Merger would give Southwest a BWI chokehold

September 28, 2010|By Jay Hancock

Thanks to competition between AirTran and Southwest Airlines, you can choose from more than a dozen daily flights from Baltimore to Orlando, Fla. A little more than $200 — less if you catch a sale — gets you to Disney World and back.

The market works — but only as long as regulators set rules to keep it strong. And if the government doesn't do just that by intervening in Southwest's proposed acquisition of AirTran, watch fares from Baltimore to Orlando and many other places take off like a Boeing 737.

"Travelers in Baltimore could potentially really feel the loss of competition there," says Diana Moss, a vice president at the American Antitrust Institute in Washington who closely follows airlines. "That's a huge increase in market share resulting from the merger."

To note that the deal would give Southwest a whopping 70 percent of the passenger business at Baltimore-Washington International Thurgood Marshall Airport only begins to portray the change it could bring.

Southwest is BWI's No. 1 carrier. AirTran is No. 2. The discounters' low fares have helped make the airport one of the few in the country able to add passengers in a bum economy. But will we be able to call Southwest and AirTran "discount" after they marry?

The combined company would have a monopoly on two-thirds of BWI's 65 direct domestic destinations. Southwest is already the only choice on about 40 percent of those routes. AirTran is its only competitor on eight more, including those to Orlando, Indianapolis, Jacksonville, Fla., Milwaukee and New Orleans.

"I think that the Justice Department would be concerned," said Michael S. Jacobs, a law professor at DePaul University in Chicago and co-director of the International Aviation Law Institute. "If it seems to increase their power at BWI, this is what regulators would make them do: They would have to give up flights to rivals."

The Justice Department's antitrust division has to approve the deal. The department rarely opposes mergers outright. But it often forces melding companies to sell certain operations to avoid too much control in certain regions or industries. United Airlines and Continental Airlines have to give up slots in Newark Liberty International Airport as part of their merger.

At most airports, analysts say, the Southwest-AirTran amalgamation won't give regulators much concern. The deal would give the combined company a national market share of about 19 percent, which Southwest spokesman Paul Flaningan notes is slightly less than that of the combined United-Continental as well as the merged Delta Air Lines and Northwest Airlines.

But that doesn't mean there's not a potential problem, even at airports other than BWI. A passive Justice Department has approved many mergers it shouldn't have in recent years. A recent example: the marriage of Ticketmaster and Live Nation.

The fact that stock in both Southwest and AirTran soared Monday says investors foresee bigger profits — through cost-cutting, sure, but also possibly through price increases.

At BWI, the merger would give the company the kind of near-monopoly enjoyed by the likes of oil baron John D. Rockefeller in the days before he heard of Teddy Roosevelt.

Regulators use a formula called the Herfindahl-Hirschman Index to measure business competition and the health of a market. I'll spare you the details, but suffice it to say that the Justice Department starts getting worried about quasi-monopoly power when the HHI score goes over 2,500.

It's already about 3,500 for the BWI passenger market, thanks to Southwest's 53 percent grip on the traffic. A Southwest-AirTran amalgamation would jack the score up to around 5,500, which pretty much "blows the lid off the threshold" of regulatory concern, Moss said.

Some might argue that competition from Washington Dulles International and Ronald Reagan Washington National airports would keep a bulked-up Southwest honest at BWI. But these three airports hardly serve the same markets in the same way as, say, Midway and O'Hare do in Chicago.

In any event, swallowing AirTran could transform Southwest from a scrappy discounter into a something that looks more like a higher-cost United or Delta. Adding AirTran's Atlanta gates will push Southwest away from its roots as a direct flyer to more underserved locations and toward a traditional "hub and spoke" arrangement, Moss said.

"I don't really think you have the classic, low-cost-carrier profile anymore," she said.

Higher costs from a hub-and-spoke setup could include expensive leases in big-city airports, more fuel burnt to route passengers through hubs rather than directly, and higher booking expenses to set up the connections.

The job of the Justice Department is to make sure Southwest doesn't recover those costs by gouging travelers at BWI.

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