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Delta Air Lines, Inc. Gets to Stay at Dallas Love Field

By Adam Levine-Weinberg - Jan 12, 2016 at 8:40AM

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Southwest Airlines has failed in its attempt to evict a rival at its home airport -- for now.

Delta will be allowed to continue its five daily flights at Dallas Love Field. Photo: The Motley Fool

The unending battle between the airlines serving Dallas Love Field will go on for at least a little while longer. On Friday, a federal judge in Dallas issued a temporary injunction barring Southwest Airlines (LUV -1.89%) from evicting Delta Air Lines (DAL -1.60%) from Love Field, the closest airport to downtown Dallas.

Following the ruling, many industry observers praised the decision for supporting competition. After all, had Delta been evicted, Southwest would have been left with sole control of 90% of the airport's gates.

The reality is a little more complicated. Unless the federal restrictions that cap Love Field at 20 gates are removed, American Airlines (AAL -2.66%) will continue to dominate the Dallas air travel market.

Too much demand -- too little space
The current dispute arose after Delta and Southwest both failed to win the rights to use two Love Field gates given up by American Airlines as part of its merger settlement with the Department of Justice. The two rivals each wanted to expand at Love Field, which has become quite popular now that restrictions on long-haul flights have been lifted.

Instead, those two gates went to Virgin America. That left Delta stuck trying to share gates leased by United Continental, while Southwest was confined to 16 gates, preventing it from expanding beyond about 160 daily departures.

Southwest has tried to add as many flights as possible at Love Field. Photo: The Motley Fool

Southwest subsequently paid United $120 million to sublease its two gates and tried to evict Delta from sharing one of them. Meanwhile, it announced plans to expand its flight schedule to 180 daily departures.

Good intentions
In his ruling, U.S. District Court Judge Ed Kinkeade determined that Delta was likely to win a breach of contract claim against Southwest Airlines. He found that Southwest didn't have the right to sublease a gate that Delta was already using and then evict it. Naturally, Delta Air Lines applauded the ruling.

But there was more to Kinkeade's ruling than supporting Delta over Southwest. He argued more broadly that legislators need to undo the restrictions capping Love Field at just 20 gates. Indeed, that is the underlying source of all of the airport's issues.

However, the chances of achieving this aim are probably slim. The restrictions at Love Field protect the larger Dallas-Fort Worth International Airport (DFW) -- and more importantly, American Airlines, which operates its largest hub there. It took decades to lift the long-haul flight ban at Love Field, and restricting its gate capacity was key to forging that compromise.

American Airlines is the main beneficiary of Love Field's gate constraints. Photo: American Airlines.

Furthermore, it was obvious from the start that limiting Love Field's gate capacity would restrict competition. A decade-old DOJ memo raised the obvious antitrust issues posed by placing an artificial cap on the airport's capacity. The compromise went ahead because it was better than the alternative of doing nothing.

Avoiding one problem, creating others
Judge Kinkeade's ruling promotes competition in the narrow sense that Delta will get to continue operating its five daily flights between Love Field and Atlanta.

But the solution may be worse than the original problem. Southwest Airlines has already been scheduling 10 flights per day per gate in Dallas, which is generally considered the absolute maximum possible in the airline industry. (Six to eight daily departures per gate is more typical, even at busy airports.)

The additional five daily flights from Delta leave no margin for error in terms of gate scheduling. This means that bad weather or other issues can cause cascading delays or flight cancellations as planes get backed up waiting for gate space to become available.

Ultimately, if Southwest is forced to accommodate Delta going forward, it may have to pare back its Love Field flight schedule. That would be a big blow to competition, as Southwest is by far the most significant competitor to American Airlines, which operates more than 825 daily departures at DFW.

By contrast, Delta's five flights at Love Field are not very meaningful from a competition standpoint, as Delta also operates frequent flights from DFW to Atlanta. Unless Friday's ruling is overturned, American Airlines could be the big winner as Southwest's growth across town grinds to a halt.

Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines, and long January 2017 $30 calls on American Airlines Group. Adam Levine-Weinberg owns shares of -- and The Motley Fool recommends -- Virgin America. The Motley Fool is long January 2017 $35 calls on American Airlines Group. 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.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$38.34 (-1.89%) $0.74
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$33.21 (-1.60%) $0.54
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$14.62 (-2.66%) $0.40

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