US low-cost carrier Southwest Airlines has been awarded two within-perimeter slot exemptions at Washington Reagan National Airport by the US Department of Transportation (DOT) to launch daily flights to Houston William P Hobby Airport. It was agreed that the carrier’s application “best meets the objectives of the slot exemption statute” having tendered for the slots in a tough competition alongside JetBlue Airways and US Airways.

Southwest Airlines will now begin the planning processes for the new service, which must be launched no later than August 5, 2013 and bring what it describes as “sorely needed low-fare competition” in a market currently served by United Airlines under a full operational monopoly.

In its application it said its flight option would attract tens of thousands of new passengers. A projection produced by Campbell-Hill on its behalf using standard traffic forecasting techniques, suggested Southwest’s service proposal will stimulate over 105,000 new annual passengers in this market. It says it will “carry many” of the new passengers itself, but others will be carried by United, “which historically lowers its fares” in response to direct Southwest competition.

Southwest said current average fares for non-stop service between Houston and Washington National are more than 60 per cent higher than Southwest's average non-stop fare between Houston and Baltimore Washington International, a similar distance. According to Southwest, United’s average one-way non-stop fare in Reagan National – Houston market (serving George Bush Intercontinental Airport) is $334, 43 per cent above average Reagan National fare levels for that distance. In fact, it said, Houston is the “fourth most overpriced” of all Reagan National non-stop markets.

"Houston is one of Southwest Airlines' three original cities, and this proposed new service is another example of our strong commitment to continue adding value to the community," said Gary Kelly, Chairman, President, and Chief Executive Officer, Southwest Airlines.

The process for the tender of two slot exemptions at Reagan National airport was launched by the DOT on November 13, 2012 after Spirit Airlines announced it would no longer require the two slot exemptions it used to provide flights to Fort Lauderdale after it switched service to Baltimore Washington International Airport. These slot exemptions authorised service to a medium hub or smaller airport within the 1,250-mile perimeter established for civil operations at Reagan National Airport.

Three US carriers made official applications to the DOT to introduce new flights from Ronald Reagan Washington National Airport this year. Alongside Southwest’s application, US Airways planned flights to Oklahoma City, while JetBlue Airways proposed flights to Jacksonville. According to the DOT these were judged across a wide criterion but promoting a service that produced maximum competitive benefits, including low fares, carried the most weight in this proceeding and Southwest’s application “best satisfied” this requirement.

According to the DOT report into the slot exemption process the US Airways application was eliminated first. The carrier proposed to inaugurate the first-ever non-stop service between Reagan National and Oklahoma City, fulfilling the slot exemption requirements of bringing competitive air services to a community unserved from the airport. However, it planned to use a two-class, 99-seat Embraer 190 on the route and DOT ruled that the use of this equipment “would not utilise the available capacity at Reagan National as efficiently” as the competing proposals.

The DOT subsequently completed a comparative analysis between the two remaining applications. JetBlue Airways said its planned offer would have provided a “much-needed, low-fare competitive service” from Reagan National to Jacksonville, a route currently served on a monopoly basis by US Airways. According to the DOT findings, travellers pay a 45 per cent ($98 per passenger) fare premium for travel between Reagan National and Houston compared to other markets of similar size and distance. By contrast, the fare premium in the DCA-Jacksonville market is only 10.4 per cent ($21 per passenger).

“While JetBlue’s application has merit, we find that Southwest’s application will likely produce greater consumer benefits, particularly fare savings for a large pool of passengers in a market experiencing significant fare premiums, than would JetBlue’s Jacksonville service,” said the DOT in its findings report.

Southwest’s current operations from Houston Hobby and in particular the success of its low-cost business model, is understood to have played a key role in influencing the legislator to its ruling. It said that in the past the introduction of Southwest flights at Houston Hobby has “had a positive competitive effect” on otherwise-monopoly service from Houston’s George Bush Intercontinental Airport. When the carrier began flights to Denver in 2006 and ended United Airlines’ city pair monopoly at Houston’s main gateway fares “dropped significantly and passenger usage increased,” said the DOT.

Similar patterns can be seen where Southwest inaugurated Houston Hobby service to Greenville/Spartanburg, SC; Philadelphia, PA; and Jacksonville, FL; as well as the New York City and San Francisco metropolitan areas. “Given this history, together with Southwest’s presence at Houston Hobby, including the many connecting opportunities, we are confident that the award of these slot exemptions to Southwest will have a competitive effect in the greater Houston market,” said the DOT in its final verdict.

“Moreover, Houston is a much larger market than Jacksonville, providing for a larger pool of potential passengers. When examining current schedules (both on a city-pair and airport-pair level) we found, consistent with the City of Houston’s claims, that, when adjusted for population size, there is less air service between Reagan National and Houston than between Reagan National and Jacksonville. Houston Hobby also offers more online connecting opportunities for passengers than does Jacksonville,” the DOT added.