Thursday, July 14, 2016

Federal Aviation Administration's Newark, New Jersey, action to cost United Airlines $412M -Kathryn's Report

United Airlines has calculated the cost of losing its iron grip on valuable takeoff and landing time slots at Newark Liberty International Airport at $412 million, or $278 million after taxes, according to a company filing with the Securities and Exchange Commission.

The airline warned investors late Tuesday that it expects to record the special charge in the second quarter. The write-down is attributed to the Federal Aviation Administration's decision earlier this year to lift slot restrictions and invite new competition at Newark, where fares are among the nation's highest. United controls 902 slots at Newark, or 73 percent of the total.

Shares of Chicago-based United declined 30 cents Wednesday to $45.86. The stock is down 20 percent year to date.

The FAA's action "impaired the entire value of its Newark slots because the slots will no longer be the mechanism that governs takeoff and landing rights," United said in the filing, which also said the company would report its fiscal first-quarter earnings next Wednesday.

"What they are saying is Newark is not quite the fortress hub it once was, in terms of profitability," said Seth Kaplan, managing partner at Airline Weekly, an online trade publication. When the slot restrictions imposed eight years ago to ease airspace congestion are lifted on Oct. 30, United will still be, by far, the airport's dominant carrier, but it will have less ability to "hoard" or "squat on" unused slots and prevent competitors from using them, Kaplan said.

Slot restrictions, a rarity among U.S. airports, tend to be exploited by airlines that dominate those airports where they apply, because it's hard, if not impossible, for competitors to gain access to those airports.

"It will still be a successful hub [for United]," Kaplan said of Newark. But to keep up with its main rivals Delta and American, "they really need to run up the score there," he said. The oil industry slump has taken a toll on demand for business travel at United's Houston hub, which, like the one in Newark, was acquired with the 2010 Continental Airlines merger.

The FAA, which has been reviewing airlines' fall scheduling plans at Newark, has said it generally approves flights that were operated by a particular carrier in the previous year. Otherwise, airlines, including new entrants, have more freedom this year to grab runway access at Newark, if they can arrange to acquire arrival and departure gates. "It's more of a voluntary process," said United spokeswoman Megan McCarthy.

The FAA announced April 1 that it would open Newark up this fall to more flights and more competition because the airport's flight delays had declined. Around the same time, United dropped a plan to acquire 24 more slots at Newark from Delta, and the U.S. Department of Justice ended its related antitrust lawsuit against United and Delta, which sought to block the deal. The lawsuit said the company didn't use as many as 82 of its slots in the course of a day. In a court document, United's lawyers had strongly denied DOJ's accusations that the airline "exercised monopoly control" to "extract a Newark premium" from travelers.

JetBlue Airways Corp. said in April it would take advantage of the upcoming relaxation of flight restrictions and would shift six year-around Florida flights to Newark from La Guardia this fall.

Las Vegas-based discount carrier Allegiant Air said last month that it will start flying a total of two flights a day in mid-November from Newark with non-daily, non-stop service to Savannah, Ga.; Knoxville, Tenn.; Asheville, N.C., and Cincinnati. Allegiant will be competing with United flights on each of those routes.

An April analysis by The Record of average ticket prices on 30 popular domestic destinations found that the fares charged by United on flights out of Newark were about 15 percent higher than those charged by other carriers at Newark and at the other airports in the New York City area. On three routes, linking Newark with Detroit, Chicago O'Hare and Jacksonville, Fla., the premium exceeded 30 percent.

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