[Federal Register Volume 76, Number 145 (Thursday, July 28, 2011)]
[Notices]
[Pages 45313-45332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18939]
[[Page 45313]]
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DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
[Docket No. FAA-2010-0109]
Petition for Waiver and Other Relief
ACTION: Notice of a petition for waiver and solicitation of comments on
grant of petition with conditions.
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SUMMARY: On May 23, 2011, Delta Air Lines, Inc. (Delta) and US Airways,
Inc. (US Airways) (together, the Joint Applicants or the carriers)
submitted a joint request for the Department of Transportation (the
Department) to waive a prohibition on purchasing operating
authorizations (slots) at LaGuardia Airport (LGA). The carriers
requested the waiver to allow them to consummate a transaction in which
US Airways would transfer to Delta 132 slot pairs (265 slots) at LGA.
In exchange, Delta would transfer to US Airways 42 slot pairs (84
slots) at Ronald Reagan Washington National Airport (DCA), convey route
authority to operate certain flights to Sao Paulo, Brazil, and make a
cash payment to US Airways.
The Department (the Office of the Secretary and the Federal
Aviation Administration, or FAA) has evaluated the proposed transaction
and tentatively determined that it affords significant benefits to the
public. At the same time, we recognize that the transaction will result
in an increase in market concentration that could negatively impact
consumers. As a result, we have tentatively determined that the
divestiture of a number of slots by the carriers is necessary for us to
allow the transaction to proceed. We have tentatively concluded that
the divestiture of 32 slots at LGA and 16 slots at DCA will reduce
adverse impacts on consumers at DCA and LGA to a degree sufficient for
us to conclude that the requested waiver is in the public interest.
This Notice prescribes rules and procedures for the divestiture of
those slots by the carriers to new entrant and limited incumbent
carriers.
DATES: Comments on the FAA's proposed grant of the petition for waiver
with conditions must clearly identify the docket number and must be
received on or before August 29, 2011.
ADDRESSES: You may send comments identified by Docket Number FAA-2010-
0109 using any of the following methods:
FOR FURTHER INFORMATION CONTACT: Rebecca MacPherson, Assistant Chief
Counsel for Regulations, by telephone at (202) 267-3073 or by
electronic mail at [email protected].
SUPPLEMENTARY INFORMATION:
Introduction
The FAA limits the number of scheduled and unscheduled operations
during peak hours at LGA pursuant to an Order that was originally
published in December 2006 and that has been extended several times
since (the Order).\1\ The Order allocates operating authorizations
(commonly known as ``slots'') to carriers and establishes rules for the
use and operation of slots. The Order allows temporary leases and
trades of slots between carriers, provided that they do not extend
beyond the duration of the Order.\2\ Most importantly for purposes of
this waiver request, the Order does not permit the purchase and sale of
slots at LGA. The only way for a carrier to sell or purchase a slot at
LGA is through a waiver of the Order.
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\1\ Operating Limitations at New York LaGuardia Airport, 71 FR
77,854 (Dec. 27, 2006); 72 FR 63,224 (Nov. 8, 2007) (transfer,
minimum usage, and withdrawal amendments); 72 FR 48,428 (Aug. 19,
2008) (reducing the reservations available for unscheduled
operations); 74 FR 845 (Jan 8. 2009) (extending the expiration date
through Oct. 24, 2009); 74 FR 2,646 (Jan. 15, 2009) (reducing the
peak-hour cap on scheduled operations to 71); 74 FR 51,653 (Oct. 7,
2009) (extending the expiration date through Oct. 29, 2011); 76 FR
18,616 (Apr. 4, 2011) (extending the expiration date until the
effective date of the final Congestion Management Rule for LaGuardia
Airport, John F. Kennedy International Airport, and Newark Liberty
International Airport but not later than Oct. 26, 2013).
\2\ The Order presently expires upon the effective date of the
final Congestion Management Rule at LaGuardia Airport, John F.
Kennedy International Airport, and Newark Liberty International
Airport, but not later than October 26, 2013.
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A different legal regime governing slots exists at DCA. The High
Density Rule (HDR) \3\ limits scheduled and unscheduled operations
there. The HDR permits carriers to sell or purchase slots at DCA with
FAA confirmation of the transaction.
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\3\ 14 CFR part 93, subparts K and S.
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On May 23, 2011, Delta and US Airways submitted a joint request for
a limited waiver from the prohibition on purchasing slots at LGA. The
carriers requested the waiver to allow them to consummate a transaction
in which US Airways would transfer to Delta 132 slot pairs (265 slots)
at LGA, and Delta would transfer to US Airways 42 pairs (84 slots) at
DCA, together with route authority to operate certain flights to Sao
Paulo, Brazil, and make a cash payment to US Airways. The proposed
transaction is described in more detail below.
We tentatively conclude that a waiver of the Order is warranted
because the potential benefits of the proposed transaction, as modified
by the conditions discussed below, outweigh its potential harms.
Standard of Review; Legal Authority
Because the proposed transaction involves the purchase of slots at
LGA, we must determine whether a limited waiver of the Order is
warranted. The FAA Administrator may grant an exemption from a rule (or
an order) only ``when the Administrator decides the exemption is in the
public interest.'' 49 U.S.C. 40109(b). The Administrator is also
authorized to ``modify or revoke an assignment [of the use of airspace]
when required in the public interest.'' 49 U.S.C. 40103(b)(1). Our
determinations on requests for waivers or exemptions are based on our
``public interest'' findings. 75 FR 7,307 and 75 FR 26,325.
Accordingly, in reviewing the carriers' petition for a waiver, we will
consider the impacts of the overall transaction as part of our ``public
interest'' analysis and determination.
The term ``public interest'' encompasses, at a minimum, the policy
objectives listed by Congress in Section 40101 of Title 49 U.S. Code.
Among other things, these include maximizing reliance on competitive
market forces, avoiding unreasonable industry concentration and
excessive market domination, and encouraging entry into air
transportation markets by new carriers. 49 U.S.C. 40101(a)(4), (6),
(9), (10), (12)-(13) and (d). These objectives are not exclusive; they
are factors to be considered (``among others'') by the Secretary in
carrying out his responsibilities and authorities. Moreover, these
objectives are included in the policies embodied in the Airline
Deregulation Act of 1978, Public Law No. 95-504 (92 Stat. 1705). The
Administrator may take these factors--including the fostering of
competition--into account when making his public interest
determination.
In the context of our public interest analysis, we will balance the
economic benefits of the transaction against any potential resulting
adverse economic consequences. Our standard does not require that we
determine that a transaction threatens no economic impairment, but
rather that any resulting adverse consequences are outweighed, in our
judgment, by the transaction's promised benefits.
In granting a waiver or exemption, we may impose conditions to
achieve our public interest objectives.\4\ Congress gave the FAA
Administrator broad powers to fashion orders to carry out aviation
programs. The Administrator's
[[Page 45314]]
general authority empowers him to ``take action [the Administrator]
considers necessary to carry out this part [49 U.S.C. chapters 401-
501], including conducting investigations, prescribing regulations,
standards, and procedures, and issuing orders.'' 49 U.S.C. 40113(a). In
furtherance of this authority, Congress expressly allowed the
Administrator to ``amend, modify, or suspend an order'' and to do so
``in the way * * * the Administrator decides.'' 49 U.S.C. 46105(a).
Accordingly, the Administrator may impose conditions on grants of
waivers or exemptions. Additionally, the Secretary of Transportation
may require conditions--such as divestitures of slots and/or other
assets, including route authority--on the approval of certain
transactions between airlines.
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\4\ See, e.g., South Dakota v. Dole, 483 U.S. 203, 208 (1987).
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The FAA has regularly relied on pro-competitive policy goals in
carrying out its slot programs.\5\ The FAA consistently has considered
the pro-competitive features of the Airline Deregulation Act in
exercising its slot allocation authority. Conditioning the grant of the
petition upon divestitures of slots in order to alleviate significant
airline market concentration (at DCA for US Airways and at LGA for
Delta) and dominance is consistent with past FAA policies.
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\5\ The FAA implemented a ``reverse lottery'' to reallocate
slots to new entrants and limited incumbents, just after enacting
the Buy-Sell Rule. 51 FR 8,632 (Mar. 12, 1986). In 1992, the FAA
amended the Buy-Sell Rule to expand protections afforded new entrant
and limited incumbent carriers. 57 FR 37,308 at 37,309 (Aug. 18,
1992); in 2000, in the context of phasing out the HDR at LGA, the
FAA specifically identified new entrant and limited incumbent
carriers to be eligible for a lottery for certain slot exemptions.
65 FR 75,765 (Dec. 4, 2000). The FAA, in the past O'Hare Congestion
and Delay Reduction Rule, granted preferential treatment to new
entrant and limited incumbent airlines in assigning new or withdrawn
slots interests. 14 CFR part 93, subpart B; 71 FR 51,400 (Aug. 29,
2006).
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2009 Transaction and Waiver Request
This petition for waiver and other relief follows a prior waiver
request by the same carriers. On August 24, 2009, US Airways and Delta
requested a waiver of the Order to allow a similar transaction to
proceed.\6\ As in this case, in the 2009 transaction, Delta and US
Airways proposed to transfer a substantial proportion of their
respective slot holdings at DCA and LGA to the other carrier. In 2009,
Delta proposed to transfer 84 slots at DCA to US Airways, in exchange
for which US Airways proposed to transfer 250 slots at LGA to Delta, as
well as an option to acquire an additional 30 slots in 2015. As in the
current proposed transaction, the 2009 proposal involved other, non-
slot considerations--including a transfer to US Airways of certain
international route authorities as well as gate, ticketing, and
operations facilities at LGA's Terminal C.
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\6\ The 2009 waiver request, our proposed response, all comments
on our response, and our final order with respect to that waiver
request are available in Regulations.gov, Docket FAA-2010-0109.
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The Department carefully evaluated the carriers' 2009 petition and
responded on February 18, 2010.\7\ In our initial response, we related
the carriers' assertion that the transaction would facilitate Delta's
establishment of a domestic hub at LGA and US Airways' enhancement of
its network at DCA; produce more efficiencies at LGA (including Delta's
plans to upgauge from US Airways' turboprops to jet aircraft; \8\
provide new and enhanced service to small communities; and benefit
consumers through enhanced network connectivity. Despite the
transaction's asserted benefits, we did not believe that the 2009
transaction should go forward unless the carriers made more slots
available for new entrants. Without a divestiture of slots by the
carriers at both airports, we found that the transaction could generate
adverse economic consequences--particularly due to the resulting
decrease in competition between Delta and US Airways and the barriers
to entry that limited the penetration of low cost competition at the
two airports.
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\7\ Notice of a Petition for Waiver of the Terms of the Order
Limiting Scheduled Operations at LaGuardia, 75 FR 7306 (Feb. 18,
2010).
\8\ Such upgauging could result in a significant increase in
passenger throughput without increasing congestion and delay.
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Balancing the benefits of the proposed transaction against its
potential adverse impact on competition, we proposed to approve the
transaction subject to the condition that the carriers dispose of 20
slot pairs (40 slots) at LGA and 14 pairs (28 slots) at DCA. We
proposed that the slots be transferred to carriers whose access to DCA
and LGA was otherwise limited. We established a procedure that would
allow eligible carriers to compete to purchase the slots being sold by
US Airways and Delta and permit the carriers to retain the cash
proceeds of the disposition.
We published our February 2010 notice for public comment. We
received extensive comments from Delta, US Airways, other carriers, air
carrier labor unions, airport authorities, public officials, and
members of the public. After reviewing those comments, we published our
final notice regarding the prior transaction on May 11, 2010 (May 2010
Notice).\9\
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\9\ Notice on Petition for Waiver of the Terms of the Order
Limiting Scheduled Operations at LaGuardia Airport, 75 FR 26,322
(May 11, 2010).
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In our May 2010 Notice, we granted the waiver request, subject to a
number of conditions, as set forth in our initial notice from February
of that year. Principally, we found that the public interest required
that the carriers divest themselves of 20 slot pairs (40 slots) at LGA
and 14 pairs (28 slots) at DCA. Moreover, we laid out a basic set of
requirements that should characterize any effective remedy involving a
disposition of slots at the two airports. We said that an effective
remedy must: (1) Provide a sufficient number of slots to allow other
carriers to mount an effective competitive response; (2) define the
pool of eligible carriers to include those with the greatest economic
incentive to use the slots as intensively as possible and exert
competitive discipline; (3) ensure that the bundles of divested slots
are suitable for a commercially viable service pattern and structured
proportionate to the slots that are part of the slot swap; and (4) not
cede slot distribution decisions to the parties themselves, who would
minimize the competitive impact on themselves and thereby reduce
consumer benefits. Our proposed order today follows these same
principles.
Delta and US Airways did not choose to go forward with the
transaction subject to our proposed conditions. Instead, in a July 2,
2010 filing, the carriers notified the Department of their intention to
appeal our decision to the DC Circuit Court of Appeals. They later did
so.\10\
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\10\ Delta Air Lines, Inc. and US Airways, Inc. v. Federal
Aviation Administration and U.S. Department of Transportation, Case
10-1153 (DC Cir. filed Jul. 2, 2010).
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2011 Transaction; Changed Economic and Industry Conditions
The transaction as now proposed by the carriers is structurally
similar to the transaction proposed in 2009. Under the transaction,
Delta would acquire 132 slot pairs (265 slots) at LGA from US Airways
and US Airways would acquire 42 slot pairs (84 slots) at DCA from Delta
and the rights to operate additional daily service to Sao Paulo, Brazil
in 2015. Delta would also make a cash payment of $65 million to US
Airways.
In their waiver petition, the carriers have presented the
Department with an analysis of the transaction's benefits. As outlined
below, many of the benefits they assert will accrue from the
transaction are the same as those that
[[Page 45315]]
we analyzed in 2009 and 2010. The carriers have also claimed that
changes in the economy and structure of the aviation industry at DCA
and LGA, since 2010, dramatically reduce the economic harms that we
viewed as potential adverse consequences of the transaction.
The carriers assert that the transaction will benefit consumers. At
LGA, they claim, it will enable Delta to create a new domestic hub by
consolidating its operations into an expanded main terminal facility,
increasing its LGA destinations, shifting short-haul service from John
F. Kennedy International Airport (JFK) to LGA, and improving
connectivity there. Delta states that it would add nonstop service and
replace US Airways' turboprop operations at LGA with larger aircraft,
which it argues would significantly expand output and increase
efficiency. At DCA, the carriers assert, the transaction would enable
US Airways to commence daily nonstop service to at least 15 new
destinations, improve connectivity, and utilize larger aircraft.
Additionally, the transaction would relieve US Airways of its
unprofitable flying obligations at LGA and allow it to transfer its LGA
facilities to Delta, resulting in a more efficient use of the terminal
facilities at LGA.
The carriers also highlight the fact that, since the time of our
review of their last proposed transaction, low-cost carriers (LCC) have
significantly increased their market penetration at both DCA and LGA.
The carriers state that JetBlue, AirTran, and Frontier have increased
the number of LCC slots at DCA by 46, thereby increasing the LCC slot
share percentage at that airport. They maintain that these holdings
increase the slot share of LCCs from 3.3% to 8.6% at DCA, exceeding the
6.5% LCC slot share that would have obtained under the divestiture
terms of our May 2010 Notice. At LGA, the carriers point out that
Frontier, AirTran, and Southwest recently acquired slots, for a net
increase of 18 LCC slots. They maintain that these holdings increase
the slot share of LCCs from 6.8% to 8.5% at LGA, closer to the 10.3%
LCC slot share sought in our May 2010 Notice. The carriers assert that
an economic analysis demonstrates that the proposed remedy, coupled
with the increased number of LCC slot holdings, would exceed the
competitive effects of the Department's May 2010 proposed divestitures
of 20 LGA slot pairs and 14 DCA slot pairs. They say that the
Southwest/AirTran merger will intensify competition in the Washington,
DC, and New York City areas.
Furthermore, the carriers assert, the United/Continental merger,
consummated on September 30, 2010, enhanced United's competitive
profile at both Newark Liberty International Airport (EWR) and
Washington Dulles International Airport, as well as at LGA and DCA.
Moreover, Delta states that this transaction would enable it to
establish a domestic hub at LGA, secure corporate accounts, shift
short-haul JFK service to international service, and thereby address
the competitive advantage secured by American Airlines/British Airways
through their antitrust immunity alliance.
Summary of Proposed Findings and Conditions
As described in more detail below, we tentatively find that the
proposed transaction, like the prior 2009 transaction, offers important
benefits to the public.\11\ At the same time, as before, we believe
that the proposed transaction could have an adverse impact on
competition, because of the reduction in competition between the two
carriers and their increased market share at the two airports, among
other things. In evaluating the public interest in this transaction, we
have carefully weighed and balanced the benefits and possible adverse
consequences of the transaction. While we remain concerned about those
possible consequences, as laid out in our 2010 notices, we believe the
transaction's promised benefits for the public--particularly in light
of the increased penetration of low cost carriers at the airports since
the time of our last review--are sufficient for us to conclude that the
requested waiver is in the public interest. Accordingly, we have
tentatively found that the transaction should be approved, subject to
the conditions set forth below, including requirements that the
carriers dispose of 16 pairs (32 slots) at LGA and 8 pairs (16 slots)
at DCA pursuant to the sale mechanisms described in detail below and
that they transfer the 265 LGA slots and 84 DCA slots in two phases so
as to attenuate the impacts of their new operations on their smaller-
sized competitors at the airports.
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\11\ Additionally, the FAA finds that the grant of the waiver
would not adversely affect safety. 14 CFR part 11.
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We note that the Department is evaluating this transaction under
its statutory authority alone. As described above, we are required to
determine whether or not, on balance, waiving the terms of the LGA
Order to allow the proposed transaction to proceed is in the public
interest. Our standard of review in this transaction is substantively
different from that of the Department of Justice, which acts under a
different statutory and regulatory framework. Our tentative conclusions
presented here are not binding on the Department of Justice, which must
evaluate the transaction under its own statutory authority.
Discussion
Developments at DCA
Since the Department last evaluated carrier slot holdings in
connection with the issuance of the May 2010 Notice, various service
changes have occurred at DCA, some of which involved an expansion of
service by low-cost carriers.
Low-cost carrier AirTran, which held 16 slots and slot
exemptions at DCA at the time of our earlier analysis, received 6 slots
from Continental as part of an exchange for operating authorizations at
EWR. The transfer was designated as temporary in nature, to expire
October 29, 2011, and Continental remains the slot holder of record. It
added a pair of off-peak slots allocated by the FAA \12\ and now
operates a total of 24 weekday slots from DCA. AirTran utilized the
additional slots from Continental to add frequencies to its Atlanta and
Orlando services.
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\12\ AirTran also received two slots from the FAA for Saturday
only operations.
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On March 31, 2010, JetBlue and American Airlines announced
an agreement for commercial collaboration that involved, inter alia, a
transfer of 16 slots at DCA from American to JetBlue. The transfer was
designated as temporary in nature, to expire October 29, 2011, and
American remains the slot holder of record.\13\ JetBlue also was
allocated one slot each in the 0600 and 2200 hour periods by FAA (which
periods are not fully subscribed and so still available to new entry).
Beginning November 1, 2010, JetBlue initiated service from DCA with
these slots, with seven daily nonstops to Boston Logan International
Airport (BOS) and one daily nonstop each to Fort Lauderdale-Hollywood
International Airport (FLL) and Orlando International Airport
(MCO).\14\ JetBlue's new service
[[Page 45316]]
competes primarily against US Airways and Delta on the DCA-BOS and DCA-
MCO routes, and against US Airways and Spirit on the DCA-FLL route.
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\13\ The arrangement also included a transfer, by JetBlue to
American, of 24 slots at JFK. The FAA limits the number of scheduled
operations at JFK and, under an Order, permits only leases, trades
or transfers through the duration of the Order. See 76 FR 18,620,
extending the duration of the Order from October 29, 2011 to the
effective date of a final congestion management rule at the three
New York City airports (JFK, LGA, and Newark Liberty International
Airport), or October 26, 2013.
\14\ The May 2010 Notice noted the pending American-JetBlue
agreement, stating that, if implemented, LCC's would increase their
interests to 5.2% of the DCA slots. 62 FR at 26,323. We also noted
that the transaction did not affect the concentration level of US
Airways at DCA, as the slots were being transferred to JetBlue not
by US Airways but by American, which would be its nearest rival at
the airport if the transaction were approved. 75 FR at 26,336.
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Another transaction affecting LCC presence at DCA came in
the wake of the 2009 acquisition of both Midwest Airlines and LCC
Frontier Airlines by Republic Airways Holdings Inc. Subsequent to the
Final Notice, Republic assigned 16 of Midwest's 18 slots to operations
marketed by Frontier (although Republic remains the holder of record of
the slots).\15\ Frontier utilizes these slots to provide service from
DCA to Milwaukee, Kansas City, and Omaha.\16\ The other two, which were
slot exemptions, were reallocated to LCC Sun Country Airlines by DOT,
where they are used to provide service to Lansing, MI.\17\
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\15\ It should also be noted that, on June 13, 2011, it was
reported that Republic was seeking to shrink its holdings in
Frontier Airlines to a minority stake by the end of 2014, based on a
tentative agreement with Frontier pilots. Associated Press, Republic
Airways Seeking New Investors for Frontier, Aims for Minority Stake
by End of 2014, Washington Post, June 13, 2011.
\16\ Through analysis of 2010 DOT Form 41 Origin and Destination
Data, we have confirmed that Midwest passenger traffic declined and
that Frontier traffic correspondingly increased in these markets
reflecting this reassignment from Midwest/Republic to Frontier.
Moreover, we have confirmed that Frontier has marketed these flights
at average yields that are consistent with LCC operations.
Accordingly, the 16 slots reassigned to Frontier have been recorded
by the Department as slots flown by LCCs.
\17\ DOT Order 2010-12-16 (December 10, 2010).
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In another development at DCA, on September 27, 2010,
Southwest Airlines and AirTran Airways announced their intention to
merge their operations through Southwest's acquisition of AirTran in a
stock and cash transaction. As noted above, at the time the Department
was analyzing the prior application, AirTran held and operated 16 slots
and slot exemptions at DCA, which it used to provide service to
Atlanta, Orlando, Milwaukee, and Ft. Myers, FL. Southwest is an LCC
that has grown dramatically since 1990 to become the largest U.S.
domestic carrier when measured by DOT Form 41 segment transported
passengers. The acquisition of AirTran will bring to DCA Southwest's
brand recognition, passenger loyalty, and access to its route network,
which together should have a strong positive and tangible effect on
overall competition at DCA. Although entry into AirTran's Atlanta hub
appears to be Southwest's main objective in pursuing the deal, the
acquisition also expands Southwest's network in one consolidated move,
adding a number of additional unconnected city pair markets into which
it could expand its presence. The combined carrier therefore provides
an expanded LCC capability at DCA to provide passengers with additional
travel opportunities on new online routes through a larger overall
network.
The Joint Applicants also argue that the merger between
United and Continental, as well as the immunized American Airlines/
British Airways alliance, will intensify competition.\18\ Considering
first the UA/CO merger and its impacts at DCA, it should be noted that
the merged carrier has only a 5% share of Origin & Destination
(``O&D'') passengers at that airport, which, with a legacy cost
structure, gives it limited ability to seriously impact competition
there.\19\ Moreover, while there is limited data from which to reach
conclusions at this point, our review of departures and average seats
at DCA since the UA/CO merger shows a decline in the carrier's overall
departures, while its yields dropped very slightly between 2009 and
2010. We do not see from these indicators that the merger has been as
relevant to the slot swap competition issues before us as the other
developments noted above. Similarly, we do not see the AA/BA alliance
as significantly impacting competition at DCA, which of course is
essentially domestic in character. As shown in Table 3, American's
share of departures at DCA declined from 15.2% to 12.2% percent from
first quarter 2010 to first quarter 2011, and its seats from 15.5% to
13.9%, figures that do not suggest increasing competitiveness.
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\18\ Petition for Waiver and Other Relief, May 23, 2011 at 13.
\19\ DOT Form 41 Origin and Destination Survey data.
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Developments at LGA
As at DCA, various service changes have recently occurred at LGA,
some of which involved an expansion of service by low-cost carriers.
However, these changes were not as significant as those at DCA.
Late in 2009, AirTran Airways began offering LGA-
Indianapolis and increased LGA-Orlando flights with 4 LGA slots it
acquired from Continental, although it now only operates LGA-MCO on
Saturdays and Sundays. This acquisition was another part of the
agreement, also noted above, by which it transferred to Continental 13
slots at EWR, as well as its lone gate at that airport. The
Indianapolis and Orlando flights compete with offerings from Delta;
JetBlue also has LGA-MCO flights.
The Compass Lexicon study, attached to the Petition for
Waiver as Appendix A, notes that ``Southwest acquired one slot from the
FAA.'' \20\ They appear to be referring to the allocation by FAA, in
mid-2009, of one 0600 LGA departure slot, which increased Southwest's
operating authorizations there from 14 to 15. Southwest had acquired
the original 14 slots at LGA in its acquisition of ATA Airlines, and
with the 0600 departure and an arrival in the 2200 hour that does not
require a slot, it is able to offer a total of 8 roundtrips from LGA.
Southwest utilizes these slots to provide service to Midway and BWI
airports.
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\20\ Petition for Waiver and Other Relief, May 23, 2011,
Appendix A at 10.
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As part of an arrangement already described above, in
November 2009 Republic Airways acquired Midwest and began operating
Midwest's slots. In 2010, Frontier, another Republic Airways Holdings
LCC, began operating 13 slots at LGA that had formerly been operated by
Midwest. With these 13 slots, Frontier markets flights to Milwaukee and
Kansas City. We have confirmed that Midwest passenger traffic declined
in those markets and that Frontier traffic correspondingly increased
during the fourth quarter of 2010, and that Frontier has marketed those
flights at average yields that are consistent with LCC operations.
Accordingly, the 13 slots reassigned to Frontier are being treated by
the Department as slots flown by LCCs.
The Southwest-AirTran merger should also, as the joint
applicants claim, intensify competition at LGA. Prior to the merger,
AirTran had a 5.7% LGA seat share and Southwest a 2.6% share. As at
DCA, the merger will bring to LGA Southwest's brand recognition,
passenger loyalty, and access to its route network, which together
should have a positive and tangible effect on overall competition at
the airport. Also, if Southwest chooses to upgauge to its B-737s in
some markets, it can increase seat capacity per flight by 15 seats over
AirTran's average aircraft seating.
As noted above, the Joint Applicants claimed that the UA/
CO merger and the immunized AA/BA alliance will strengthen competition
at New York as well as in Washington. Again, there is not much yield
data available to support this contention, and whatever impacts there
are in New York will be felt more at EWR and JFK than at LGA. A review
of American, United,
[[Page 45317]]
and Delta departures at LGA indicate that over the last two years it is
Delta that has most expanded departures at LGA, while American's
departures have risen to a much lesser degree and United's have
remained essentially the same. As above, we do not see from these
indicators that these developments have been as relevant to the slot
swap competition issues at LGA before us as the other factors noted
above.
The tables below capture the changed circumstances described above,
by depicting ``original'' and ``current'' competitive positions in both
slots and number of departures, seats, and passengers for the carriers
serving DCA and LGA: \21\
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\21\ Republic Airways Holdings holds 113 total slots at DCA, as
the result of a sale/licensing transaction with US Airways. Its
subsidiaries largely operate from these slots under pay-for-service
arrangements with US Airways. All 113 are commuter slots, rather
than air carrier slots. Republic's operations from these are
included within US Airways' results in the tables for DCA.
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BILLING CODE 4910-13-P
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The Effects of the Proposed Swap: US Airways at DCA
If the planned transaction is approved without change (i.e., the
additional 16 slot divestitures offered by the carriers are not
required as a condition for approval), US Airways' slots at DCA would
increase from the 254 held at the time of the Department's earlier
analysis to 347. An additional 113 slots are held by Republic Airways
Holdings under a financing deal with US Airways and operated by it for
US Airways on a fee-for service basis. US Airways states that with the
new slots at DCA it will provide service to at least 15 destinations it
currently does not serve, some of which currently have no nonstop
service from that airport.\22\ It also plans to increase the number of
seats offered at DCA by filling the new capacity with larger regional
jets and mainline jets, claiming that it can gain over 1 million new
seats without adding to congestion at the airport. Delta states that
with the slots it retains it will continue to serve its seven hubs,\23\
maintain its shuttle service to LGA, and continue service on its AIR-21
slot exemption routes.\24\
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\22\ In a 2009 press release addressing the intended new service
under the previous petition, US Airways identified 15 new
destinations as Cincinnati, Des Moines, Grand Rapids, Madison (WI),
Montreal, Miami, and Ottawa (all of which then had daily nonstop
service from DCA), and Birmingham (AL), Islip (NY), Ithaca (NY),
Little Rock, Myrtle Beach (SC), Pensacola, Savannah, and Tallahassee
(all of which at that time had no daily nonstop service from DCA).
``US Airways announces slot transaction with Delta Air Lines,''
August 12, 2009. The present petition reiterates the commitment to
serve at least 15 new destinations, but does not specify whether
those will be the same as the ones identified in 2009.
\23\ Delta's seven hubs are New York/JFK, Atlanta, Memphis,
Detroit, Minneapolis/St Paul, Cincinnati, and Salt Lake City.
\24\ Delta states it would serve its ``AIR-21 routes.'' Delta
was awarded 2 slot exemptions under AIR-21 for service to Salt Lake
City; in addition, however, Atlantic Southeast flies as Delta
Connection to Jackson, MS, with 2 DCA slot exemptions awarded under
AIR-21, and Comair flies as Delta Connection to Lexington, KY, with
2 Vision-100 slot exemptions.
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US Airways would increase its dominance at DCA in terms of slot
holdings with the addition of the 84 slots. Table 5 below shows
comparative slot interests of the carriers serving DCA, were DOT to
grant the petition without requiring any additional divestitures. In
this scenario, the slot holdings of US Airways would increase to 40.8%
(54.1% if those held by Republic Airways Holdings but operated for US
Airways are included), while those held by Delta (plus commuter
affiliates) would decline to 13.6% and those held by LCCs would stay at
8.5%.
[[Page 45323]]
[GRAPHIC] [TIFF OMITTED] TN28JY11.004
The Effects of the Proposed Swap: Delta at LGA
Delta states that, with 265 new slots, it would almost double its
nonstop destinations from LGA to more than 70 cities. Further, it would
create a domestic hub at that airport, and increase the number of
customers served without increasing congestion by using larger capacity
aircraft than US Airways currently uses with the slots. It would
achieve this through use of an all-jet fleet, replacing the turboprops
that are currently utilized by US Airways. With the slot swap Delta
will likely focus on expanding its domestic network out of the enhanced
LGA hub and concentrate its JFK operations on international and long-
haul domestic service.
[[Page 45324]]
Delta states that it would also offer service to many destinations
that are not currently served nonstop by either Delta or US Airways. US
Airways will retain its shuttle service to Boston's Logan Airport and
DCA and continue flights to Charlotte, Philadelphia, and Pittsburgh. US
Airways claims that its smaller aircraft operations at LGA have been
unprofitable. It contends that swapping assets from there to enhance
its successful operations at DCA will improve its profitability by more
than $75 million.
Delta would operate a total of 18 of 20 gates in US Airways'
Terminal C, and add one additional gate to its existing ten at Delta's
Terminal D, for a total of 29 gates in the two terminals. Delta would
then build a 600-foot connector between the two terminals so that it
can operate as a single terminal from a passenger perspective. A
``significant number of construction jobs'' would be created in
connection with this work. Delta will take over the current US Airways
Club in Terminal C and convert it into a Sky Club to complement the
existing club in Terminal D.
US Airways on the other hand, will have 6 gates once the terminal
is reconfigured to add more ramp positions, plus 3 parking positions
for regional jets. US Airways would continue to offer high-frequency
schedules from LaGuardia to its Charlotte, NC, and Philadelphia hubs
and Pittsburgh with more than 60 weekday flights. All US Airways
flights from LaGuardia would continue to arrive and depart from nine
gates and parking positions in Terminal C. US Airways will build a new,
5,000-square foot US Airways Club.\25\ Delta and US Airways will
continue to compete with Shuttle Services to Boston and DCA (Delta at
its 6 gates in the Marine Air Terminal). Finally, subject to Government
approvals and to other conditions, Delta will convey to US Airways, for
purposes of intended US Airways flights to Brazil beginning in 2015,
certain Brazilian route authorities and slots at Sao Paulo, Brazil.
---------------------------------------------------------------------------
\25\ Delta, US Airways Announce New Agreement to Transfer Flying
Rights in New York and Washington, DC, Delta, and US Airways Press
Release, May 23, 2011.
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Delta would accede to a dominant position in terms of slot holdings
at LGA, with the addition of the 265 slots (even were the 32 slots
required by the Department to be divested). Table 6 below shows
comparative slot holdings of the carriers serving LGA, without any
additional divestitures. As can be seen, under the proposal Delta's
slot share would almost double, from 24.2% to 47.5%. American would
remain second, at 20.6%. US Airways' share would decrease from 34.8% to
11.7%. The table also reflects the increase in LCC share, due to the
developments noted above, from 6.9% to 8.2%.
[[Page 45325]]
[GRAPHIC] [TIFF OMITTED] TN28JY11.005
BILLING CODE 4910-13-C
Description of the Claimed Benefits of the Swap
As noted above, the Joint Applicants contend that approval of the
slot swap would enable both carriers to more efficiently operate at the
airports and permit more passengers and destinations to be served. They
argue that efficiencies will occur through upgauging of aircraft size
at both LGA and DCA, thereby increasing throughput and competition
while reducing congestion and delay. In addition, they contend that the
facilities transfer will enable Delta to create a seamless hub at LGA
and facilitate enhanced competition and preserve and enhance small
community access at both LGA and DCA.
For the reasons stated below, we tentatively agree with the Joint
Applicants' claimed benefits discussed below, and find that these
claimed benefits likely would be realized if the transaction were
implemented as remedied. Our tentative view derives in large part from
concerns that some of the slots at issue in this transaction are
currently being used sub-optimally and inefficiently, both from the
perspective of the carriers holding them as well as from the
perspective of the public interest.
Benefits at DCA:
Expanded US Airways Service--With the addition of 84
slots, US Airways will be able to initiate daily nonstop service to at
least 15 new destinations from DCA. Some of these routes are currently
served by other carriers from other Washington area airports and some
of these routes do not currently have any daily nonstop service. These
destinations include several small, medium-sized, and larger
communities.\26\ The airline anticipates an increase of approximately
20 to 25 percent in passenger enplanements at DCA as a result of new
flights and schedule improvements. This projected service would not be
affected by the
[[Page 45326]]
proposed divestitures if they come from Delta's complement.
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\26\ While Delta and US Airways have made public some of their
new intended services, including service to small communities, the
carriers have not released all intended service changes and are not
obligated to implement or retain over the longer-term any of the
proposed services in new markets.
---------------------------------------------------------------------------
Improved connectivity--US Airways contends that it will
afford DCA originating passengers more nonstop destination service and
provide additional connecting passenger service through an expanded
network.
Up-gauging and up-grading service--US Airways plans to up-
gauge aircraft and offer customers more dual class service. It will use
larger aircraft, including more large regional and mainline aircraft
with first-class service on large regional jets, on many routes by
2012.
Benefits at LGA:
New domestic hub at LGA--With the additional slots and
facilities it will acquire under the proposal, Delta will establish a
new domestic hub at LGA. A hub presence will allow increased connecting
opportunities, improving travel options for passengers across Delta's
network. It will also permit increased operations to smaller
communities, which are often only able to sustain service through hub-
and-spoke operations. Delta submitted a study by Compass Lexecon that
asserted that Delta's expansion at LGA would produce more than 6,000
new connecting opportunities for their passengers at that airport.
Consolidation of LGA operations in one main terminal
facility--As noted above, Delta will link its Terminal C and Terminal D
gates with a 600 foot connector. This will provide added convenience to
many passengers, particularly ones with connecting flights, and allow
shorter connecting times on some flights.
Improved Competition against US Airways at Philadelphia
and United/Continental at Newark--The carriers claim that Delta's
development of a hub at LGA will create ``important'' new competition
against US Airways' hub at Philadelphia and United/Continental's at
Newark. Philadelphia International Airport is approximately 100 miles
from LGA and constitutes a distinct market. However, the operation of a
stronger hub for Delta at LGA will provide additional options for
travelers in the greater New York area, and should provide some
competitive counterweight to the strong UA-CO hub at Newark.
Delta Will Expand Service at LGA--Delta will approximately
double the number of within perimeter nonstop destinations served from
LGA and shift short haul service from JFK to LGA, freeing up JFK for
longer-haul flights.\27\
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\27\ While it is true that Delta is proposing to expand its
operations significantly at LGA, many of the new flights would
represent backfills in markets being vacated by US Airways as it
moved operations to DCA. Thus, while it might be ``new'' service on
Delta, it may not be ``new'' service for the communities affected.
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Delta Will Increase the Available Seat Capacity of New
York Airports--US Airways currently operates 39% of its flights with
turboprop aircraft configured with 37 or fewer seats. Delta plans to
utilize an all-jet fleet at LGA. Replacing US Airways' turbojets with
larger jets will increase available capacity, estimated to equate to a
2% overall increase in New York seat capacity.
The Joint Applicants' Compass Lexecon study estimates the magnitude
of capacity benefits in terms of roundtrip seat capacity increases of
2.5 million at DCA and 4.4 million at LGA.\28\ The study further
estimates that the consumer benefits from the increased flying
generated by improved network connectivity and service at approximately
$126 million annually for passengers flying to and from LGA and at
approximately $27 million for passengers flying to and from DCA, for a
total of approximately $153 million at both airports combined. They
cite another $33 million in estimated benefits to consumers flowing
from increased airport operational efficiency resulting from upgauging
from turboprop aircraft to jet aircraft at LGA. In addition, the Joint
Applicants argue that the facilities transfer will enable Delta to
create a seamless hub at LGA and will facilitate enhanced competition
and preserve and enhance small community access at both LGA and DCA.
While these estimates are of course subject to customary assumptions
and estimations, we do not believe they are unreasonable for the
purposes here.
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\28\ The benefits data and analyses referenced in the Waiver
Application are derived from the study prepared by Compass Lexecon
in November 2009 and submitted to the Department on March 22, 2010.
See Consumer Benefits from the Proposed US Airways Delta Slot
Transaction, included in Joint Appendix to Comments of Delta Air
Lines, Inc., and US Airways, Inc., Docket No. FAA-2010-0109, dated
March 22, 2010. That study was based on Delta and US Airways
schedules from a peak day (Thursday) in Summer 2009.
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Perceived Costs and Risks of the Transaction
Although there are clearly consumer benefits that would result from
the proposed transaction, as we pointed out in the Final Notice there
are also aspects that could pose economic risks to consumer interests.
In particular, the Department must remain mindful of concerns regarding
the potential for higher fares due to increased market concentration of
the dominant carriers at both DCA and LGA.
In their filings, US Airways and Delta have not challenged the
calculations stated in the May 2010 Notice that, if the transaction
were approved as now proposed, the proportion of US Airways' share of
slots and departures at DCA, and Delta's share of slots and departures
at LGA, would significantly increase.
In the Department's earlier analysis, we determined that there were
increased levels of airport concentration, which together with (1) An
increase in the number of monopoly or dominant markets in which
increased pricing power could be exercised,\29\ (2) the prospect for
higher fares in some markets, and (3) the potential for use of
transferred slot interests in an anti-competitive manner,\30\ warranted
a conditioning of approval on the carriers' agreement to divest a
number of slots. Given all of these concerns, we asserted that limited
divestitures at both airports would cause an injection of additional
competition from other carriers, which could be effective in mitigating
these prospective harms.
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\29\ Our analysis found that US Airways and Delta tended to
charge higher relative fares where they operate monopoly or dominant
routes from airports where they have strong presence. While Delta
tended to price more competitively at LGA (where its position was
less dominant than US Airways at DCA), US Airways, holding the
highest current share of slot interests and departures at DCA,
charged on average 124 percent of the Standard Industry Fare Level
(SIFL), a cost-based index that the Department has used historically
to assist in its evaluation of pricing. However, in markets where it
held a 95 to 100 percent share of nonstop departures, US Airways
charged substantially more. 75 FR at 7,309-7,310.
\30\ Under their proposal, Delta and US Airways are not
committing to any particular markets for defined periods. As we
noted earlier, they would be free, as is any other carrier, to
discontinue routes that are being proposed and to initiate new
routes elsewhere. With that freedom, they could, if they so chose,
use additional slots to target smaller competitors. We expressed
concern that competitors, especially low-cost carriers at DCA that
are tied to specific markets through slot exemption awards, might be
unable to successfully respond.
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Our analysis also noted the very low levels of LCC operations then
prevailing at DCA and LGA, calculating that LCCs had only a 3.3 percent
share of slot interest holdings at DCA and a 6.9 percent share of slot
interest holdings at LGA. Because LCC's created the most competitive
impact at the airports,\31\ we required that, in order to minimize the
overall number of divestitures required while maximizing the
competitive impact of those divestitures, the carriers
[[Page 45327]]
divest slots to qualified new entrants and limited incumbents, which
are largely LCCs. Through this mechanism, we believed the economic
efficiency of the slot utilization at both airports would be maximized
through the operation of more seats at lower fares per slot than by
Delta or US Airways, and would also minimize the total number of slot
divestitures required to remedy the anticompetitive effects of the
transaction.
---------------------------------------------------------------------------
\31\ Our analysis cited studies of the domestic U.S. airline
industry demonstrating that entry by low-fare carriers dramatically
lowers fares and increases the volume of passengers carried in a
market. See, 75 FR at 7,309.
---------------------------------------------------------------------------
Accordingly, in the May 2010 Notice, we approved the prior waiver
application subject to the condition that 40 LGA and 28 DCA slots be
divested via a DOT-approved process.
Changed Conditions Since the May 2010 Notice Was Issued Have Not
Eliminated Competitive Concerns
As discussed above, the Joint Applicants have claimed that the
Department's earlier competitive concerns have already been addressed
as a result of significant increases in LCC penetration that have
occurred at both airports since the May 2010 Notice was issued.
(Notwithstanding that claim, they have offered to divest up to 32 slots
at LGA and 16 slots at DCA through a DOT process if necessary to
alleviate any ``lingering'' competitive issues.)
LCC entry and increased presence at both airports have not
addressed all of our competitive concerns. While we have found evidence
that increased LCC presence at both airports has a positive impact on
the competitive structure at these airports, additional remedies,
including divestiture of slots and the implementation of the slot
transfer between the applicants in tranches, are necessary to further
address competitive concerns.
We agree that, at DCA, recent developments have added 44 slots to
the LCC listings, increasing their percentage of slot operations from
3.3% to 8.5%. Similarly, recent developments at LGA have added 15 slots
to LCC listings, increasing their percentage from 6.9% to 8.2%. LCC
departures, seats, and passengers have, with one exception, all
increased as well at DCA and LGA. At DCA, LCC departures from first
quarter 2010 to first quarter 2011 increased from 4.7% of the total to
7.1%; seats over the same period increased from 6.8% to 9.2%; and
passengers over the same period increased from 7.6% to 10.3%. At LGA,
the comparable statistics are departures, 9.9% increasing to 10.0%;
seats, 15.2% declining to 14.9%; and passengers, 17.0% increasing to
18.2%. See Tables 3 and 4.
In addition, we looked at the competitive impact of the added LCC
services, particularly at DCA. There, the entry of JetBlue into the
DCA-Boston market in the fourth quarter of 2010 was especially helpful
in gauging the impact of new LCC entry into a major market in which US
Airways was by far the dominant carrier.\32\
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\32\ For example, in the second quarter of 2010, US Airways
carried almost 70% of the passengers in this market, trailed by
Delta at 18%.
---------------------------------------------------------------------------
During the first three quarters of 2010, the average passenger
weighted yields in DCA -BOS were 62 cents, 59 cents, and 53 cents
respectively, with US Airways' averages being 68 cents, 63 cents, and
55 cents. With an average weighted yield over all DCA markets for these
quarters at 22 cents, this was clearly a lucrative market for carriers,
and especially so for US Airways. JetBlue entered the market
aggressively in October 2010, carrying over 48,000 passengers that
quarter with highly competitive fares that yielded only 24 cents per
mile. US Airways' yield that same quarter--the last for which we have
data--dropped from 55 cents to 44 cents, with overall average passenger
weighted yields in the market falling from 52 to 38 cents. Removing
seasonality concerns, US Airways' passenger weighted yield fell 37%
from 4th quarter 2009 to 4th quarter 2010--from 70 cents to 44 cents.
This data demonstrates JetBlue's entry enhanced competition and
significantly reduced fares. Its presence continues to have a
disciplining effect on fares: our check of available one-month advance
purchase economy fares showed JetBlue charging $69 one-way, with US
Airways, Delta, and United all matching.\33\
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\33\ DCA-BOS nonstop fare for travel on July 29, 2011, per
ORBITZ Web site information as of June 29, 2011.
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A similar, although less significant, demonstration of LCC
competitive influence appears in the LGA-IND market. In 2009, US
Airways carried approximately 39% of passengers in this market at an
average yield of 27 cents, while Delta/Northwest carried 47% of
passengers at an average yield of 28 cents. AirTran initiated service
on November 4, 2009 following its acquisition of 6 slots from
Continental, four of which were utilized in the LGA-IND market. After
AirTran's entry into the market, the average passenger weighted yield
dropped from 29 cents to 22 cents and remained at approximately 19
cents through 2010. AirTran's passenger share rose from 8% in 2009 to
35% in 2010 while Delta/Northwest's yields declined from 28 cents to 19
cents, and US Airway's yields declined from 27 cents in 2009 to 20
cents in 2010. Overall, with the entry of AirTran in the LGA-IND market
the average passenger weighted yield in the market declined 29% between
2009 and 2010. These two impacts illustrate the potential beneficial
effects that other LCCs may be able to bring to DCA and LGA markets if
afforded entry by slots being divested in the present case.
While the Department considers these developments very encouraging,
they do not persuade us that our original concerns regarding the
transaction are no longer valid or that additional remedies are no
longer appropriate or necessary. First, many of the incremental LCC
slots are being operated under temporary or potentially reversible
circumstances. At DCA, the slots noted as being transferred from legacy
carrier American to LCC JetBlue remain technically held by American on
FAA's listing, and their agreement could expire as early as this fall.
The same is true for the slots transferred between AirTran and
Continental. The former Midwest slots at both airports that were
``reassigned'' by Republic to Frontier marketed flights can presumably
be ``reassigned'' back to Republic if appropriate conditions presented
themselves. In addition, some of the other slots shown as transferred
to LCCs are during the early or late hours when slots are not fully
subscribed and so their use by LCCs does not present as much a
competitive discipline as better timed slots might. Moreover, the
Department's objective here is not to simply increase the shares of
LCCs, but, as we set out at various points in the May 2010 Notice, also
to protect against the use of market power by dominant carriers in a
potentially anticompetitive manner.
Claims That Nearby Metropolitan Airports Have a Disciplining Effect
Remain Unpersuasive
In addition to pointing to LCC growth at DCA and LGA, the Joint
Applicants reassert that competition among the three airports in the
Washington area and the three in the New York City area exerts a
disciplining influence on the respective fares at DCA and LGA.\34\
Thus, in the New York City market, they argued that, while flights at
LGA are generally closer substitutes for one another than are flights
at EWR or JFK, flights from EWR and JFK ``are still relevant'' to a
discussion of competition at LGA. In an effort to address the specific
situations at hand, they offered a modified version of the earlier
study they presented to attempt to measure the impact of competition
from
[[Page 45328]]
Southwest and other LCCs at DCA/LGA and at adjacent airports.
Normalizing the ``competitive effect'' of Southwest at the same airport
to a value of 1.0, the modified version went on to specify the relative
competitive effect of service by other LCCs at the same airport, as
well as the effects of Southwest and of the LCCs from adjacent
airports. A summary table indicated that, for example, the competitive
effect of an AirTran flight at the same airport was 0.247, while that
of JetBlue at an adjacent airport was 0.091.
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\34\ Delta and US Airways' Comments of March 22, 2010, Appendix
B, Analysis of Relevant Airport Groupings. Docket No. FAA-2010-0109.
---------------------------------------------------------------------------
In our May 2010 Notice, we addressed the findings of the earlier
study, expressing concerns that its methodology was flawed in a number
of fundamental respects. The modified version put forward here does not
appear to have corrected these flaws. Moreover, not only are the
statistical bases for the new conclusions not presented, but the
results show anomalies that are not explained.\35\ In sum, as with the
earlier presentation, we are not prepared to accept the conclusions as
submitted and to agree with the Joint Applicants that existing or
potential competition from adjacent airports would satisfactorily
address the need for remedies in this case.\36\
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\35\ Why, for example, would JetBlue have a much stronger
competitive effect than Air Tran at the same airport (a 0.635 factor
vs. a 0.247 factor), but a significantly lower effect than AirTran
from an adjacent airport? (0.091 vs. 0.164).
\36\ That said, we can say as we did in the May 2010 Notice that
yields (i.e., revenue per passenger mile) remain substantially
different among these airports, and that if the airports were
effective economic substitutes for all passengers, there would
result a greater self-equalizing of yields and the yield spreads
would not differ so significantly. We also recognized that there
does exist a low level of competition among the Washington and New
York City area airports, but at an insufficiently low level such
that one airport can exert enough competitive influence on the fares
at another airport to substantially reduce yield disparities among
the airports and constitute a true substitute for it. We continue to
believe that is the case.
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Evaluation of Risks and Benefits
As discussed above, the proposed transaction, like the prior 2009
proposal, offers important benefits to the public. Nonetheless, we
found earlier that the potential for harm was substantial, particularly
in the increased levels of concentration at the two airports.
Accordingly, we placed conditions for approval on the divestiture of 40
slots at LGA and 28 slots at DCA. The primary issue before us is
whether, because of the increased penetration by LCCs at the airports
since the time of our last review, the public interest can be
adequately protected at this time with no or fewer divestitures being
required.
In evaluating the public interest in this transaction, we have
carefully weighed the benefits and possible adverse consequences of the
transaction. We do not believe that the transaction can be approved
without divestitures being required. The transaction may give rise to
very different levels of competitive harm at each airport, and the
post-transaction market share levels are high, particularly at DCA.\37\
Accordingly, we have tentatively found that conditions for approval
remain necessary. These include a requirement that the carriers not
only dispose of 32 slots at LGA and 16 slots at DCA pursuant to the
sale mechanisms described in detail below, but that they begin
operations of the transferred slots in two phases so as to attenuate
the impacts of their new operations on their smaller-sized competitors
at the airports.
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\37\ With Republic's holdings included, US Airways would hold
54% of the slots, with its closest competitor, American, holding
12.3%. At LGA, Delta's share would be 47.5% without further
divestitures, with its closest competitor (also American) at 20.6%.
See Table 6.
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Remedies
Divestiture
For these reasons, notwithstanding the favorable impacts of
increased LCC competition at both airports, we tentatively condition
the grant of the requested waiver on the divestiture of the slots as
set out below. These total 32 slots at LGA (16 arrival and 16
departure) and 16 slots at DCA.
We propose that the slots be sold by the carriers and that the
proceeds of the sales be collected and retained by the carriers. We
tentatively select this method, rather than one whereby the FAA would
withdraw the slots and reallocate them by lottery (or similar means) to
new entrant and limited incumbent carriers. A sale would facilitate the
Joint Applicants' intentions to maximize the value of their slots as
they initially intended and conforms to the High Density Rule
provisions at DCA, which permit slots to be purchased or sold. 14 CFR
93.221(a).
These slots would be divested, in accordance with the procedures
proposed below, to limited incumbent and new entrant carriers having
fewer than five percent of the total slot holdings at DCA and LGA
respectively, and that do not code share to or from DCA or LGA with any
carrier that has five percent or more slot holdings. We also propose
that carriers eligible to participate in the purchase of divested
shares not be subsidiaries, either partially or wholly owned, of a
company whose combined slot holdings are equal to or greater than 5
percent at DCA or LGA, respectively.\38\ The effects of these
additional divestitures are as set forth below:
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\38\ An anomaly in this regard appears to be Frontier, which is
wholly owned by Republic but yet has a discretely different LCC
business plan. As we discussed above, Frontier's operations at DCA
and LGA have been consistent with LCC yields, and have had useful
competitive impacts at both airports. Moreover, with the acquisition
of AirTran by Southwest, the number of LCCs has diminished, and
Frontier has become the third largest LCC after Southwest and
JetBlue. DOT's Form 41 Origin and Destination Passengers for 2010
shows Southwest/AirTran with a total of 87,025,480 domestic
passengers, JetBlue with 18,548,950, and Frontier with 5,317,150.
Anticipating that Frontier's presence as an eligible bidder will
help to stimulate and maintain competition at these airports, we
will tentatively exempt Frontier from the ``no subsidiaries''
requirement, subject to any slots it might purchase being held and
operated by Frontier and Frontier retaining its LCC business plan.
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BILLING CODE 4910-13-P
[[Page 45329]]
[GRAPHIC] [TIFF OMITTED] TN28JY11.006
The impacts of the divestitures at LGA are shown in Table 8:
[[Page 45330]]
[GRAPHIC] [TIFF OMITTED] TN28JY11.007
BILLING CODE 4910-13-C
Implementation in Tranches
We are concerned that, were US Airways and Delta to immediately
commence service with the full complement of the newly transferred
slots at DCA and LGA, respectively, the successful start-up or expanded
service offered by the new entrant or limited incumbent receiving the
divested slots could be placed at competitive risk.
We believe that the ability of these new services to establish a
market foothold on any new routes that the carriers receiving the
divested slots choose to serve from either DCA or LGA would be
facilitated by a requirement that the slots being transferred between
the applicants be spread over a period of time following the completion
of the mandated slot divesture.
As a result, we are proposing to further condition our approval of
the transaction on the Joint Applicants' agreement that the transferee
Joint Applicant will operate \39\ none of the newly acquired slots
included in their Agreement during the first 90 days after the closing
date for the sale of the divested slots. Furthermore, no more than 50
percent of the total number of slots included in the Agreement could be
operated by the transferee Joint Applicant between the 91st and the
210th day following the closing date for the sale of the divested
slots, after which time the transferee would be free to operate the
remainder of the slots.
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\39\ These limitations apply to the operation of the slots by
the acquiring carrier or by any other carrier on behalf of the
acquiring carrier.
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We believe that these restrictions will afford the services that
result from the sale of the divested slots a limited, but reasonable,
period of time to advertise their presence in any new markets in which
they are planning to offer service, begin selling tickets, and commence
operations. Limiting the resources by which the applicants could
immediately challenge any service using divested slots during the
initial months of the transition will, in our view, provide greater
assurance that the remedial competitive services that we sought to
encourage by requiring the slot divestiture in the first place will
prove to be successful.
Eligible ``Bidders'' for Divested Slots
We tentatively find that the eligible bidders for the divested
slots must be carriers having fewer than five percent of total slot
holdings at DCA and/or LGA, do not code share to or from DCA or LGA
with any carrier that has five percent or more slot holdings or are
involved in a code-share relationship at DCA/LGA with carrier(s) that
also would not qualify as eligible bidders, and are not subsidiaries,
either partially or wholly-owned, of a company whose combined slot
interest holdings are equal to or greater than five percent at LGA and/
or DCA.\40\ Based on FAA slot holding data, incumbent carriers at DCA
that would qualify under these limitations are AirTran, Spirit, Sun
[[Page 45331]]
Country, JetBlue and Frontier. At LGA, incumbent carriers that would
qualify are AirTran, Southwest, Frontier, JetBlue, and Spirit. In
addition, of course, any carrier not currently holding slot interests
at the respective airports and otherwise meeting the criteria would be
eligible under our proposal.
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\40\ As noted above, Frontier qualifies as an eligible bidder
due to its unique business plan and relationship in the Republic
structure.
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Bundles for Divested Slots
We tentatively find that bundling the packages of slots for sale
will enable an eligible carrier to purchase sufficient slots to operate
competitive service, with times spread across the day. Bundling assists
a purchasing carrier to initiate or increase service in a way that
meets its operational needs and enhances competition.\41\
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\41\ See also, 75 FR at 7,311 and 75 FR at 26,337.
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Because the number of overall divested slots is now fewer than we
originally proposed in the Final Notice and competitive concerns
remain, we believe it appropriate to maximize the potential competitive
discipline of the slots by packaging more slots in fewer bundles,
rather than fewer slots in more bundles, as compared to the bundles we
adopted in the May 2010 Notice.\42\ We propose to bundle for sale 8
slot pairs at each airport, meaning that there would be one bundle at
DCA and two bundles at LGA. In addition to maintaining high competitive
discipline levels, we tentatively believe this arrangement would be
preferable to dividing the slots into smaller packages that could cause
underutilizations or inefficiencies--at gates and terminal facilities,
with aircraft and in staffing. We seek comment on this approach.
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\42\ See 75 FR at 26,337.
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More specifically, at DCA the single bundle would include the
following slots: 0700, 0800, 0800, 0900, 1000, 1000, 1100, 1200, 1300,
1400, 1600, 1700, 1800, 1800, 2000, and 2100.
At LGA, Bundle A would consist of:
0600D, 0630D, 0730A, 0830D, 0830A, 0930D, 1100A, 1230D, 1300A, 1400D,
1500A, 1600D, 1700A, 1830D, 2000A, and 2100A
LGA's Bundle B would be:
0630D, 0700D, 0800A, 0930D, 1000A, 1030D, 1230A, 1330D, 1430A, 1600D,
1630A, 1730D, 1830A, 1930D, 2030A, and 2130A.
Procedures for Transferring Divested Slots
We propose that the slots be sold to the new entrant/limited
incumbent carriers, which have necessary DOT and FAA operating
authorities, on a cash-only basis, through a Web site managed by the
FAA. Under this proposal, the FAA would specify a bid closing date and
time and the bidder's identities would not be revealed.
We also propose that an eligible carrier may purchase only one slot
bundle at each airport, except at the seller's option as discussed
later. This limitation would balance the Department's interest in
maximizing the competitive discipline of the slots with creating an
opportunity for at least two carriers to obtain the slots. We propose
to permit an eligible carrier to register for each slot interest bundle
that it wishes to buy, and assign it a random number for each
registration so no information identifying the bidder is available to
the seller or public. A bidder would be allowed to indicate its
preference ranking for each slot interest bundle as part of its offer.
Finally, the FAA would review the offers for each bundle in order.
We propose to require all offers to purchase slot bundles to be
sent to the FAA electronically. The offer would have to include the
prospective purchaser's assigned number, the monetary amount, and the
preference ranking for that slot interest bundle. The FAA would post
all offers on the Web site as soon as practicable after they are
received. Each purchaser would be able to submit multiple offers until
the closing date and time.
Once the sales period closes, we propose that the FAA would
determine the highest offer for each bundle. If each bundle had only a
single offer, the FAA would notify the seller by forwarding the
purchaser's identification. If one eligible carrier had made the
highest purchase offer on multiple bundles, the FAA would determine
which offer will be valid based on preference ranking and bundle order.
The FAA would identify the next-highest offer from a carrier that
remains eligible to purchase the bundle as the successful offer on the
other bundles. This information would be forwarded to the respective
seller. The FAA would also provide information about the amount of the
highest offer, and the selling carrier may choose to accept the highest
offer instead of the offer identified by the FAA. Upon acceptance, the
FAA would notify the selling and purchasing carriers to allow them to
carry out the transaction, including any gate and ground facilities
arrangements. The full amount of the proceeds could be retained by the
selling carrier. The seller and purchaser would be required to notify
the FAA that the transaction has been completed and certify that only
monetary consideration will be or has been exchanged for the slot
interest bundles.
In the unlikely event that there are no offers for a slot interest,
we propose that those slot interests will revert automatically to the
FAA. If necessary, we would announce at a later date a means for
disposing of or retiring a slot interest that attracts no purchase
offer. We do not expect that this need will arise.
We propose the option of a cash-only, FAA ``blind'' Web site,
because it has the capability of maximizing the competitive potential
of the divestiture packages because that sale method would target the
potential competitors with the greatest economic incentive to use slots
as intensively and efficiently as possible. We seek comments on this
proposal.
Other Considerations
We also tentatively find that eligible carriers may be unable to
use the slots if they cannot obtain access to gates, ticket counters,
baggage handling services, loading bridges, and other ground facilities
at either DCA or LGA. Accordingly, we propose to require the selling
carrier to make these available to the purchaser under reasonable terms
and rates if the purchasing carrier lacks access to gates and ground
facilities and is unable to obtain such access from either the Port
Authority of New York and New Jersey, the operator of LGA, or from the
Metropolitan Washington Airports Authority, the operator of DCA.
We propose to subject the slots to the same minimum usage
requirements as provided in the LGA Order and HDR. However, we propose
to waive the respective use or lose provisions of the LGA Order and HDR
for 6 months following purchase to allow the purchaser to begin service
in new markets or add service to existing markets. The purchaser must
initiate service no later than 6 months following purchase. We seek
comment on the conditions described above.
We further propose that the purchaser may lease the acquired slots
to the seller until the purchaser is ready to initiate service to
maximize operations at the airports. However, we tentatively would
require that the slots not be sold or leased to other carriers during
the 12 months following purchase because the purchaser must hold and
use the acquired slots.
Purchasers could engage in one-for-one trades of these slots for
operational needs. The limitations would attach to the slot acquired by
the eligible carrier in a one-for-one trade. Any one-for-one trades
would be subject to the FAA notice requirements in the LGA Order and
HDR. We further propose that the duration of any trades or leases of
LGA
[[Page 45332]]
slots may not exceed the duration of the LGA Order.
We additionally propose that, after the initial 12 months, and for
four years thereafter, the slots may be sold, traded, or leased (as
authorized by the HDR at DCA and otherwise as authorized at LGA) to any
carrier that at the time of the sale, trade, or lease would have met
the eligibility requirements to make an offer under this proposed
waiver for the divested slot interests. These proposed restrictions
would increase the probability that the divested slots are used and
operated by carriers that will enhance competition at LGA and DCA,
lower fares, and benefit the traveling public. We recognize, however,
that restrictions on alienation of these slots may depress their value
for the carriers holding them. In order to balance the need and desire
of those carriers to maximize the value of the divested slots with the
Department's desire to afford the traveling public a broad array of
competitive service, we propose that the alienation restrictions on the
divested slots terminate after a total of five years following initial
sale.
Tentative Findings
We have carefully evaluated the risks and potential benefits of the
proposed transaction, focusing our public interest analysis on the
effects arising from that transaction as a whole. We tentatively
conclude that, on balance, the potential benefits of the proposed
transaction, as modified by the required slot divestitures to new
entrant and limited incumbent carriers and by implementation in
tranches, outweigh its potential harms. This tentative decision would
also allow us to preserve the other important benefits resulting from
the transaction, such as a more efficient use of slots at both airports
and a potential for enhanced service benefits to passengers.
Invitation for Comment
The agency has placed a copy of the waiver request in the docket.
The FAA invites all interested members of the public to comment on the
waiver request, proposed grant of the waiver, proposed conditions to
the waiver, and proposed divestiture remedy. Several commenters,
including JetBlue Airways Corporation, Spirit Airlines, Inc., and the
Air Carrier Association of America, have filed comments in the Docket
to the waiver request. We will review all previously-filed comments
(unless withdrawn), with all comments submitted within this comment
period, in making our final determination on the waiver request.
Issued in Washington, DC, on July 21, 2011.
Ray LaHood,
Secretary.
J. Randolph Babbitt,
Administrator, FAA.
[FR Doc. 2011-18939 Filed 7-27-11; 8:45 am]
BILLING CODE 4910-13-P