The two carriers could thus free up 10 slot pairs just by rationalizing capacity on the two routes where they compete today. If the DOJ demanded additional slot sales, it might lead to service cuts at smaller airports. However, that negative effect might still be outweighed by the increase in competition on routes to larger cities, as more passengers travel on those routes and would benefit from lower prices.
Barbarians at the gate
The main reason why the new American Airlines wants to hold on to all of its slots at Reagan Airport is not to continue service at small airports, but rather to prevent competition at larger ones. Southwest Airlines Co. (NYSE:LUV) and JetBlue Airways Corporation (NASDAQ:JBLU) have both expressed an interest in expanding at Reagan Airport. For example, Southwest Airlines Co. (NYSE:LUV) bought two slot pairs from Spirit Airlines Incorporated (NASDAQ:SAVE) last year in order to introduce service to St. Louis: the first competition for American’s route between the two airports.
Southwest Airlines Co. (NYSE:LUV) could also be interested in flying to Nashville (where it is by far the largest carrier), a route for which the new American would otherwise have a monopoly. Southwest might even reintroduce competition on the route to Raleigh-Durham; it has a 24% market share there. Nonstop routes to cities like Dallas, Indianapolis, Charlotte, Pittsburgh, and Hartford — all currently monopolized by American or US Airways — could also be attractive to low-cost carriers.
The real scoop
One of the reasons why many smart investors have historically avoided airline stocks is that it is hard to generate a competitive advantage, or a “moat”. Instead of working to create competitive advantages for the new American Airlines, the company’s management has essentially asked the government to build a moat for it by giving it a dominant share of the slots at Reagan Airport.
This is a savvy business move, but regulators at the Department of Justice are likely to see through it. If American and US Airways have to sell off slots at Reagan Airport as a condition of their merger, low cost carriers like Southwest and JetBlue Airways Corporation (NASDAQ:JBLU) will benefit, as they have had trouble growing there because of the slot constraints. Travelers in the cities that finally see competition on routes to Reagan Airport will also be big beneficiaries. American’s management team might complain, but it would be a clear failure of the antitrust system if the carrier is allowed to amass a dominant share of the slots at one of the country’s most desirable airports.
The article Washington: The Key Battleground of the American-US Airways Merger originally appeared on Fool.com is written by Adam Levine-Weinberg.
Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of SPIRIT AIRLINES INC. (NASDAQ:SAVE).
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