Markets

How United Turned Southwest Into a New Direct Competitor

By Brett Snyder

Updated on: December 16, 2010 / 7:34 PM EST / MoneyWatch

When Continental and United (UAL) merged, the biggest concern for passing antitrust review was the Continental hub in Newark. That highly-congested airport is dominated by Continental, and regulators wouldn't be happy with growing that dominance. To avoid having a problem, Continental effectively gave the pre-merger United slots to Southwest (LUV) in order to keep the new United the same size and introduce a new competitor. Southwest has now officially announced its plans for those slots, and there's no doubt this is meant to compete with United head-on. That's actually a good thing.

The biggest concern for the Department of Justice is always the consolidation of power and elimination of competition. That's obviously OK in principle or mergers wouldn't be allowed at all, but it's not OK when it creates a monopoly or near-monopoly on big routes. In this case, the major concern was on flights between United/Continental hubs.

For example, routes like Newark to Denver and Chicago stood to lose direct competitors in this merger, and that's why Southwest was a logical choice. The airline could compete in those markets but not be a tremendous threat. That's why it was no surprise at all when the first route Southwest announced from Newark was... Chicago/Midway.

Chicago is one of the largest operations in the Southwest Airlines system and it's one of the key competitive markets that would be hurt by a Continental/United merger. At the time, the only surprise was that Southwest also announced service to St Louis. It's not usually at the top of the list for Southwest when it comes to new routes. But Midway was a no-brainer.

Everything continued down the expected path with yesterday's announcement on how Southwest is going to fill out the last 10 slots. We'll see flights from Newark to Baltimore, Denver, Houston/Hobby, and Phoenix.

So now, Southwest can butt up against United in just about every hub. Sure, Chicago/Midway isn't the same as O'Hare, Houston/Hobby isn't the same as Intercontinental, and Baltimore isn't the same as Washington/Dulles, but each airport provides a valid alternative within those metro areas. Denver, of course, is a direct hit. Phoenix, on the other hand, is really just the best way for Southwest to funnel traffic throughout the West Coast.

This is presumably exactly what the Department of Justice wanted here. While United and Continental were competitors (though fairly cozy competitors) in these markets before, there is now a real competitor going up against the combined airline. This will likely reduce fares but that doesn't mean it's bad for United.

First off, Southwest flies to different airports in many of these cities and that is a natural barrier to someone looking to switch. Also, Southwest provides a different product than United and the flights will operate less frequently. So, United still offers more frequency and full service from preferred airports for those high dollar business travelers. And it won't need to compete with anyone for those types of customers anymore.

Southwest, meanwhile, will get a lot of new traffic and it will be able to add Newark to its route map. This is playing out exactly as you would expect, and both airlines will benefit.

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