There is a saying out there that the global airline and aviation industry is forever bound in legal knots.
Even in the U.S., it seems, where protectionism and corruption is most frowned-upon relative to other parts of the world, policy makers and airlines mix about as well as oil and water. Bureaucracy and hubris continue to prohibit both parties from jointly crafting intelligent and progressive business solutions that empower consumers and suppliers.
The latest example hails from my hometown in Dallas, TX, concerning San Francisco-based Virgin America airlines and the City Council of Dallas, who have collectively proven, once again, an inability to exercise legal practice without lapsing into a tumultuous and expensive litigious spat over available assets at Love Field airport.
Quite sadly, it is another case study of politicians vs. airline executives clashing over short-term motives rooted in hypocrisy, not rationale, while entirely downplaying the evolving business and consumer needs.
Even more unfortunate, this mind-boggling trajectory has steadily become the norm, rather than the exception, of childish political behavior in the so-called, “land of the free.”
“Let’s raise an objection to make sure everyone looks equally stupid”
Here is where it began.
On Friday morning, a Virgin America Airbus A320 landed at Dallas Love Field airport and offloaded its Chief Executive Officer, David Cush, and Chairman Donald J. Carty, to speak at a Press Conference discussing the future of its Dallas operations. The carrier currently operates nonstop services from Dallas’ larger metropolitan airport, Dallas/Ft. Worth International, located in the mid-cities between Dallas and Fort Worth, to Virgin’s main hubs in Los Angeles and San Francisco. For months, the carrier has been bidding for two gates that are available at the smaller, domestic-only Dallas Love Field airport, located just a few miles north of downtown Dallas. There are two other known airlines vying for the gates up against Virgin: Delta Air Lines and Southwest Airlines.
In an unusually bold move for a rather new, and relatively small, US-based airline, Virgin’s two Executives said on Friday that they were “confident” they would receive the two gates at Love Field airport. The gates are currently subleased to American Airlines, which American must surrender as a U.S. Department of Justice mandate in order to proceed with its merger with US Airways. American has owned these two gates at Dallas Love since 2006, although it doesn’t even use them, as it concentrates all of its North Texas operations out of its massive hub and headquarters at DFW Airport.
Prominent Domestic US Carriers serving Dallas and Fort Worth metropolitan area-airports
|DFW International||Dallas Love||Hub/Base?|
|Delta Air Lines||X||X|
Other than Virgin, there had been no prior indication, from either Delta, Southwest, American nor any airport officials, that a clear winner had emerged in the bidding process. The two gates are ready for use in a new, state-of-the-art 20-gate terminal at Love Field airport.
RELATED POST: The new Terminal 2 at Dallas Love Field airport, in pictures
On that sunny Friday morning, Virgin’s executives assured the media and flying public that both the U.S. Department of Justice and American Airlines had ratified plans to transition the two gates to Virgin in a lease transfer agreement. With the DOJ’s blessing, as well as paperwork drafted by American, the subletter, it seemed that everything was good to go.
Only one final, critical step remained to approve the transfer process, and that entailed having the City of Dallas review and sign the paperwork agreements. However, Cush and Carty, confident that the ink was all but dry on the deal, waived any lingering speculation aside, claiming that the City Council signature was “usually routine” and re-directed the audience towards an introductory fare sale on flights from Dallas Love to a slew of new markets that Virgin America plans to launch this fall from the airport, to Washington, D.C., New York, Los Angeles and San Francisco, all starting on October 13, 2014.
The schedules were loaded on Virgin’s website with promotional fares offered for as low as $79 each way in the main cabin, and the sale lasted until midnight on Saturday evening. Flights are still bookable on Virgin America’s home page.
But after the Press Conference concluded and the Virgin America A320 plane turned around and took to the skies later that day, the events that have transpired in Dallas have been anything but “routine.” The Dallas City Council ultimately rejected the lease reassignment paperwork and has delayed further actions on awarding any decisions to the three competing carriers until further notice.
What started off as pomp and circumstance in typical Virgin America flair, (the company is minority-owned by flamboyant business tycoon Richard Branson, founder of the Virgin Group) has now catapulted into a highly politicized saga between four involved airlines, the airport and political parties, with likely humiliating ramifications ahead. City Council officials claim that they need to consider other airline options besides Virgin (which, to those who can read between the lines, indicates that they are heavily biased towards gifting the gates to Southwest).
So now, six days later, what could have been an entirely painless business transaction guaranteed to bring jobs, economic growth, low airfares and welcomed competition into North Texas is now a political tug-of-war as City Council officials meet this week to assess the finer details.
As more and more details emerge, the only clarity that appears to be consistent across the board is that industry lawyers, consultants and even some of the airlines themselves are resorting to the standard operating procedures of outdated protectionism and flawed reasoning to promote self interests.
What’s worse is, if the big guys are able to win their case, this means that Dallas and Fort Worth residents will continue to be subjected to higher airfares and fewer airline choices, which is not in the interest of the public.
North Texas is still suffering massively from lack of low-fare competition
As mentioned previously, Virgin is vying for these two gates against Delta and Southwest Airlines. The common thread between Delta and Southwest is that they both already serve Love Field airport. Southwest owns 16 of the 20 gates at Love (the airport is capped at 20 maximum gates) and controls over 95% of total airport capacity, measured by seats, and offers over 1,600 weekly flights, according to CAPA and OAG. Delta and United have 1 gate each, and control the remaining capacity with several daily flights to their respective hubs at Atlanta (64 weekly) and Houston (80 weekly), respectively on regional aircraft. The outstanding two gates, sublet to American, have been dormant for several years.
Current airlines, gates and number of flights per week at Dallas Love Field airport
|Airlines||Gates||Flights Per Week|
|Delta Air Lines||1||64|
*American Airlines subleases 2 gates at Dallas Love, but does not operate scheduled services into the airport since it discontinued nonstop flights from Love Field to Chicago O’Hare in 2009 on regional jets
Meanwhile, Delta also operates a much larger concentration of flights out of DFW International airport to its hubs across the country. Virgin America only operates out of DFW airport at this time, offering 6 daily flights (3 each to LAX and SFO) out of 1 gate in Terminal E. Southwest only operates out of Dallas Love Field airport.
In its bid for the 2 gates at Love Field, Virgin stated explicitly from the get go that should any decisions rule in its favor, it would move and consolidate all of its Dallas-based operations at Love Field airport, and offer flights to its LAX and SFO hubs, as well as launch services to New York and Washington D.C., as stated above, along with Chicago O’Hare at a later juncture in spring 2015.
Delta, conversely, would split its operations between DFW and Dallas Love, by far creating the costliest scenario of the three by stretching its resources across two airports in the same metropolitan region. In contrast to Southwest and Virgin, who wish to sublease the gates directly from American, Delta has been lobbying the City of Dallas to get the gates and make them available as common-use for all airlines. So far, its campaign the least likely to succeed of the three bids.
When it comes to low-fare competition in Dallas, the City needs to realize that high-fare legacy carriers still control the dominant share of the traffic between the two airports. Combining data for airline operations out of both DFW International and Dallas Love Field, American Airlines, maintains roughly 71% of the market share within the region, measured by weekly seats. Southwest is next at roughly 14%. Spirit and Delta come in distant third and fourth places with approximately 3.3% share each.
Virgin is very far down the list with 0.06% share of the overall pie. The carrier has only been serving the Dallas market since 2011, and is among the smallest US airlines. But, that hasn’t precluded it from success in Texas within a short period of time. Virgin has executed its strategy well in the DFW market, despite the stranglehold that American has over the corporate travel sector.
The carrier has traveled down a long, hard road to profitability, 7 years to be exact, before it was able to claim its first-ever annual profit in 2013. In fact, prior to Q3 2013, it had only recorded a single quarterly profit in 2010. Timing could not have come at a worse occasion for a small upstart carrier that aimed to lure corporate travelers with a slightly more “premium” product priced at a low-fare. The 2008 Global Financial Crisis, spikes in fuel prices, and major consolidation across the US airline industry has created challenge after challenge for Virgin to win at anything other than high customer satisfaction scores, which led to constant scrutiny from Wall Street for several years.
It is appalling that City Council has overlooked Virgin’s success at DFW airport
Maintaining strict capacity discipline and pulling unprofitable routes has helped Virgin back on its feet. Virgin has shown no leniency towards under-performing markets, and has pulled the plugs on ventures into major metropolitan cities such as Orange County, San Jose, Philadelphia and Toronto. Dallas could have easily fallen prey to similar measures, but Virgin managed to gain positive traction in the market despite fare wars and elite status matches offered by American and United, who also compete with Virgin on the Dallas/Ft. Worth to Los Angeles and DFW to San Francisco markets.
It certainly helped that American filed for Chapter 11 bankruptcy protection shortly after Virgin opened its DFW station, and that United continues to fare unfavorably among customers following post-merger woes with Continental Airlines. Still, both airlines have the size and scale to crush small competitors even in the worst case scenarios. It is therefore inconceivable to believe that Virgin America has fared poorly on its existing DFW routes; otherwise, it would be outright suicidal to invest in the idea of expanding out of Love Field.
The carrier has claimed that can offer a highly differentiated product to even more customers in Dallas/Ft. Worth by flying into Love Field over DFW International. Virgin brands itself as a low-cost carrier with a hybrid-style product. Customers can up-sell beyond their base ticket price for extra legroom seating, in-flight entertainment, catering, lounge access, or even First Class.
In contrast, carriers such as American and Delta are highly legacy carriers, and Southwest offers few ancillary upsell items in addition to its standard hard product beyond in-flight WiFi and Early Boarding. Spirit is an ultra-low cost carrier that charges for all upsells, all the way down to printing one’s boarding pass at the airport.
Put simply, there isn’t any reason why politicians should feel that granting Virgin America greater gate access at Dallas airports would do any harm to the traveling public. If anything, they should be overly supportive of grass-roots efforts to bring more flights to more consumers. If Virgin wins the gates, the carrier will grow operations from 6 to 18 daily flights.
If that isn’t value-add, I don’t know what is in the eyes of City Council.
How policy-making has become a victim of its own ineptitude
Whether conducted at a local or national level, this fallout has proven that aviation policy making has an erratic track-record of consistency and communication. The situation, as it stands today, has historical ties to several legal chapters in aviation history that have taken an effect on the commercial environment dating back to the 1960’s.
The first, and perhaps most relevant, is the existence of the 40+ year-old Wright Amendment, which was repealed in 2006 after a lengthy court battle to open up Love Field airport to commercial nonstop flights between Dallas Love and cities beyond Texas, adjacent states, Missouri and Alabama. External States could only be served nonstop on aircraft seating 56 passengers or less, thereby limiting an airline like Southwest from operating a flight from Dallas Love to Chicago, for example, unless Southwest used regional jets, which it does not own.
That will change on October 8, 2014 when Southwest will be commencing its first nonstop flights from Dallas Love to 15 new coast-to-coast markets when the ban is formally lifted, after an 8-year “dormancy period” which Southwest’s two main opponents in the legal battle, American Airlines and DFW Airport, had both agreed to back in 2006.
The second relevant example, and more recent, was the U.S. Department of Justice lawsuit against the proposed merger of American and US Airways as an alleged violation of anti-trust law. Following a settlement in November 2013 that would entail both airlines surrendering take-off and landing slots at two airports, New York LaGuardia (17 pairs) and Washington Reagan (52 pairs), as well as two gates each at Boston, Chicago O’Hare, Dallas Love, Los Angeles and Miami airports, the intention was to add low-fare competition into as many airports as possible.
This is a critical evaluation point to be upheld following the slot and gate divestures. Although the impact is likely NOT going to add much low-fare competition at the end of the day (which is a separate analysis altogether) it still remains to be executed that low-cost carriers will be the beneficiaries of these assets, specifically, jetBlue, Virgin America, Allegiant, Southwest and Spirit. During the allocation processes, Virgin received six take-off and landing slots at LaGuardia and four at Reagan.
The challenge for Virgin, however, is that both LaGuardia and Reagan airports face “permiter rule” limitations when it comes to flights operating out of the airport longer than 1,250 nautical miles (Reagan) and 1,500 miles (LaGuardia). This means that Virgin’s flights out of these airports (neither of which they currently serve) cannot be connected to its two primary hubs in LAX or SFO as they fall outside the perimter limits.
This leaves few viable options for Virgin to utilize its slots from both airports based on the restrictions. Sure, short-haul options are available between markets such as New York to Chicago, or Washington to Orlando. But, the reality is that these city-pairs are already a bloodbath with low-fare competition.
Conversely, markets such as Dallas to New York and Dallas to Washington D.C. are NOT saturated with low-cost capacity share and, in actuality, are monopoly controlled by higher-fare, premium network carriers.
Data in CAPA and OAG show that for the current week, American Airlines controls a whopping 74.36% of the market share from DFW to New York LaGuardia. Delta controls 19.51%, and Spirit controls 6.14% with a mere daily flight between the two markets. Between Dallas/Ft. Worth and Washington Reagan, American controls 100% of the capacity.
Furthermore, the Dallas/Ft. Worth to New York LaGuardia and Dallas/Ft. Worth to Washington Reagan flights each rank #6 and #15 among American Airlines’ Top U.S. Domestic Origin and Destination city pairs, based on number of passengers per day, each way. They also generate yields at 19 cents, which ranks higher than New York to Miami and Dallas to Los Angeles.
Put simply, they have generated handsome profits for American. This will likely continue to be the case as American fortifies its presences in both airports following its merger with US Airways.
Of course, the dynamics will alter somewhat when Southwest commences nonstop flights from Dallas Love to New York LGA and Washington Reagan starting in November of 2014, as outlined in the initial round of 15 new nonstop markets from DAL, but the carrier has yet to unveil schedules and frequencies between each of these city pairs. It is unlikely, however, that the number will be significantly large enough to create major pricing pressure on American, and Delta, and certainly not for Spirit which aims to attract bottom-feeder traffic.
It is also well known that the low-fare “Southwest effect” is largely outdated and that the carriers airfares have risen to achieve near parity with major network carriers.
The bottom line is that Virgin has much more to gain from access to the Love Field gates than either of its competitors based on creating new flight options and choices for consumers.
It also has far more to lose than the other two if the outcome does not rule in its favor.
As such, it is inconceivable as to why the City Council is hesitating to give the gates to Virgin and instead is heavily weighing Southwest as the most viable candidate (based off of a consulting study recommendation by L.E.K., which the city of Dallas hired). L.E.K.’s conclusions theorize that the “city’s main objective” should be to maximize the number of passengers originating and terminating their trips at Love Field, and so therefore, the gates should go to Southwest.
Southwest is also stirring the pot by adding its own layer of hypocrisy
The biggest flaw in this reasoning is that Southwest hasn’t even unveiled its scheduling data for the 15 new markets it plans to introduce starting in the fall. The carrier is allegedly going to release this information in May 2014, but likely is awaiting for the gate awarding decision to be finalized prior to doing so. Obviously, the access to two additional gates could have a scalable impact on scheduling decisions so this is all fair and rational.
However, the L.E.K. findings pre-supposes the conclusion that being capped at 16 gates maximum will present major constraints for Southwest, limiting its expansion possibilities and network scale from the airport.
Again, those assumptions are entirely hyperbolic for several reasons.
For starters, Southwest IS the largest domestic airline by passengers transported. By no means is the airline constrained in terms of growth opportunities across its system-wide network other than the fact that it has chosen, on its own accord, to avoid expanding into international boundaries until its recent acquisition of AirTran. To that end, not only is the carrier commencing overseas operations starting this summer, it has also successfully managed to lobby the city of Houston to build an international gateway at Hobby airport with a Federal Inspection Services facility slated to open next year.
These facets, combined with the Wright Amendment deal, are more notches in the Southwest belt that gleas how it often is able to get what it wants.
The second irony in the whole situation is that Southwest has always publicly taken affront to the concept of creating “hub” airports across its system, even though it has large-scale operations at mid-continent airports in cities such as Houston, Denver, Chicago and even Dallas Love, which STILL ranks as one of its top-10 largest stations in spite of the Wright Amendment restrictions which have been in place since inception.
If Southwest truly had envisioned plans to transform Dallas into one of its largest “hub” markets, then it could have taken an economic incentive packaged offered by DFW Airport in 2005 to expand into vacated Terminal E when Delta shut down its hub at the airport. Southwest would have had access to 22 gates, 6 more beyond what it has today at Love, along with other incentives such as waived airport fees and the ability to draw from a larger traffic base centralized in the mid-cities between Dallas and Fort Worth. It could have also flown international routes from DFW, something it will not be able to do from Dallas Love.
Instead, Southwest chose to engage in a legal battle, which was victorious, albeit costly, for the carrier, and agreed to the terms of the settlement to be capped at 16 gates, and endure 8 years of only offering 1-stop connection itineraries for originating and terminating passengers into Dallas until October 2014.
Not that I believe Southwest made the wrong choice; in fact, I lauded this decision and was happy with the outcome. However, I don’t think it’s fair for Southwest to suddenly cry that its facing a new set of disadvantages just because the competitive landscape in its hometown city have altered dramatically since 2006. Just because Virgin America is a small and easy target, and because Southwest has political wherewithal to hire consultants and lawyers to spin the story in their favor, doesn’t mean it deserves greater market share control at Love Field.
Truth be told, Southwest is saddled by higher costs these days and its competitors have cleaned out their balance sheets via Chapter 11 bankruptcy. Its once lethargic, stagnant 800-lb gorilla across town, American Airlines, has re-emerged as a leaner foe, and its merger with US Airways, if executed seamlessly, will become a formidable industry giant that will be a tough force for even the likes of Delta, which has had its act together for years, to reckon with.
Speaking of Delta, cue another irony factor: the perpetrator in this whole mess who tipped over the dominos in 2005 when it pulled its DFW hub, edging Southwest to fight to repeal the Wright Amendment and expand options for local travelers. Now, suddenly, Delta wants to flirt with Dallas again, and this time, park itself on Southwests’ own turf at Love Field. Two more gates are available at Dallas Love, and Southwest wants everything for itself?
Meanwhile, as the AirTran integration process with Southwest has moved at snails pace, Spirit Airlines has swooped into Dallas, along with JetBlue, Virgin, Alaska and others. There are more options and choices for customers than there were before that have created challenges for Southwest to contend with, but the carrier wants to keep any further growth as suppressed as possible.
However, the market is truly not fragmented. American is still very much the king of the castle. For Southwest, being a distant #2 is tough, but in the end, it’s not right for the airline to fight back against rightful competition based on terms that it once sought to fight against in not so distant history: monopoly control.
That is why I cannot, for the life of me, understand how policymakers and consultants are siding with an airline that controls 95% of the traffic at Love field airport and wants to increase its share of the gate space from 80% to 90%.
And finally, perhaps the most ironic of all, I don’t see how Southwest can convincingly cry foul when it was once in the same boat that Virgin America is currently in. Small, narrow-body only fleet, low-fare, riddled with legal challenges barring its startup in 2007, yet innovative, hip and popular among consumers.
The short-term victors will be the pockets of those paid by politicians to delay matters
On Monday, Dallas City Council’s transportation committee met with representatives from all three stakeholders, including Cush, Southwest EVP Ron Ricks, Delta SVP Holden Shannon, and two presenters, Dallas aviation director Mark Duubner and L.E.K. Consulting professional Darren Perry, who prepared the study with the outcome in favor of Southwest.
Each of the three bidders have reiterated the same standing: Virgin has the backing of the Department of Justice and American, the current subleasor. Southwest promises that it can add 17 additional markets from Dallas if the gates are granted to them (really?). Delta still maintains that the City of Dallas needs to take over the gates and make them common use.
Turns out, nobody walked away a clear victor, and discussions have been pushed back to full City Council for a briefing on May 7.
There are short-term victors in the form of expensive lawyers and frivolous consultants who are brought in to litigate and create 2 x 4 matrices on power point slides to guide the City Council towards making the “right” decision.
For Virgin, it’s a potentially embarrassing scenario that could reflect how its never good to count one’s chickens before they hatch, particularly in light of the fact that Virgin has evaded consistent profitability for the vast majority of its operating period, so perhaps maybe best to not throw stones in a glass house.
For Delta, the efforts are futile. The airline went on the aggressive and loaded schedules for nonstop services from DAL to its hubs in Detroit, Minneapolis/St. Paul, New York LaGuardia and Los Angeles as early as fall 2013, which are also available for booking on Delta.com. But the DOJ has already rejected Delta’s bid, citing ineligiblity, as it is not a low-fare airline, and will not add much value to the picture. It is also tough to justify split airport operations in the same metropolitan area, although Delta, as the most financially sound U.S. carrier, has the bandwidth to make this happen.
For Southwest, the challenge is to prove to convince City Council that airfares will remain low despite the controversial advocacy of enhanced monopoly. That will be a very tough-sell given that its airfares out of Dallas have jumped 37% between 2008 and 2013. It also has to prove that its Dallas operations will be significantly impacted by being denied rights to a mere two extra gates, even with its 16 remaining ones operating fully-optimized.
For Dallas City Council, however, it’s just simply another rotten example of how politicians never fail to pass up an opportunity to emerge in the middle of relatively straightforward business operation, intercept the transaction with their dirty hands and then continue to add expensive, futile and time-consuming delays to “reconsider” the prospects. Usually, those in power will come to a decision that is rarely far off from what was painfully obvious from the get-go, but only to add their own seal of chest-beating to remind the public of who has the most influence, irrespective of their own short-sightedness and lack of industry knowledge.
The biggest irony of all is that Virgin America’s fare sale entailed donating $20 a ticket, to a maximum of $55,000, to the KIPP (Knowledge is Power Program) in the Dallas/Fort Worth area.
Knowledge is power, but unfortunately, the people in Power have once again proven that knowledge isn’t necessary to create noise.