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Mar242010

« Dear Southwest: Grab Your Bag of Fiction; It’s On »

On Tuesday morning a headline in The Washington Post read “Southwest Airlines Feeling Squeezed Out at National Airport”.  Terry Maxon wrote on The Dallas Morning News blog “Delta, US Airways Maneuver Around Southwest Airlines.”  The headline in Business Week read “Delta, US Airways Sweeten NYC-Washington Plan by Boosting Small Rivals.

As I prepared to write this piece, I began by reviewing the various comments submitted to the U.S. Department of Transportation (DOT) by the air carriers during the comment period set forth following its tentative decision on the proposed Delta Air Lines – US Airways slot swap deal.  When I got to Southwest’s, I thought I was in a time warp.  A time warp whereby many of the same arguments used in Southwest’s fight to repeal the Wright Amendment were being dusted off and employed again.  Another opportune time for poor, little Southwest Airlines to get something on the cheap from the carriers that have invested hundreds of millions of dollars in their respective infrastructures over the past decades.  But here’s the thing:  Southwest is neither poor nor little.

Background

All of these stories of course pertain to a repackaging of the proposed Delta-US Airways slot swap first announced in August 2009.  In the initial deal made between Delta and US Airways, US Airways would receive 42 slot pairs from Delta Air Lines at Washington’s Reagan National Airport and a route authority to Sao Paulo and Tokyo Narita in exchange for 140 slot pairs at New York’s LaGuardia Airport. 

In February 2010, the DOT tentatively approved the deal between Delta and US Airways. The caveat was each carrier had to sell 14 National and 20 LaGuardia slot pairs to U.S. or Canadian carriers that have less than 5% of the total slot holdings at the respective airports. This stipulation materially impacted the value of the deal, so US Airways and Delta went back to the drawing board.

Late Monday, the two airlines announced a restructured proposal.  Only this time, they included provisions providing slots to competing carriers.  Delta concluded deals with WestJet, AirTran and Spirit to transfer up to five slot pairs each at New York’s LaGuardia Airport (LGA).  US Airways will transfer up to five slot pairs to JetBlue at Washington Reagan (DCA).  The inclusion of WestJet, AirTran, Spirit and jetBlue certainly satisfies the DOT’s requirement that divested slot pairs be provided to a U.S. or Canadian carrier with less than a 5 percent share.

Let’s Get Some Southwest Non-fiction on the Table

In its submission, Southwest complains that at LGA, "instead of an airport balanced among three airlines of roughly equal size, the slot swap would catapult Delta into a dominant position more than twice the size of the nearest competitor."  But Southwest does not ever mention anything pertaining to its size within the U.S. domestic market. In 2008 there were only 6 airport markets with more domestic origin and destination (O&D) traffic than LGA.  Southwest is the largest carrier in three of those six markets.  At the 48 domestic airports where Southwest is the largest carrier of O&D traffic, it is at least twice the size of the next largest carrier in 27.

At Dallas Love Field, Southwest controls 94.3 percent of O&D traffic and the second largest carrier has 2.2 percent.  At Houston Hobby Airport, Southwest controls 86.2 percent of O&D traffic versus 5.2 for the nearest competitor.  At Chicago Midway, Southwest has 79.1 percent control while the next largest competitor has 8.8 percent.  At Love Field, Houston Hobby and Chicago Midway the average fares rose at those airports 36.2 percent, 21.8 percent and 29.4 percent respectively between 2005 and 2008.  In each of the 48 airport markets where Southwest is the number one competitor, fares on average increased 17.5 percent between 2005 and 2008. 

Southwest would have us all believe that their presence at an airport is the ultimate discipline on fares and they claim it in every regulatory filing and certainly on every advertisement.  Despite what Southwest likes to say, it is not the same Southwest that sprinkled the “Southwest Effect” on markets in 1992. The claims of low fares stimulating new demand just do not hold today - because everyone offers low fares. 

During the period between 2005 and 2008, wasn’t Southwest enjoying the benefits of a fuel hedging program that provided the carrier with a most significant cost advantage relative to an industry that had largely restructured itself?  I assumed that cost advantage benefit garnered from a fortuitous bet on the price of oil was being passed on to the consumer.  Instead Southwest was raising fares.  In their filing they actually go as far as calculate the cost saving their low fares would bring to each the DCA and LGA markets.  The calculation is performed after including a $25 bag fee on top of the fare of the competition. 

Fiction Fatigue

If Southwest wants to gain entry to the few remaining slot controlled airports, then it should make the incumbents an offer – one that provides the slot holder a return on that carrier’s prior investment.  In a 2006 regulatory filing, Delta described how it took 22 years to build its slot portfolio at LGA.  The Buy-Sell Rule is a mechanism in place permitting such purchase.    

The filing states, “In sum, Delta acquired the right to operate most of the 243 LGA slots it currently operates at LGA through market-based transactions.  Delta acquired them through diligent investment in private market transactions, not by regulatory fiat. Delta has also invested hundreds of millions of dollars in expanding its service at LGA because Delta valued the right to expand its service at the airport, believing it would be profitable to make such investments.  Delta’s decisions to acquire slots in market-based transactions and develop its landside infrastructure at LaGuardia over three decades have permitted Delta to grow steadily and to offer greatly expanded services there to meet consumer demand.”

Carriers that purchased slots at the controlled airports did so expecting they would earn a commensurate return on their expended capital.  Of course that would mean average fares would more than compensate the cost of operating at those airports.  The average fare at LGA in 1990 was $150; by 2005 the average fare had fallen to $136; and in 2008 that fare was $159.  A similar trend can be found at Washington National, although fares in 2008 were higher.

Southwest Is Not Special

Southwest’s growth has caused/forced the industry to reduce costs in order to match the fare offerings from it and the so-called low-cost carriers it helped spawn.  Today, however, Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers.  Low fares to air travel consumers in smaller communities that the Southwest operating model ignores.  It is these legacy carriers that have invested hundreds of millions of dollars at slot controlled airports. 

If Southwest wants to play, it should have to write the same type of check.  They won’t because the low fare structure at either of these airports will not produce adequate revenue streams to justify the investment.  Instead Southwest somehow believes it is “entitled” to the slots being divested by US Airways and Delta.

Southwest is no longer the only game in town.  It talks about all the money consumers will save as a result of Southwest’s entry into DCA and LGA, subtracting its entry level fares from average fares plus bag fees for the incumbents. Once Southwest is imbedded, there’s a new “Southwest Effect.” As mentioned above, in markets where Southwest is the largest carrier, fares increase the fastest.

Ted Reed at TheStreet.com wrote “Southwest Blasts Revised Slot Deal.”  In his story, Reed quotes Southwest, "Allowing two of the country's largest airlines to collude on trading assets in a way to reduce competition while dramatically increasing their market dominance at two of the United States' most important airports is, on its face, an alarming prospect that should not be permitted."

Who is the largest US domestic airline?  Southwest.

To me the more alarming prospect is allowing Southwest to get something for free – yet again.  Think Wright Amendment and the undoing of a deal because the market had changed and they needed to find a new way to grow.  Simply you have to pay to play, Southwest.  You have the cash.  Make someone an offer they cannot refuse.  The rules to do so are in place.  I have every confidence that neither LGA nor DCA absolutely needs Southwest.  I am confident that JetBlue, AirTran, Spirit and WestJet can do just fine.

It’s On. 

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Reader Comments (38)

You rightly bring up the Wright Amendment. One thing I was thinking of is Southwest is complaining how hard it is to get into LGA or DCA, yet with their DAL compromise they've protected themselves from new entrants by capping the number of gates at 20.

03.24.2010 | Unregistered CommenterDan Webb

Southwest's dominance in certain markets is irrelevant to this argument because those markets aren't slot-controlled like LGA & DCA. You're comparing apples to oranges.

Regarding the 20-gate limit at DAL, Southwest conceded to that limit to help get rid if the Wright Amendment and satisfy the local NIMBYs. That wasn't Southwest's idea in order to limit competition.

03.24.2010 | Unregistered CommenterPaul Thompson

Paul

The post is relevant. There is alot more in there than you choose to identify. Southwest can fly to each DCA and LGA. Just pay like the rest of the industry has had to for decades. Did you miss that piece? It is not as if there have not been plenty of opportunities along the way.

Stop ignoring the facts about Southwest's size in the US domestic space. Might the fact that they did not get included have anything to do with their own inaction?

I wrote what many think and don't say.

03.24.2010 | Unregistered Commenterswelbar

Very insightful & interesting comparison.

Definitely adding your blog to my must read's

03.24.2010 | Unregistered CommenterChris

Indeed. I think this quite a bit. WN is very good at playing the victim in these markets. I have long held the WN is no longer the low-cost carrier. In my experience their fares are higher, on average, than many of their legacy competitors. For them to claim that they would save anybody very much money in DCA or LGA is laughable. The fares at both airports (as shown by you) are already extremely low. Without question there are more "underprivileged" airlines that deserve a shot at DCA and LGA, including airlines like jetBlue, Virgin America (just for example, as nobody in their right mind would think that VX wants in), etc. WN is not deserving here. Bottom line.

03.24.2010 | Unregistered CommenterLogan R

Well you fail to point out tha tthe New York Metro area is the largest market in the US and SWA only had 8 daily departures out of the 3 Major NY airports. Also correct me if I'm wrong but didn't the US Govt allot slots intially when these airports became Slot controlled, So yes they have invested millions of dollars, but then again...every airline has invested milllions of dollars on airports and facilities, and their ops in general. You also fail to point out that the airports you noted where Southwest has the most market share, DAL, HOU, MDW.... Also have bigger Hub Legacy airlines with big Hubs in the same city DFW American IAH Continental, and ORD United & American.
Your report is so biased against Southwest that its hard to take is seriously, you might be able to convince some people with your argument but people who are well informed won't be convinced, and see it as more of a propaganda tool on behalf of USAirways & Delta. Finally don't forget that Southwest today did not get where it is by handouts, and it actually started as a very small nimble company and had to fight and compete to get where it is today. Slot controlled airports should not have heavy market concentration by 1 or 2 carriers controlling more than half the market, and note I said slot controlled airports.

03.25.2010 | Unregistered CommenterDave

Do your research on The Wright Amendment otherwise don't try and tell us that it only benefited Southwest, when actually it was probably a much better deal for American and their Mega Hub in DFW

03.25.2010 | Unregistered CommenterDave

DAVE, YOU HIT IT RIGHT ON THE MONEY...EXTREMELY BIAS.

03.25.2010 | Unregistered CommenterTOM

I had a few observations on reading your blog post.

You mention that "[a]t Love Field, Houston Hobby and Chicago Midway the average fares rose at those airports 36.2 percent, 21.8 percent and 29.4 percent respectively between 2005 and 2008."

But Dallas Love, Houston Hobby, and Chicago Midway had something else interesting in common in the second quarter of 2008; all three were among the five airports (of the top 100) with the lowest average fares in that quarter -- with Dallas Love being lowest, Hobby third-lowest, and Midway fourth-lowest. Incidentally, the other two airports of the five with the lowest average fares -- Oakland and Burbank -- also have Southwest as their largest carrier.

And it is entirely unsurprising that average fares would have increased significantly at Dallas Love from 2005 to 2008, since the modifications to federal law governing Love allowed Southwest to sell tickets to cities outside the Wright Perimeter. A ticket from Love to Los Angeles or Love to Philadelphia probably is going to cost more than a ticket from Dallas to Albuquerque or Dallas to St. Louis.

It's also interesting to see how you gloss over the increase in average fare levels at Washington Reagan National between 2005 and 2008 with the statement, "A similar trend can be found at Washington National, although fares in 2008 were higher." In the second quarter of 2005, the market average fare at National was $169. By the second quarter of 2008, the market average fare at National had increased to $231. That's an increase of 36.6% -- higher even than the increases at Love, Hobby, and Midway.

Not to mention that in the latter period, a Southwest-dominated route from Love to Little Rock boasted fares that were roughly 60% lower than the US Airways-dominated route of similar stage length from National to Hartford. Even the relatively competitive (thanks to AirTran) Atlanta-Washington market had average fares that were nearly 80% higher than Southwest's Dallas-St. Louis, which is virtually the same distance.

You also state that "In each of the 48 airport markets where Southwest is the number one competitor, fares on average increased 17.5 percent between 2005 and 2008." But the fact still remains that in the vast majority of airport markets where Southwest was first in market share, fare premiums in the second quarter of 2008 were below the national average.

You claim "Today, however, Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers. Low fares to air travel consumers in smaller communities that the Southwest operating model ignores." Which smaller communities (and more specifically, communities lacking low-cost carriers) see low average fares -- especially in comparison to the handful of smaller communities served by Southwest?

In reference to Southwest's hedging program, you assert the following: "During the period between 2005 and 2008, wasn’t Southwest enjoying the benefits of a fuel hedging program that provided the carrier with a most significant cost advantage relative to an industry that had largely restructured itself? I assumed that cost advantage benefit garnered from a fortuitous bet on the price of oil was being passed on to the consumer."

To some degree, the benefits were passed on to the consumer, in that average fares in markets served by Southwest remained generally lower than fares in markets not served by Southwest. But it would have been profoundly unwise for Southwest to not gradually raise fares over that period in recognition of the inevitable end of their favorable hedge position. Measured price increases over a prolonged period are far more palatable to consumers than price spikes.

You also point out that "In 2008 there were only 6 airport markets with more domestic origin and destination (O&D) traffic than LGA. Southwest is the largest carrier in three of those six markets." At how many of those six airport markets with more O&D traffic than LGA do slot rules restrict competition and market entry? At how many of the three where Southwest is largest do slot rules apply? At how many of those three do competitors find regulatory or facilities issues that restrict their ability to compete?

Moreover, you state that "[a]t the 48 domestic airports where Southwest is the largest carrier of O&D traffic, it is at least twice the size of the next largest carrier in 27." At how many of those 27 do slot rules restrict market entry? Orange County is it -- and even there, new entrants are being allocated slots as other carriers have chosen to reduce service there.

Another assertion is that "Southwest would have us all believe that their presence at an airport is the ultimate discipline on fares and they claim it in every regulatory filing and certainly on every advertisement." As a researcher at M.I.T., you must be seeing a radically different set of advertisements for Southwest than I do in the Boston area, where the primary messages have been frequent flights with free checked bags. I'm missing the "ultimate discipline on fares" aspect -- but I invite you to point out the points in every advertisement where they do make that assertion.

Amusingly, you assert that "If Southwest wants to play, it should have to write the same type of check. They won’t because the low fare structure at either of these airports will not produce adequate revenue streams to justify the investment. Instead Southwest somehow believes it is “entitled” to the slots being divested by US Airways and Delta."

Actually, that is exactly what they have proposed to do -- in their filing with DOT, they have asked the government to require the slots be sold to the highest bidder in a public auction. How exactly does that translate into entitlement and lack of willingness to pay for those slots?

The proposed restructuring of the deal still fails to divest the number of slots required by the DOT. Further, the deal to transfer slots to JetBlue, Spirit, AirTran, and WestJet appears to be structured expressly to lock Southwest out of the slot divestitures. If Southwest is willing to pay more for the slots than the four carriers above, exactly how is that a belief in being "entitled" to the slots being divested?

03.25.2010 | Unregistered CommenterScott B

Bill,

Thanks for proving me right. Every time I've heard you speak or read your blog, I have found you to be biased and ignorant, and now I have proof. Your main argument is that Southwest wants a protected piece of business solely based on their supposed underdog pro-consumer self-image. That's simply not true. If you would have taken the time to read the docket Southwest filed to the FAA you would have seen that Southwest actually is requesting an auction where the slots are awarded to the highest bidder. I know it would have been hard for you to find. It's not like there was an entry on the table of contents of that document titled: "Allocating Divested Slots via a Transparent Auction to the Highest Bidder is the Only Way to Ensure Effective New Competition at LGA and DCA." Oh wait, there is.

So your quote, "Simply, you have to pay to play, Southwest" is actually what Southwest is trying to do.

Southwest's complaint here is that the deal happened behind closed doors. All they want is the chance to purchase these assets.

But thanks for posting this. It gave me a good laugh. I almost laughed as hard as I do when I hear you called an expert.

03.25.2010 | Unregistered CommenterFree Market

Free Market

I fully expected to receive highly charged, emotional rants like yours. The title makes reference to a term used by a Southwest official toward me when on the other side of Southwest in another highly charged case. That said, please refer to the footnote below in Southwest's own filing.

Footnote 15: Southwest was offered LGA slots by an incumbent carrier on one occasion but only at exorbitant prices, i.e., prices that were so high that the resulting flights would have been uneconomic.

A major point in the blog is that certain carriers have invested millions and millions of dollars in acquiring slots. Those carriers should be able to charge whatever they believe provides for an appropriate return on that investment. Should the government be able to take slots away from air carriers that spent precious capital to purhcase them? I do not think so.

Slots have been bought and sold for years. If Southwest wants slots, it should buy them from the carriers that have invested in them. Southwest could have bought them along the way but instead is now only using an opportunity to get them on the cheap. Just because there is an auction does not guarantee any air carrier an adequate return on a prior investment.

What is exhorbitant as Southwest refers in its filing? As I wrote it must be some price where Southwest does not believe it can justify the investment. That is fair as value is in the eyes of the beholder.

As for reading the blog of someone biased and ignorant, I appreciate it. You are joined by many who think differently. I do appreciate you writing because it made me laugh and reminded me of the comments made by a Southwest official in the past.

Swelbar

03.25.2010 | Unregistered Commenterswelbar

Wow...how about we throw the breaks on a bit. He is simply stating that Southwest does a pretty damn good job of playing the victim, despite the fact that they carry move passengers domestically than any other carrier. The fact is, who else could outbid Southwest...they won't let American buy the slots, Continental already operates the best hub in the New York area in Newark, and Southwest has deeper pockets than any other low-cost carrier, really any other carrier for that matter. So basically, instead of having to compete against the nation's largest carriers, they are putting their financial power up against that of Westjet, Airtran, Jetblue...etc. Now don't get me wrong, those are all well running airlines, but to expect them to compete against Southwest is ludicrious. As far as fares increasing in 2008, no one is glossing over the fact that they went up...oil was also $150/barrel at one point during the year...it would make sense to raise them.

The main point here is that if Southwest is to bid on these slots, they will win, because the largest carrier that they'll be bidding against might be Jetblue, a company so much smaller than itself...so by all means, call it a fair competition. Oh, and to go to length to make an argument for Southwest based on one or two slot controlled airports is like listening to the DOT and the EU in particular posture against ATI for AA/BA, it completely ignores the route structure as a whole, and focuses on one variable, it is short sided and to be honest a little ignorant.

03.25.2010 | Unregistered CommenterBA

"Today, however, Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers."

That's only because they are forced to offer low fares by carriers like Southwest, Airtran, JetBlue, etc. Go look at average fares in places like GSP, CVG and HSV. You'll find fares that are extremely high. Gee...I wonder why?

The fact that you miss even this most basic of points undermines your credibility.

03.25.2010 | Unregistered CommenterDoug

Doug

Nice try, read the piece again.

I believe this sentence preceded your selectivity: Southwest’s growth has caused/forced the industry to reduce costs in order to match the fare offerings from it and the so-called low-cost carriers it helped spawn.

And this sentence followed your selectivity: Low fares to air travel consumers in smaller communities that the Southwest operating model ignores. It is these legacy carriers that have invested hundreds of millions of dollars at slot controlled airports.

Just wanted there to be sufficient context.

Swelbar

03.25.2010 | Unregistered Commenterswelbar

Wait a minute!

What is wrong with the slots going to the highest bidder? If LUV (or another carrier) is the highest bidder, how can you claim they are getting the assets on the cheap?

I do not even like the DOT's 5% restriction. Why should that be a consideration?

I always thought that selling to the highest bidder in an auction was capitalism at its best.

03.25.2010 | Unregistered CommenterBob Maurer

@Bob - Selling to the highest bidder makes sense in a portion of the argument. The incumbent carriers should be doing what is best for their interests. Selling a slot for $5.1M to WN versus $5.0M to WestJet (for example) provides both a negative & positive valuation for those slots.

In the positive, they receive an extra $100K. That's it.

In the negative, they provide their LARGER competitor access to a tightly controlled arena where, in the long run, they will inevitably lose value.

The actions of DL & US were formulated so that they could control who competes with them, and likely in which markets. It may not be the greatest public good but is good for these companies.

03.25.2010 | Unregistered CommenterChris

@Chris

I think your analysis is correct, but that is exactly why they should be forced to do so. The US/DL attempt to exclude a competitor because it will diminish a profit pool is exactly why DOT should step in here. The trade, as stands, is more or less collusion.

03.25.2010 | Unregistered CommenterDHizzle

recent gov stats show luv has the highest yield per asm of any carrier. luv does a great job but they aren't the low fare carrier. they have created the illusion of being the low fare carrier. just the facts.

03.25.2010 | Unregistered Commenterairwolf

This BLOG is right on! I read that Southwest Airlines response and it keeps repeating the same thing "Southwest should get all the available slots". Why would Southwest get all the available slots available? That's absurd! Southwest is a corporation like the other airlines and corporations look out for themselves. SWA lower prices when the enter a new market until they drive out all of the competition and then the prices rise dramatically. Southwest is not in DCA because they chose not to. They only wanted the smaller, less congested airlines and LGA does not fit that profile. They just recently started BOS which they could have done years ago, but they wanted to dominate the airports that they serve. SWA is the biggest domestic airline on earth. They carry the most passengers than any other airline on earth. Southwest thinks that they have the right to choose which method that DL or US sell their property is laughable! Southwest will get nothing. They never wanted LGA or DCA and now they want in. TOO BAD SO SAD! HAHAHAHA

03.25.2010 | Unregistered CommenterAirline Employee

Mr. Swelbar,

I find it interesting that you post disagreements with folks who point out one portion of your analysis as flawed, but seem to ignore the point by point rebuttal that Scott B. posted.

Free Market, et al., may be easier targets, but I'm calling you to question about avoiding a measured, complete, and respectful response to your blog. IMHO.

03.25.2010 | Unregistered CommenterWill B

Hey Will

You want to write at midnight -- I am not going to respond in kind. You are (w)right, Southwest should be embarassed to have an employee like "Free Market" in their hire. ScottB did write an intelligent response -- at least in one area. Unlike many here.

For all of you (like ScottB and screen name friends) that like to write under a screen name after midnight -- I call you out (BK). I write during the day and sign my name, so should you.

We may be free to move about the country. But apparently we are not free to say anything against the "low fare" darling. It disgusts me.

Stop hiding. Southwest cannot anymore.

Swelbar

03.26.2010 | Unregistered Commenterswelbar

Swelbar addresses Doug claiming "Nice try, read the piece again...

Just wanted there to be sufficient context."

OK, I'll bite and address the entire context.

Here's the relevant paragraph:

"Southwest’s growth has caused/forced the industry to reduce costs in order to match the fare offerings from it and the so-called low-cost carriers it helped spawn. Today, however, Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers. Low fares to air travel consumers in smaller communities that the Southwest operating model ignores. It is these legacy carriers that have invested hundreds of millions of dollars at slot controlled airports."

The assertion that legacy carriers "have invested hundreds of millions of dollars at slot controlled airports" is orthogonal to fare levels in "smaller communities that the Southwest operating model ignores." Most passengers in Greensboro see little benefit from US Airways' investment in DCA when the average GSO-DCA fare is an unaffordable $212 each way.

But I asked you in my previous post to support your assertion that "Legacy carriers with iconic names like American, Continental, Delta, United and US Airways are also offering low fares to passengers. Low fares to air travel consumers in smaller communities that the Southwest operating model ignores." Which smaller communities -- lacking low-cost competition from the likes of JetBlue, Spirit, AirTran, Frontier, or Allegiant -- are enjoying low average fares? Even more to the point, lower average fares than those seen in the smaller markets like CRP, JAN, LBB, TUS, BOI, or GEG in which Southwest is the market leader.

BOI serves a metropolitan area smaller than BTR, and yet BTR's market average fare was one-third higher as of the third quarter of 2009. Spokane and Des Moines are similar in size, yet average fares at DSM are roughly one-quarter higher than average fares at GEG.

And I'd like to know how the high average fares in markets like HSV, GSP, CAE, GRR, and SAV (among dozens of others) support the claim regarding "[l]egacy carriers...offering low fares to passengers. Low fares to air travel consumers in smaller communities that the Southwest operating model ignores."

And while legacy carriers may have "invested hundreds of millions of dollars at slot controlled airports," they have also likely reaped hundreds of millions, if not billions in past profits from that investment. And many of the slots they possess were simply handed to them by the government at no cost decades ago.

And in regard to your response to Free Market, you ask and answer: "Should the government be able to take slots away from air carriers that spent precious capital to purhcase [sic] them? I do not think so."

The government has proposed no such thing. Delta and US Airways have every right to walk away from their proposed deal if they are unable or unwilling to meet the government's conditions. And again, many of the slots they possess were given to them or their predecessors at no cost whatsoever. The government hasn't dictated that they divest the slots for free, either; merely that they divest them to carriers with limited market share at the airports in question.

And there is plenty of history of the government blocking deals or requiring divestitures in order to clear business transactions. Even the agreement which allowed Delta, Continental, and Northwest to code share domestically required those airlines to give up gates at hub airports to competitors and proscribed code shares on hub-to-hub routes.

And if you want to accuse one of those who replied with a critique of your position by claiming he or she had written a "highly charged, emotional rant," I point you to your own words where you belie your own bias; for example:

"Another opportune time for poor, little Southwest Airlines to get something on the cheap from the carriers that have invested hundreds of millions of dollars in their respective infrastructures over the past decades."

"To me the more alarming prospect is allowing Southwest to get something for free – yet again."

"Simply you have to pay to play, Southwest."

And even the title: "Dear Southwest: Grab Your Bag of Fiction; It’s On"

It is valuable to read the words of people who are "biased and ignorant" simply to know what's out there. And, when possible, it is even more valuable to point out the flaws in the weak arguments of the biased and ignorant.

But not a single word about the billions of dollars which Southwest has saved consumers and businesses over their nearly four decades of operation. They wouldn't have succeeded just by being cheap; there are dozens of defunct airlines which offered low fares. They became the largest domestic carrier not by being the cheapest; they aren't always the least expensive. They did so by reliably delivering the product they promised, with good customer service, at fares that have been consistently reasonable when compared to the cost of providing that service. They don't view their customers as the enemy.

Sure, LGA and DCA have done just fine over the years without Southwest. But consumers in the New York and Washington, D.C. areas, along with those wanting to travel there, will continue to pay the price -- including those bag fees -- for their absence.

03.26.2010 | Unregistered CommenterScott B

Mr Swelbar, the time at which a respondent might choose to post has no relevance to the content of his or her arguments. In my own situation, I have a day job outside the airline/transportation industries, as well as interests and a social life which are pursued in the evenings outside my home. I doubt my employer would appreciate my use of work time to reply to posts on a blog unrelated to my job.

I am certainly willing to wait for you to refute my arguments. Would it matter if I wrote them in draft form and posted them first thing in the morning? They'd still be waiting for you.

And honestly, ad hominem attacks are beneath the academic standards of the institute at which you hold a position. Again you reveal your bias with the following:

"We may be free to move about the country. But apparently we are not free to say anything against the "low fare" darling. It disgusts me.

Stop hiding. Southwest cannot anymore."

Of course you can say what you want; it's your blog. But by the same token, when you misuse statistics to support an argument, you should expect that someone may refute you.

03.26.2010 | Unregistered CommenterScott B

ScottB

And not a mention that fares have decreased 55% in real terms over the past 30 years. Surely Southwest is entirely responsible for that given that it serves less than 70 cities when the network carriers serve more than 450 in the contiguous 48. NOT

Surely not a single word about the billions of dollars which the legacy carriers have injected into the economes of communities that the Southwest model ignores over the same time period.

Surely. wow.

swelbar

03.26.2010 | Unregistered Commenterswelbar

Swelbar replies, "And not a mention that fares have decreased 55% in real terms over the past 30 years. Surely Southwest is entirely responsible for that given that it serves less than 70 cities when the network carriers serve more than 450 in the contiguous 48."

Starting with a straw man argument isn't promising. I made no claims that "Southwest is entirely responsible" for the decline in inflation-adjusted airfares post-deregulation. In fact, it would not surprise me if DAL-HOU fares, for example, had not declined in real terms since 1978 -- given the existence of prior robust competition in one of the few markets without CAB-regulated airfares.

Carriers like AirTran, JetBlue, Frontier, and Spirit have also helped to exert fare discipline on the network carriers -- but without the scope of Southwest's system, they necessarily have more limited influence. Markets without low-fare carriers continue to see high fares that keep increasing.

And while the network carriers may have spent billions in their captive markets over the past thirty years, consumers in those communities have repaid that money handsomely through higher airfares. The network carriers managed to build an ample store of consumer resentment in communities which were gouged with high airfares.

The network carriers have shown themselves to be quite willing to match or undercut the low fares of new entrants into their markets, so one must ask why presumably loyal customers would eagerly switch to competitors -- unless the legacies' pricing and business practices had indeed alienated those customers.

03.26.2010 | Unregistered CommenterScott B

Smart move on the part of USAir and Delta. It is transparently anti-competitive (to be able to pick who you compete with). If I were them, I wouldn't want to compete with Southwest either. I would choose to compete against the smaller weaker airlines that they both picked. That way we can squeeze them out of the market. Of course then SWA would swoop in to buy those slots at a discount later on anyway.

USAir employees refer to SWA as the "Borg" (a Star Trek Next Generation reference to an alien race that "assimilates" every race into it's own culture), "You will be assimilated" the Borg say. Delta's Southern-style reference to SWA as Bermuda grass. Once it gets a foot-hold, it's all over.

03.26.2010 | Unregistered CommenterShiner

ScottB

My blog was not intended to provoke a data battle. In fact, our comment thread regarding our interpretation of the same data obscures what I think is the bigger issue

The real point of the blog was to underline the simple fact that Southwest is big. It is a major airline - and a major player – in the industry. Southwest cannot continue to cry “all the big boys” are picking on it because, in data and reality, it IS one of the big boys. Southwest’s attempts to portray itself as “victim” are aimed at the possibility of a slot “auction.” An auction might be good for Southwest, but it probably will not yield a value that the current holders of those slots believe is compensatory based on investments made over the years. An auction request from Southwest is simply to design a game that will only benefit them as their pockets are deeper.

I am entitled to write that and I did. While you and other Southwest supporters might not agree, it does not make my opinion any less valid or the data wrong. I do appreciate your passion for your company or client or this topic. That said, I wish you well.

03.26.2010 | Unregistered Commenterswelbar

An auction will quickly establish a fair market value for the divested slots. Whether that value is sufficiently compensatory in the opinions of current holders is hardly relevant as they've already signaled their willingness to divest slots for likely a fraction of their perceived value (as long as they go to hand-selected weaker competitors) to complete the swap. Additionally, no investment is guaranteed any return. Just ask the folks whose investments in Delta and US Airways were wiped out by bankruptcy.

03.26.2010 | Unregistered CommenterDrew Ramsey

An auction will not be in the best interest of anyone. First off the DOT has already said that no carrier with a 5% share of slots can bid rules out AA at LGA & DCA. UA is ruled out at DCA since they code share with US. CO & AC are in the same alliance as US so they are also ruled out. F9 is out because they cannot fly to Denver since it's out of the perimeter as is XV & AS with west coast hubs. So only 4 airlines could bid.
And then in an auction you might not get the price that you want, but Southwest Airlines said that the selling carriers cannot have a say in who bids. I'd rather get negotiate with Jetblue for the price that I wanted.

Southwest also wants the DOT to force DL & US to make available some gates, equipment, & ticket counter space to them too and at the same price that US & DL pay? I think Southwest has lost their mind! They need to just offer the incumbent carriers enough money where they can't say "No". I'm glad that 6 airlines are onboard with this deal along with UA, CO & AA who think that the DOT should mind their own business. This deal will go thru. Everyone is happy except Southwest.

03.27.2010 | Unregistered CommenterPhoenix Phil

"The claims of low fares stimulating new demand just do not hold today - because everyone offers low fares." Well, legacy carriers certainly do where they must compete with low fare carriers. But there are still plenty of high fare examples around, and US and DL fit the mold of charging high fares when they can. Examples: ATL-BNA $353 DL, CLT-JAX $457 US lowest r/t fares for midweek May dates. While I realize that the term "low fares" is relative and subjective, are there comparable fare examples anywhere on WN's network for similar nonstop market service?

"I assumed that cost advantage benefit garnered from a fortuitous bet on the price of oil was being passed on to the consumer. Instead Southwest was raising fares." How much did other carriers raise prices in the same timeframe? Without the context of cost factors and other carrier fares, the examples provided (e.g. MDW fares up 29.4 percent 2005-2008) do not provide insight into whether some or all of WN's cost advantage was being passed onto the consumer.

"As mentioned above, in markets where Southwest is the largest carrier, fares increase the fastest." Fastest compared to what markets or carriers?

If the objective is to provide more competition and lower fares, then plugging DCA (and more LGA service) into WN's network would likely have consumer beneficial fare effects (just as providing slots to FL, B6, and NK would as well). If the objective is to provide more DCA/LGA opportunities to small communities, then having WN at the table wouldn't fit well since the majority of their recent focus is on larger markets.

03.27.2010 | Unregistered CommenterRobert S

Mr. Swelbar,

I apologize if the time of my post offended you. I fail to see how it relates to it's content??It's currently 9:22am, Sat. morning in Chicago.

That said, your response still doesn't cover/address the well thought our responses some have posted that take exception with your post. What's wrong with civilized debate?? I'm speaking specifically of Scott B's posts. I see clearly that you have some history with other posters.

This was my first time to your blog, referenced by Terry Maxon at DMN. I was frankly surprised to read your response to me, as it seemed rather hostile. Based on this experience, I'm going to choose not to play.

Enjoy your sandbox.

03.27.2010 | Unregistered CommenterWill

Hey, where is this Southwest airlines response to the DOT? I can't find it. Is it on this blog?
I would think that if USAir & Delta can't get this new proposal approved them they will just lease the 125 LGA slots to DL and the 42 DCA slots to USair. DL coudl then just trade the GRU & NRT slots to USAir for doing the slot trade. Then Jetblue would never get into DCA and Westjet would have a hard time getting into LGA. This deal will get approved.

Swelbar writes,

"My blog was not intended to provoke a data battle. In fact, our comment thread regarding our interpretation of the same data obscures what I think is the bigger issue"

You may choose to call it interpretation; I see it as obfuscation to justify a profoundly biased viewpoint. You tried to imply Southwest was raising fares at airports where it leads in market share more than the rest of their peers while obscuring the fact that fares at Washington National actually rose even more quickly. Moreover, you ignored the fact that Southwest was raising fares from a lower baseline and generally continued to charge less than competitors chose to charge at airports not served by Southwest. A $10 increase on a $100 fare is a greater percentage increase than $15 on $200 -- but most people would still prefer to pay $110 rather than $215.

You continue by saying, "The real point of the blog was to underline the simple fact that Southwest is big. It is a major airline - and a major player – in the industry."

If your intent (i.e. "[t]he real point") was to point out that Southwest was the largest domestic carrier, then do not attempt to cloud the issue with specious arguments about fares. I and several other commenters have invited you to provide proof of your assertion that the network carriers offer low fares in small markets -- at least, in small markets where low-fare carrier entry has not forced them to respond with lower prices.

It would be very simple to simply point out that Southwest is the largest domestic carrier and leave it at that. But then, starting from that point, one could argue that divesting slots to Southwest in some sort of mechanism to determine a fair market price would probably produce the largest public good, as they have the largest network across which to offer low fares to and from National and La Guardia.

You state that "An auction might be good for Southwest, but it probably will not yield a value that the current holders of those slots believe is compensatory based on investments made over the years. An auction request from Southwest is simply to design a game that will only benefit them as their pockets are deeper."

But the government's responsibility here is not to "yield a value that the current holders of those slots believe is compensatory" or to do something that "might be good for Southwest." The government's responsibility is to maximize the public good realized from the use of public resources which have been granted to private companies; specifically the rights to operate flights to and from congested airports like National and La Guardia. And arguably, Southwest's scope of operation likely provides the greatest opportunity to maximize competition at these airports -- but an auction would also presumably maximize the monetary compensation afforded to the existing slot holders.

The appropriate price isn't simply what the slot holders want to charge. After all, I'm sure that in an area devastated by a hurricane, there are people willing to pay $500/night for a motel room that normally goes for $50, or $20 for a gallon of milk or gasoline.

And Swelbar finishes with "I do appreciate your passion for your company or client or this topic. That said, I wish you well."

Ah, the polite brush-off since you aren't able to refute my points. Thank you for conceding to my arguments.

03.27.2010 | Unregistered CommenterScott B

Oh and just a postscript. I hope that posting at 6:17 PM is more amenable to Mr. Swelbar's schedule. Or is the weekend also verboten for posting?

03.27.2010 | Unregistered CommenterScott B

I wonder why some claim to believe in pure, fair market competition, but don't believe that DL/US should be able to do what they want to with the slots...just a question. Only when it benefits passengers right...the only thing that "fare discipline" has created is an unprofitable industry...

03.29.2010 | Unregistered CommenterBA

Thank you ScottB! I thoroughly enjoyed your retorts to the blog owner.

"Only when it benefits passengers right...the only thing that "fare discipline" has created is an unprofitable industry..."

The book on how to run a profitable airline has already been written. One wonders why the legacy airlines have steadfastly refused to read it.

03.29.2010 | Unregistered CommenterLimestone

Should legacy airline passengers essentially "subsidize" other FLIGHTS (not passengers)? Is it a piece of turkey on a stale bun or an extra bag that's the issue or is it the true cost of the RJ experiment?

AM

03.30.2010 | Unregistered CommenterAM

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