Who Is The Real Winners Of The AA & US Airways Merger?

The past week, Department of Justice gave its blessing for US Airways and American Airlines to become married.

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Fireworks exploded throughout the miles & points community. Some people love the merger. Others despise it with a passion. Personally, I am indifferent except for my strong dislike for future CEO Doug Parker.

The merger created winners and losers. One group of winners that have been neglected are the other airlines. Say what? Other airlines can be big winners in this merger. For the merger to be approved by the DOJ, the "new" American Airlines needed to give up "52 slot pairs at Washington Reagan National Airport (DCA), 17 slot pairs at New Your LaGuardia Airport (LGA), along with certain gates and facilities used to support services at those airports. [In addition}, the airlines agreed to divest two gates at: Boston Logan, Chicago O'Hare, Dallas Love Field, Los Angles International and Miami International." Other airlines will be able to bid on these divested slots. In a nod to consumers, the DOJ ordered that the only airlines that could bid on these slots are LCC or Low Cost Carriers. 

The Motley Fool put together an amazing article on how Southwest and Jetblue will be the true winners of the AA & US Merger. According to Adam Levine-Weinberg, the author of the article, "The DOJ wants these slots to go to 'low-cost carriers' to enhance competition at these two key airports. Instead of specifying low-cost carriers, or LCCs, it would have been more straightforward to call out Southwest Airlines and JetBlue Airways directly. Not only are they the top two LCCs in the U.S., they are also by far the most interested in expanding at Reagan and LaGuardia and have the greatest financial resources."

Who Is A LCC?

LCCs or Low Cost Carriers typically are non-legacy airlines. "On paper, at least, the U.S. still has a substantial number of LCCs that could potentially bid for the slots that American and US Airways are giving up. Beyond Southwest and JetBlue, privately held Virgin America and Sun Country Airlines fit the LCC designation. Even Alaska Air -- which is technically a legacy carrier -- markets itself as a 'low-fare' carrier. Additionally, there is a growing group of airlines that brand themselves as 'ultra-low-cost carriers.' This includes Spirit Airlines, Allegiant Travel, and Frontier Airlines."  Even though many of these airlines are categorized as low cost carriers, not all of them are likely to bid on the spots of DCA or LGA.

Why Not Bid?

This is where the Motley Fool article gets really good. Many have predicted only Southwest and JetBlue will bid on the now empty slots. Why? A few reasons:

1) No West Coast Flights

 - DCA & LGA have flight distance restrictions of 1,200 miles. Frontier and Virgin America have 
   hubs on the West Coast. They are unlikely to bid on the slots at DCA & LGA, because their
   flights from those airports will require a stopover. No direct flights to their respective hubs.
   Why would you want slots that would require layovers?

2) $$$

   DCA & LGA are airports with lots of customers with money. Money that can be spent on
   airlines tickets. All the airlines know this. For this reason, the cost of the slots are going to
   be pricey. "The last time slots became available at LaGuardia and Reagan (in late 2011), 
   JetBlue paid $40 million for eight slot pairs at Reagan and $32 million for eight slot 
   pairs at LaGuardia." The cost of all the slots will reach $200-$300 million range.

   The cost to buy the slots might knock-out a few LLCs. Sun Country and Frontier are probably
   out. Both airlines do not have the capital to invest in those slots. While Sun Country and  
   Frontier are LLCs without the money to buy the spots, Allegiant and Spirit Airlines do have 
   the cash. The two airlines have the cash, but the two still won't bid on the slots. It will go 
   against their ultra-low cost carrier model. "Investing tens of millions of dollars in slots does 
   not seem to fit the ultra-low-cost carrier "profile." They are more likely to serve alternate 
   airports where operating costs are lower. That's because ultra-low-cost carriers cater to 
   leisure travelers who are very price-sensitive, as opposed to business travelers who will 
   pay extra for the convenience of using a close-in airport." For these reasons, Allegiant
   and Spirit Airlines will bow out of the bidding.

Who Does That Leave?

That leaves the two giant Low Cost Carriers: Southwest and Jetblue. These airlines are going to get slots at two of the business national airports in the country and access to millions of customers. How do I know this? Look back to the 2011 sale of slots at DCA and LGA. Who bid on these slots? Only Southwest and JetBlue airlines and they will do it again. 

Who will be the real winner of the merger?  Southwest and JetBlue! 
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