An airline turf war is brewing in Dallas. For the last four decades, Southwest Airlines (NYSE:LUV)has had a virtual monopoly on service to Dallas Love Field. However, the lifting of restrictions on long-haul flights this fall is making Love Field much more attractive for other carriers.
There's a catch. By law, Love Field is only allowed to have 20 gates -- 16 of which are already controlled by Southwest. American Airlines (NASDAQ:AAL) controls two of the other four gates at Love Field, but it agreed to give them up to satisfy antitrust regulators as part of its merger with US Airways. This has created a scramble among other airlines that are now interested in adding flights at Love Field.
Southwest would be happy to get even more gates so it can continue building up long-haul service at Love Field. Delta Air Lines (NYSE:DAL) has also made a bid to add flights at Love Field in the last few months. Finally, Virgin America threw its hat in the ring last week -- and immediately became the favorite to win these gates.
Looking for new competition
The Department of Justice has not yet clarified the process for how American will divest its Love Field gates. However, all of the airlines recognize that the DOJ's goal is to bolster competition. Specifically, DOJ regulators are concerned that the U.S. air travel market is becoming an oligopoly.
In light of this concern, Virgin America is in a great position to succeed in gaining gates at Love Field, because it is a fraction of the size of Delta and Southwest. Delta has basically admitted that Virgin America is likely to be the DOJ's preferred bidder. Soon after Virgin America announced its interest in the Love Field gates, Delta released a statement arguing that Delta and Virgin America could both operate at Love Field.
Competing for a scarce resource
All three airlines that have expressed interest in American's gates at Love Field have a case for why they would provide the most competition. First, while Southwest dominates Love Field, it's still a relatively small fish in the Dallas-Fort Worth area. Southwest tends to operate 120-130 daily departures at Love Field. Meanwhile, at Dallas-Fort Worth International Airport, rival American Airlines offers more than 750 daily departures.
Southwest needs American's gates in order to grow at Love Field. While the carrier is adding 15 new nonstop destinations from Love Field this fall -- boosting competition with American Airlines -- it will need to cut some of its current flights in Dallas to make room for the new ones.
Southwest CEO Gary Kelly has stated that it would be hard to schedule any more than 10 departures a day per gate. That means Southwest can operate at most 160 daily departures from the 16 gates it currently controls. By contrast, Southwest offers more than 200 daily departures in Chicago (where it has 32 gates), Las Vegas (where it has 19 gates), and Baltimore (where it has 28 gates).
Delta Air Lines was also quick to express interest in American's gates, which it currently leases. Last November, it announced plans to add 18 flights to its schedule at Love Field, serving a variety of its hubs and international gateways. It even put these new flights up for sale -- without knowing if it would get the gate space necessary to support these flights.
Delta's main argument for getting the Love Field gates is its big global network. If it wins the gates, it would be able to offer one-stop connections from downtown Dallas to virtually anywhere in the U.S., as well as numerous international destinations.
However, Virgin America has the strongest argument of all for getting a shot to expand at Love Field. First, Virgin America is tiny compared to Southwest and Delta, with annual revenue of less than $1.5 billion. As a result, it cannot compete effectively against American's megahub at Dallas Fort-Worth International Airport.
Second, if Virgin America wins the gates, it will add competition on several key routes. Virgin America hopes to move its three daily roundtrips to Los Angeles and San Francisco from DFW to Love Field while adding a fourth flight to each city. It will also start four daily roundtrips to New York's LaGuardia Airport and Washington's Reagan Airport and two daily roundtrips to Chicago's O'Hare International Airport.
While the city of Dallas has nominal control of who gets the Love Field gates, the DOJ can block any move that would be bad for competition. In general, the DOJ wants low-cost carriers to get the assets American is divesting. Still, given Southwest's large presence at Love Field, Delta had a realistic shot at overcoming the DOJ's objections when it was a two-way contest.
However, Virgin America would provide the biggest boost to competition. If it wins the Love Field gates, it would add new low-cost-carrier competition to New York, Washington, D.C., and Chicago -- three of the top seven U.S. metro areas.
A Virgin America victory may therefore be pre-determined. Regulators could simply exclude Delta and Southwest from the bidding process on the grounds of Delta's overall size and Southwest's large current footprint at Love Field. This provides a clear path for Virgin America to build up a small focus city in Dallas -- its first outside of California.
Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.