Southwest Airlines Co. (LUV - Analyst Report) and JetBlue Airways Corp. (JBLU - Analyst Report) announced that they have won bids to purchase take-off and landing slots at Reagan National Airport (DCA) in Washington. The slot divestment is part of the mega merger deal between American Airlines and U.S. Airways Group Inc. that led to the formation of American Airlines Group Inc. (AAL - Analyst Report).
Southwest Airlines has won bids for 27 pairs of slots, while JetBlue will take over 12 such slot pairs and obtain additional 8 pairs in DCA, which is currently being leased from American Airlines. However, the financial details of the deal were not disclosed and are subject to final approval by the U.S. justice department.
The slot win will expand Southwest’s daily departure from DCA to 44 from the present 17. Also, the company expects to declare new flight details later in the quarter with services starting from the third quarter.
On the other hand, JetBlue announced its intention to activate 30 roundtrip flights from DCA as against the current 18. The increased number of flights will cover new destinations. The news was greeted positively by the shareholders of Southwest and JetBlue, as both the stocks ended in green with 2.96% and 5.75% gains, respectively.
Notably, in Nov 2013, both American Airlines and U.S. Airways got the nod for the merger after clearing a series of legal hurdles. As part of the agreement, the carriers agreed to give up 52 take-off and landing slots at DCA and 17 pairs at La Guardia airport (LGA) in New York. Notably, American Airlines still needs to vend 5 more pairs of slots at DCA to fulfil the terms of the merger.
The Department of Justice (DOJ) argued that the opening up of slots to rival carriers will enhance accessibility at some of the busiest airports and simultaneously heighten competition. The divesture has already begun with Southwest acquiring 22 take-off and landing slots while Virgin America took over 12 such slots at the busy international airport of LGA. Southwest has been significantly benefitting from the slot divesture demanded by the DOJ.
For quite some time DCA has been a very popular and high fare airport serving the political and business commuters of Washington. Both Southwest and JetBlue intend to bring down airfares to and from DCA.
We believe the deal will present a win-win situation for both the carriers as they will not only gain additional slots, but also get a significant share of the Washington air service market with competitive ticket pricing. However, consumers will be the biggest gainers from the heightened competition as it will result in low average fares.
Southwest sports a Zacks Rank #1 (Strong Buy), while JetBlue carries a Zacks Rank #2 (Buy). Another stock worth considering within this sector is United Continental Holdings Inc. (UAL - Analyst Report), which carries the same Zacks Rank as Southwest.