Delta, WestJet receive DOT approval for joint venture

Delta Air Lines and WestJet received tentative approval from the US Department of Transportation late on  Friday for their proposed antitrust-immunized joint venture in transborder markets. The approval would see the combined service operating approximately 27% of traffic across the US/Canada border, with Air Canada in the top position at 45% and United Airlines trailing at 12%. But the approval comes with conditions.

Specifically, the DOT will require WestJet to divest eight slot pairs at LaGuardia Airport in New York City. Southwest Airlines, JetBlue, and Spirit Airlines were among the carriers opposed to the JV/ATI approval without some action on the LaGuardia slots. WestJet initially acquired the slots as part of a divestiture deal tied to the Delta/US Airways slot swap at LaGuardia and Reagan National Airport in Washington, DC.

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Major concerns about New York City – Toronto traffic

The DOT devotes a significant portion of its decision analysis to the NYC-Toronto market. This is the highest volume transborder market and represents 6% of all US-Canada passengers. It also carries 99% of its travelers on non-stop routes. Delta and WestJet indicated that capacity was likely to decrease as the partnership moved forward. That reduction cannot be easily replaced by new entrant competitors.

Under the proposed JV, New York–Toronto would go from five competitors to four, with a combined Delta/WestJet accounting for just over 20 percent market share. Our analysis of this market shows competitive concerns, despite having four competitors under the scenario in which the applicants are granted ATI. Under normal conditions, market forces would be able to address competition concerns, despite the high levels of concentration. However, market entry for services involving NYC airports, particularly for new entrants, is not likely, timely, or sufficient to address our concerns due to the persistent inability of carriers to access slots for new and/or additional services at LGA and JFK, as well as entry barriers at Newark (EWR) resulting from its IATA Level 2 status.

The DOT also observes that “A revenue-sharing and metal-neutral JV, in which Delta and WestJet act as a combined entity, would revert effective control of WestJet’s acquired LGA slots to Delta.” Given Delta’s position at LaGuardia, “the carriers’ combined slot portfolio would surpass the threshold of concern that was established in 2011. Furthermore, the transaction would decrease LCC slot holdings at LGA, with a likelihood of increased fares in at least some markets where WestJet, as an independent LCC, was a price leader.”

The proposed remedy seeks a single portfolio of the eight slot pairs, sold via blind auction, to a single recipient airline. The slots divested must be within 30 minutes of the current WestJet slots but need not be those exact slots. Only carriers currently holding less than 10% of the total LaGuardia slot portfolio are eligible to bid.

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Other markets losing competitors

The DOT identifies several other markets that are likely to see reduction in competition. In total approximately 30% of passengers across 330 city pairs are expected to see a notable reduction in competition. This could affect 7.1 million passengers annually based on the DOT’s analysis.

Markets that go from three to two competitors, or two to one competitors, pose significant competitive concerns and represent approximately eight percent of the transborder market, totaling 1.9 million passengers. The 169 markets facing a substantial reduction in competition mostly involve travel to western Canada (Calgary, Edmonton, Winnipeg) where WestJet is strongest. Many of the markets that go from three to two competitors include large markets such as: Calgary–Los Angeles/ NYC/ Orlando; Vancouver–Hawaii; Winnipeg–Las Vegas; and Edmonton–NYC.

Excluding Swoop, too

The carriers proposed to include WestJet’s ULCC arm Swoop in the JV partnership “for financial purposes, but not for the purpose of integrating Swoop’s operations into the metal-neutral JV, because Swoop’s low-cost business model is as incompatible with the commercial strategy of the proposed JV as it is with that of WestJet.” The DOT finds this an unacceptable approach as Swoop provides necessary competitive counter-balance in the market.

Although Swoop is ultimately part of the WestJet corporate structure, Swoop is an air carrier separate from WestJet, with its own air operator certificate, and its status as an independent entity and its low-cost structure would provide significant competitive discipline. To address the competitive harm that we believe is likely to occur, and for which market forces are not sufficient to counter, we propose to exclude Swoop from the JVA. Absent this remedy, we tentatively would find that the alliance substantially reduces competition.

In addition to explicitly excluding Swoop from the JV the DOT will require that the agreement be updated so that Swoop is not restricted from growing its transborder presence, “We also propose that the Joint Applicants remove all restraints placed on ULCC operations in the JVA, including caps and markets served…” The original application would have limited that expansion in favor of the partnership.