Airline M&A

Meet the Mega-Airline: Regulators Roll Over for American-US Airways Merger


The U.S. government has ended its effort to block the merger of American and US Airways (LCC), clearing the way for a deal that will create the world’s largest carrier. The airlines expect a federal bankruptcy court to approve the combination on Nov. 25, setting up American parent AMR’s exit from court-supervised restructuring before the merger closes next month.

The fierce rhetoric Justice Department attorneys unleashed in August—in a lawsuit that alleged the deal would lead to higher fares and fees for travelers—had become muted by November. Concessions from the deal with antitrust regulars will bring about noticeable changes in Washington, D.C., and New York, where American and US Airways will be required to sell landing slots in the hope that smaller rivals like Southwest (LUV) and JetBlue (JBLU) will be able to provide competitive balance. Here’s a guide to what’s likely to happen for the new mega-airline, its competitors, and travelers.

1. Does the settlement require big changes from American and US Airways in the merger? Not really. Both the government and the airlines are claiming victory, naturally, but it’s hard to see much the Justice Department lawyers managed to alter from the initial merger proposal. American and US Airways will need to sell access at two airports that cap flights with takeoff and landing slots—52 pairs at Reagan National near Washington and 17 at New York’s LaGuardia Airport—while also relinquishing gates to rivals at five other large airports. That will mean 44 fewer daily flights at National and a dozen at LaGuardia. Regulators will get to say which airlines gain the access lost by the merged giant, and so far it has been made very clear that legacy rivals like Delta and United aren’t welcome. That means Southwest, JetBlue, and Virgin America will get the chance to offer new service. Still, on the big items this merger will proceed much the way American and US Airways had hoped.

2. Will the smaller airlines provide a significant curb to higher pricing by the Big Three of American, United (UAL) and Delta (DAL)? It’s an open question, of course, but it’s difficult to see how the little carriers will manage it. With the type of limited concessions required in this deal, Southwest and JetBlue will find some new market opportunities with flights from Washington, New York, Chicago, and Los Angeles. But legacy airline hubs are referred to as fortresses for a reason: The airports serve as their financial backbones—like Delta’s base in Atlanta or American’s in Dallas-Fort Worth—and are heavily defended. For the bulk of the new airline, the concessions will not mean much to the financial or operational targets of the new American Airlines, as the companies stressed on a call Tuesday with reporters.

3. Why didn’t the government obtain more concessions? Why not just go to trial? A trial held big risks for both sides. And while antitrust attorneys said the government’s case had merit, it was also a lawsuit that ran into heavy criticism from an outpouring of workers’ unions and political leaders in the many cities where American and US Airways employ lots of people. Major lawsuits are not litigated in a vacuum; both sides are keenly attuned to public opinion and the politics of the case. Airline workers even rallied at the U.S. Capitol, highlighting for Congress the fear of job loss to balance concerns about gouging consumers.

4. Will the traveling public end up paying higher fares? Probably. After years of airline mergers and capacity cuts—as well as new fees for things like bags and assigned seats—fliers have capitulated to the industry’s changes. There is also more consumer awareness of the high costs facing the airline industry from the volatility of fuel prices. Most travelers now see it as obvious that someone has to pay—and it’s almost always them.

5. Why is the settlement so concentrated on service at Reagan National? US Airways was already the dominant carrier at that airport, which has severe limits to its growth in terms of arrival/departure slots and physical space to expand. (It’s on the Potomac River, for one thing.) Combined, the new airline will have 56.5 percent of the flights at the airport but will need to give up essentially the same amount of flights that American had before the merger was announced.

6. Is there a winner in this? Yes—the attorneys who will bill the new American Airlines for many, many hours of work.

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • LUV
    (Southwest Airlines Co)
    • $29.24 USD
    • 0.56
    • 1.92%
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