Why the DOJ Wants to Clip Delta's Wings

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Delta Air Lines isn't very happy with the Department of Justice right now. The DOJ is requiring AMR and US Airways to give up slots and/or gates at seven different airports around the country as part of their merger. Most notably, they must divest slots covering 44 round-trip flights at Reagan Airport near Washington, D.C.

AMR and US Airways need to give up slots and gates in order to merge (Photo: AMR)

Delta would love to bid for slots at Reagan Airport, as well as some of the other gate space becoming available. However, the DOJ seems intent on limiting the sales to low-cost carriers, in an attempt to boost competition. That leaves Delta out in the cold.

Delta has been very vocal about its belief that it should be allowed to bid on an equal footing with low-cost carriers. However, its protests are unlikely to succeed. More than anything else, the DOJ is worried about the growing oligopoly of "The Big Three": American, Delta, and United Continental . Transferring slots within that oligopoly would not solve the problem.

Delta's demands

After the merger settlement was announced on Tuesday, Delta put out a press release saying that it looked forward to bidding for the slots that would be divested, particularly at Reagan Airport . As it became more clear that the DOJ wasn't interested in bids from legacy carriers, Delta put out a second, more combative press release on Wednesday.

The DOJ doesn't want to let Delta buy slots at Reagan Airport (Photo: Delta Air Lines)

This time, Delta stated that it wanted to bid for gates at Love Field in Dallas as well as slots at Reagan Airport. The company also noted that it would be able to serve small- and medium-sized cities from Reagan Airport, as it operates smaller regional aircraft, unlike the low cost carriers . These cities might otherwise lose service to Reagan Airport when American makes the necessary flight cuts there.

On Thursday, Delta was at it again, with a press release announcing new service at Love Field that will start next October, when restrictions on long-haul flights will be lifted. Delta plans to add 18 daily nonstops, including enhanced service to Atlanta, and new service to New York, Detroit, Minneapolis/St. Paul, and Los Angeles. There's just one catch: Delta will need to bid for and win access to the gates American is giving up !

Nice try, but no luck
On Thursday, a senior official in the DOJ's antitrust division threw cold water on the idea that Delta and United could qualify to bid for slots and gates. DOJ lawyers think that the legacy carriers are already tacitly "coordinating" when it comes to setting fares, fees, and schedules. By contrast, the low-cost carriers have shown more of an inclination to compete in those respects.

Residents of the small cities that could lose direct service to Reagan Airport may want Delta to come in and restore that service. However, by definition, those would be routes where Delta would face no competition -- and in turn, Delta would not be using those slots to compete with American. (Thus, you could see why American might be eager to sell slots to Delta, if given the opportunity.)

By contrast, a low-cost carrier like Southwest Airlines would be likely to add flights to larger cities that have no competition today. Dallas, Cleveland, Charlotte, and Hartford are some of the larger metro areas where a single legacy carrier has a monopoly on service to Reagan Airport. Stiffer competition on high-traffic routes like these is what regulators are really hoping for.

Delta has a better shot at getting a spot at the table for the Love Field gates. There, it plans to serve high-traffic routes, where it would compete against American's flights from nearby Dallas-Fort Worth International Airport (and possibly Southwest flights from Love Field).

Still, with the exception of Los Angeles, Delta already flies from Dallas-Fort Worth to all the cities it listed for its Love Field expansion. So while a Delta Love Field expansion would give travelers a new option, it wouldn't increase the number of airlines flying from the Dallas-Fort Worth area to Atlanta, Detroit, New York, or Minneapolis.

Foolish conclusion

Delta is doing everything in its power to get a seat at the table as American and US Airways dispose of assets to satisfy regulatory concerns. However, the DOJ seems dead set on ensuring that the assets up for sale go to low cost carriers.

The DOJ's stubbornness is understandable: after all, one of its complaints has been that the legacy carriers are tacitly coordinating to avoid sparking fare wars. Since the DOJ's mandate is to protect consumer interests, it makes sense to get slots and gates into the hands of the airlines that will compete most vigorously. Right now, only low cost carriers fit the bill.

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The article Why the DOJ Wants to Clip Delta's Wings originally appeared on Fool.com.

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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