger matters, Justice and Transportation department apparatchiks, who must give the nod ,often pay heed to political opposition.

That's especially true when the sticking point is crowded, congested and heavily regulated Reagan National Airport, Washington's hometown jetport. Just five miles from Capitol Hill, National Airport is where anyone who's anyone in government seems to have a reserved parking space and a parochial interest in keeping flight schedules convenient so they can jet home to the district (or their summer home) for the weekend.

If you only read the top lines of a 31-page report on the potential merger issued last week by the nonpartisan Government Accountability Office, you'd find plenty more than National Airport about which to worry. The GAO said combining US Airways and American would reduce competition on 1,665 one-stop domestic routes affecting 53 million passengers. The airlines also overlap on a dozen nonstop routes and seven would have no competition at all if the merger is approved. The GAO report also raised the specter of the combined carrier's uncomfortably close collection of hubs. "Closing hubs is not unprecedented," the report notes dryly and "the combined airline could be expected to rationalize its network over time."

Market dominance is also a concern. The merged carrier would control 74 percent of passenger traffic at Dallas Fort Worth Airport, 72 percent in Miami and 70 percent in Charlotte. The two carriers would have less clout at Washington National, where US Airways and American command 49 percent of passengers.

So why all the fretting about National? It’s about aircraft schedules. National is one of four U.S. airports where flights are restricted by "slot controls" that limit take-off and landings. The combined US Airways-American would control 68 percent of the slots at National and no other airline has more than 12 percent. In contrast, a merged US Airways and American would control just 8 to 33 percent at the other slot-constrained airports (Kennedy, New York's LaGuardia Airport and Newark).

There's also precedent. When the government approved a New York/Washington asset swap between US Airways and Delta in 2011, the two airlines agreed to forfeit slots at National, and US Airways agreed not to exceed its current share (54 percent) of slots. JetBlue Airways (NASDAQ: JBLU) won a government-sponsored slot auction and that allowed the spunky competitor to launch its own flights at National Airport.

In defending his perceived right to keep all of the National assets that US Airways and American Airlines currently control, US Airways chief executive Doug Parker, who'll run the merged carrier, has played a few nifty rhetorical and political games.

First, he declared at a Senate hearing in March that National Airport was a US Airways hub. That not only startled politicians, but also airline watchers because US Airways had never before made such a claim. The designation of an airport as a hub is more than semantics, too. It signifies that the airline considers the airport a facility where it gathers passengers from "spoke" cities and then flies them again to their final destinations. The economics of a hub are convoluted and removing a few spokes say, by a slot divestiture could destroy the financial viability of the entire operation.

Then in May, Parker convinced about 100 members of Congress to tell the Transportation and Justice departments that the merged carriers should be allowed to keep all of its National slots because it would be the only way to ensure small cities keep their flights into the nation's capital. And nothing plays quite so well back in the district as telling constituents that you've fought to keep convenient, nonstop flights into Washington so granny and the kids can make a pilgrimage to see the Washington Monument or the Lincoln Memorial.

But Parker may have been too clever by half, something he learned last week when he faced another round of Senate scrutiny. Jay Rockefeller (D-VA), who chairs the Commerce Committee, raised the rather dicey history of airline mergers. "Other airline CEOs have repeatedly promised that merging their airlines would lead to more choices for travelers in small and rural communities," he said. "I have found that not to be the case."

And both Democratic and Republican senators found fault with Parker's it's-all-mine defense. The top players on the Senate Judiciary Antirust Subcommitte, chairwoman Amy Klobuchar (D-MN) and ranking Republican Mike Lee (Utah), don't like that a US Airways-American merger would put 90 percent of domestic aviation market in the hands of four airlines. Kelly Ayotte (R-NH) seemed unconvinced by Parker's claim that keeping all of his slots meant better service to small towns. Mark Warner (D-VA) played homer: He fretted that allowing the merged carrier to control more than two-third of the slots at National posed a threat to the dominance of United Airlines (NYSE: UAL) at Washington's other airport, Dulles Airport in Virginia.

But Maria Cantwell (D-WA) may have done the best job last week of hoisting Parker on his own petard. She pointed out that it was just a year ago that Parker wanted Congress to make it easier to fly long-haul routes from National. When all was said and done, National's so-called "perimeter rule" was loosened and Parker's US Airways launched new flights to San Diego not exactly the kind of small, rural community Parker is now claiming his merged airline would continue to serve.

The give-and-take over National won't stop the US Airways-American Airlines merger, of course. But Congress and the bureaucrats will, eventually, extract concessions from Parker. He'll kick and he'll scream, but he'll yield a packet of National slots to get his merger. That's because the only thing more powerful than a global wave of business consolidation is politicians riding the wave of their own provincial best interests.