Delta, US Airways Submit Revised Slot Swap Proposal

When the U.S. Department of Transportation last year approved a proposal by Delta Air Lines and US Airways to swap dozens of slots at New York LaGuardia and Reagan Washington National airports, the carriers refused to agree to DOT's conditions. A year later, Delta and US Airways are back with a new proposal—their third since August 2009—which again stops short of DOT's latest required divestments of 20 slot pairs at LaGuardia and 14 pairs at National airports.

At stake for Delta is the development of what it claims would be a domestic, corporate travel-focused hub at LaGuardia, while US Airways would retreat from certain costly LaGuardia operations, preserve its Northeast shuttle and other services at the airport and add 15 new destinations from Washington, D.C.

In the newest proposal revealed last week, the airlines argued that new competition in both markets, along with a commitment to surrender 16 slot pairs at LaGuardia and eight at National, would satisfy the spirit of the regulatory conditions.

Do they have a chance at approval this time? "I thought they did the first time," said aviation consultant Robert Mann. "On the other hand, this proposal would seem to be a little more accommodating of some of the initial objections, without changing the economics of the deal such that it was unattractive."

According to the revised agreement, Delta would gain from US Airways 132 LaGuardia slot pairs in exchange for 42 slot pairs at National, $66.5 million and rights in 2015 to serve São Paulo, Brazil. In the previous agreement, revised to appease prior regulatory objections, Delta was to gain 110 slot pairs at LaGuardia, but give up five slot pairs apiece to AirTran, Spirit and WestJet. US Airways, meanwhile, would have received 37 slot pairs at Washington National, with five slot pairs going to JetBlue.

"Regulators have given the companies a lot of pushback given the level of slot concentration Delta will have at LaGuardia if the transaction were to be completed," according to a research note by Deutsche Bank aviation analyst Michael Linenberg.

DOT in May 2010 called its divestment requirements of 20 slot pairs at LaGuardia and 14 pairs at National the "minimum necessary to remedy the reduction in competition resulting from the transaction."

Carriers Promise Preserved Competition

Delta and US Airways maintained that evolving market conditions have eased many of DOT's concerns. Among other developments, the carriers pointed to AirTran's expansion at both National and LaGuardia, new JetBlue services at National and mergers between AirTran and Southwest and between United and Continental, both of which are changing the face of competition.

At National, the slot share of "low-cost carriers" has increased to nearly 9 percent from 3 percent since the initial proposal, according to Delta and US Airways, "exceeding the 6.5 percent LCC slot share the DOT sought to create by divestiture" in its previous order.

Meanwhile, at LaGuardia, Frontier, AirTran and Southwest in the past few years each gained new slots. If DOT approves the revised Delta-US Airways proposal, an additional 32 slots would go "to airlines with limited or no service" at the airport, according to the carriers, lifting "LCC slot share at LGA" to 11 percent, exceeding the 10 percent share originally ordered by DOT.

Delta Plans LaGuardia 'Hub'

At LaGuardia, Delta sees opportunity to build a domestic hub that would allow it "to compete more effectively for corporate accounts in New York," according to the slot swap proposal.

Though Delta has not identified any new markets it would fly to from LaGuardia should the deal go final, the carrier plans to "approximately double the number of nonstop destinations it serves from LaGuardia, including top business destinations and many cities not currently served nonstop by Delta or US Airways," according to the proposal.

"We have a whole list of what's the next market we want to serve," said Delta senior vice president for New York Gail Grimmett. "That's a normal, ongoing process anyway within the network strategy."

Delta would use aircraft larger than the turboprops operated by US Airways, "adding as many as 4 million additional roundtrip seats available at LaGuardia without increasing congestion," according to the proposal. Delta also would assume control of Terminal C, where it would build a connecter to its current home in Terminal D. The carrier would operate 29 gates out of the expanded terminal, with plans to "convert the existing US Airways lounge in Terminal C to a Sky Club, while continuing to operate its current Sky Club in Terminal D."

Delta already has invested in LaGuardia. "When we first announced [the slot swap proposal], we talked about a $40 million investment, and we've continued to grow that," Grimmett said. "Now, we're looking at a $100 million improvement in the facilities. No matter what, we are committed to growing in LaGuardia. This opportunity is the easiest way to do something like this."

Delta also is in the midst of a $1.2 billion revitalization at New York JFK's Terminal 4. The first major phase is slated for completion in 2013.

If it picks up the US Airways slots at LaGuardia, Delta would shift some domestic flights to the airport from JFK while bulking up JFK's international services.

"Going back to 2009, it was clear to me that a battle for New York was shaping up," said Mann. "If this deal gets done on substantially similar terms to what's being proposed here, Delta will have essentially won the battle and pushed American out of New York. That's an interesting development, because during the '70s and '80s when I was with American, we pushed real hard to get United out of New York, never thinking for a moment that there was ever a next phase of that. American will still have a large presence at JFK, but in terms of being able to develop the corporate marketplace, Delta will have won the battle."

US Airways Mum On New National Services

US Airways in 2009 identified 15 markets it intended to serve from National upon approval, including Cincinnati, Miami and Montreal. However, a spokesperson this week indicated those markets could change.

"It's a serious opportunity for them, and it's a good one, because they have an ability to build a larger presence at a close-in airport that has a premium," Mann said. "Not unlike the LaGuardia premium relative to JFK, National has a premium relative to Dulles. US Airways has a strong position at National, but they'll end up with a far stronger one and the ability to serve more airports with better frequency and a better mix of equipment."