American Airlines (NASDAQ:AAL) on Wednesday announced its long-threatened cutbacks at Ronald Reagan Washington National Airport. The airline is being forced to end some flights at the congested airport just outside the nation's capital as part of its merger with US Airways, in order to make room for low-cost carriers. As a result, American will end nonstop service to 17 cities from Reagan Airport.
The impact of these flight cuts will vary significantly from city to city. The airports losing service can be divided into three camps. First, there are several airports that will continue to have nonstop service to Reagan Airport through another carrier. Second, there are a handful of airports that have flights to one or both of the other Washington D.C.-area airports on other airlines. Third, some airports will lose their only service to Washington, D.C. Those cities are the real losers here.
Federal regulators are requiring American and US Airways to give up 52 slot pairs at the airport as a condition of their merger. This will necessitate dropping 44 round-trip flights (the other eight slot pairs are already leased to JetBlue Airways (NASDAQ: JBLU)).
The 17 cities losing flights are: Augusta, Ga.; Detroit; Fayetteville, N.C.; Fort Walton Beach, Fla.; Islip, N.Y.; Jacksonville, N.C.; Little Rock, Minneapolis, Montreal, Myrtle Beach, S.C.; Nassau, Bahamas; Omaha; Pensacola, Fla.; San Diego; Savannah, Ga.; Tallahassee; and Wilmington, N.C.
Category one: the lucky ones
A few cities will still have nonstop service to Reagan Airport. They are merely losing some competition. Detroit and Minneapolis are both Delta Air Lines (NYSE:DAL) hubs and will continue to have ample service on Delta. The airline is also starting a nonstop flight between Omaha and Reagan Airport next month. Lastly, Air Canada flies between Reagan Airport and Montreal.
Delta and Air Canada will now have monopolies on these four routes, which could drive prices up. However, with the exception of Omaha, all of these cities also have direct service on other airlines from Washington Dulles International Airport and/or Baltimore-Washington International Thurgood Marshall Airport. This indirect competition should help limit price increases.
Category two: the ones in between
While most of the cities American is dropping will not retain service to Reagan Airport, many have direct flights to Dulles Airport or BWI. In this context, it's helpful that United Continental (NASDAQ:UAL) operates a hub at Dulles and Southwest Airlines (NYSE:LUV) operates one of its largest focus cities at BWI.
Among the cities losing nonstop service to Reagan Airport, United flies from its Dulles hub to Fayetteville, San Diego, and Savannah. Meanwhile, Southwest and its AirTran subsidiary fly from BWI to Little Rock, Islip, Nassau, and San Diego. Lastly, Spirit Airlines (NASDAQ: SAVE) offers seasonal service from BWI to Myrtle Beach between late April and early November.
Category three: the real losers
This leaves six airports that are actually losing their only service to the nation's capital: Augusta, Fort Walton Beach, Jacksonville, Pensacola, Tallahassee, and Wilmington. Residents of these cities will either need to connect at a nearby hub or drive one to two hours (or more in some cases) to the nearest airport that will still have nonstop service to Washington, D.C.
It's very unlikely that the airlines that buy American's slots at Reagan Airport will maintain service to small cities. It simply doesn't make financial sense to spend millions of dollars to buy a slot and then use it for a low-traffic route.
However, there's still some hope for these communities. United Airlines operates the only other true hub in the D.C. area, and it may view American's downsizing as an opportunity to expand. United already serves plenty of small and medium-sized cities from Dulles Airport, and it could probably generate enough connecting traffic to profitably serve some or all of the cities that American is dropping.
American Airlines (and former US Airways) executives stubbornly resisted the idea of giving up slots at Reagan Airport. They even went to Congress to tell lawmakers that many small cities would lose their service to Washington, D.C. if antitrust regulators required the merged carrier to divest slots.
The reality is not quite so stark. American Airlines is dropping service to 17 cities from Reagan Airport later this year, but only six of those cities are actually losing their sole direct service to Washington, D.C. Even those cities could potentially be "rescued" by new service on United to its Dulles hub. Meanwhile, fliers in the D.C. area are likely to see lower airfares to popular destinations as low-cost carriers build up service at Reagan Airport.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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.