MIAMI — The US Department of Justice (DOJ) sued on Tuesday to block a slot swap between legacy carriers Delta Air Lines and United Airlines at their respective hubs in the New York metropolitan area. The proposal, which emanated out of United’s plan to shift its high frequency services to the Los Angeles and San Francisco area from New York JFK (a Delta hub) to its own hub at Newark, would involve the trade of 15 daily slot pairs at New York JFK for 12 slot pairs at Newark Liberty (about one third of Delta’s total holdings of 32 daily slot pairs).

Assistant Attorney General William Baer announced the suit on a call with reporters on Tuesday, charging “United with trying to maintain and enhance its monopoly position at Newark, violating Section 2 of the Sherman Act.” The lawsuit also charges “United and Delta Airlines, the seller of the slots, with violating Section 1 of the Sherman Act by entering into an agreement that restrains trade.”

JFK is not in play

It is instructive that the DOJ isn’t suing to block the portion of the deal covering slots at New York JFK. While JFK is technically a slot restricted airport, in practice the only portions of the day where those slot restrictions have any relevance is at peak hours. Outside of the early morning window from 6 to 10 am, when arriving international flights coalesce with domestic flights timed for business travel, and the evening window from 5 to 9 pm, when most international flights depart, JFK is pretty much unrestricted.

Moreover, even given those constraints, no carrier that has tried to add service at New York JFK in recent years (mostly international ones) has had trouble securing slots. And to top it off, Delta holds just 31% of the slots at JFK airport, with low cost carrier (LCC) JetBlue constraining them with another 28% of slots. Given all of these factors, there is little danger of United and Delta being unable to consummate this portion of the deal.

Defining the market

Newark on the other hand, does have genuine slot constraints. United controls 73% of the slots at Newark Airport, an airport which many carriers would love to serve but are prevented from doing so. For example, Virgin America tried for years to acquire suitable slots at Newark before finally starting service in 2012, while Southwest pounced eagerly on the 18 daily slot pairs United was forced to divest as a result of the United-Continental merger. JetBlue would also love to expand its service profile at the airport, as would ultra low cost carriers Frontier Airlines and Spirit Airlines.

As far as the DOJ’s case goes, the first key thing to consider is defining the market. United will argue that Newark is just one airport in the overall New York metropolitan area, and that all three airports compete with each other. Under this scenario, United’s trade of slots at JFK for slots at EWR would merely be moving flights around within the same market. If this argument is taken to its extreme, it would be no different than United and Delta moving terminals or shifting flight times within their operations at a single airport.

We don’t find this reasoning compelling however, due to Newark’s relevance to the state of New Jersey. JFK and La Guardia can plausibly be said to mostly serve New York City, but Newark not only draws upon New York City proper, but the massive affluent population of Northern and Central New Jersey, as well as its large swath of businesses and business travelers. Newark’s addressable market is tangibly different than that of La Guardia/JFK, and so it should at least be treated as partially separate.

Assessing customer benefits

Assessing the customer impact of the EWR slots flowing to United requires layering of several impacts, some positive and some negative. Under the transaction’s scenario, United would gain 12 additional slot pairs at Newark. This would harm consumers by reducing direct competition (by removing 12 daily Delta flights that overlap with United’s network) and preventing additional LCC competition from driving down fares in Newark. However, it would benefit consumers, particularly business travelers, in the form of new destinations and frequencies on existing routes.

If the DOJ tries to force Delta and United to give up anything more than four or five Newark slots to the open market as concessions, the carriers are likely to cancel the Newark portion of the transaction, at which point Delta would simply write a check to United (we are currently hearing about $1 million per JFK slot) for the slots, while there would be no change in Newark operations. This would avoid the consumer harm of lost competition from Delta, but it would sacrifice any benefits from added service. And, more importantly in the DOJ’s eyes, it would remove the chance to inject some LCC or ULCC competition into Newark.

The third scenario for the DOJ to consider is a mixed scenario where United gets some (say 7-8) of the Newark slot pairs, while 4-5 slot pairs are auctioned off as a concession, most likely to one of Southwest or JetBlue. In this scenario, some of the lost competition from Delta is replaced by LCC competition, and the deal still goes through, generating new services for United.

The optimal path for the DOJ depends on which customer benefit they value more: preventing United from acquiring additional slots (i.e. removing Delta’s competition), or injecting more LCC competition into the Newark market. If it’s the latter, then the DOJ absolutely should allow the deal to go through with 4-5 slots auctioned off as a concession.

United wins under any scenario

Regardless of what happens to the Newark slots, United is a winner here. Since the DOJ is only suing to block the Newark portion of the deal, the JFK component of the deal will still go through. So not only is United going to be able to save millions of dollars per year by closing operations at New York JFK, they will also be compensated for the slots that they will give to Delta. If Delta can’t trade Newark slots for the JFK ones, then they’ll simply write Delta a check. And that check will be to the tune of $15 million, an added one-time bonus to the bottom line for slots that were set to become dead economic assets any way. Regardless of the outcome of the DOJ’s Newark lawsuit, United is a winner here.