When the U.S. Justice Department went to court to block the American Airlines-US Airways Group Inc. (LCC:US) merger, antitrust chief Bill Baer signaled he was gearing up for an all-or-nothing fight.
Stopping the deal, he said, was “the right outcome for consumers.” The Justice Department hadn’t mapped out fixes that would salvage the combination, he told reporters on an Aug. 13 conference call.
Thirteen weeks later, the department announced a settlement that requires few concessions from AMR Corp. (AAMRQ:US)’s American and US Airways and clears the way for a $17 billion tie-up creating the world’s largest airline. The carriers said yesterday that their goal of $1 billion in savings and new revenue remains intact.
“You just wasted a lot of our tax money on a bad lawsuit,” said Mike Boyd, a former airline executive who has run his Evergreen, Colorado-based consulting firm Boyd Group International Inc. since 1984. “The airlines didn’t give up much of anything.”
To resolve regulators’ concerns that the deal would give the merged airline too much clout at Washington’s Ronald Reagan National Airport and boost prices, American and US Airways agreed to divest 52 pairs of takeoff and landing slots there. That still would leave the combined carrier with more than half the daily departures.
Providing access for lower-fare rivals (AAMRQ:US) was a narrower remedy than once seemed possible under the initial Justice Department objections to the deal, which included concern that US Airways would end a discount ticket offering and that the new American would have too much control over certain routes.
“This was just enough for the government to save face,” said Savanthi Syth, a Raymond James Financial Inc. (RJF:US) analyst in St. Petersburg, Florida.
The merged carrier will retain American’s name and headquarters in Fort Worth, Texas; U.S. hubs in New York, Miami, Dallas, Chicago, Washington, Los Angeles, Phoenix, Philadelphia and Charlotte, North Carolina; and partnerships such as American’s trans-Atlantic alliance with British Airways to jointly plan schedules.
AMR’s plan to exit bankruptcy is based on the merger with Tempe, Arizona-based US Airways. The judge overseeing that case set a hearing for final consideration of the restructuring on Nov. 25 -- the day that the airlines and the Justice Department had been set for trial in the antitrust suit. The antitrust case judge also must approve the settlement.
The accord sets in motion an eventual auction of the Reagan National flight slots along with 17 pairs -- each representing one takeoff and one landing -- at New York’s LaGuardia. At five other airports not subject to U.S. controls on flight slots, the merging airlines will have to cede gates.
Making room for low-cost carriers will help stimulate the competition that the Justice Department sought, Baer said.
“This settlement improves on a problematic status quo,” Baer told reporters on a call. “It provides more competition than exists today in this industry, and that is obviously good news for consumers all across the country who stand to benefit from more choice and more competitive airfares.”
US Airways Chief Executive Officer Doug Parker, who will run the post-merger American, said low-fare competition is nothing new. The concessions won’t dent the combined carrier’s status atop the U.S. industry or its ability to take advantage of its new-found clout, he said.
“There’s definitely nothing at all we view as a financial risk to the companies or we would not have agreed to it,” Parker told reporters on a conference call.
At Reagan National, for example, eight of the 52 daily slot pairs covered by the settlement already were leased by American to JetBlue Airways Corp. (JBLU:US) At Dallas Love Field, home to Southwest Airlines Co. (LUV:US), American is ceding two idle gates now being leased to Delta Air Lines Inc. (DAL:US)
“Why mince words?” Jamie Baker, a New York-based analyst for JPMorgan Chase & Co. (JPM:US), said in a note to clients. “‘A win for the airlines’ is how we view the negotiated settlement.”
Investors sent AMR up 26 percent to $12 in over-the-counter trading in New York, because equity holders will get a payout as part of the bankruptcy restructuring. US Airways rose 1.1 percent to $23.52, pushing its year-to-date gain to 74 percent.
Baker recommends AMR as neutral and US Airways as overweight, the equivalent of buy, while Raymond James’s Syth rates US Airways as market perform. Syth doesn’t cover AMR.
The settlement will help smaller airlines such as JetBlue, said Jeff Straebler, managing director for aerospace in John Hancock Financial Services’ bonds and corporate finance group in Boston.
Baer signaled that the Justice Department would give preference to discount carriers as the takeoff and landing rights are sold at Reagan and LaGuardia and gates made available in Dallas, Chicago, Los Angeles, Miami and Boston.
Southwest anticipates a “fair and transparent process” to win the right to expand at Reagan National and LaGuardia, said Brad Hawkins, a spokesman. A JetBlue spokeswoman, Jenny Dervin, reaffirmed the New York-based airline’s Reagan National interest and is “looking at other opportunities this proposed settlement creates as well.”
While the settlement doesn’t address Advantage Fares, as US Airways calls one of its discount ticket categories, the Justice Department wouldn’t want an agreement that regulates pricing, said Jonathan Lewis, an antitrust lawyer at BakerHostetler in Washington.
“They’re not going to go in there and micromanage what the fares should be,” he said. “The preferred remedy always is structural or divestiture. The idea is if there is enough to be divested, then marketplace will take care of the pricing. The competitive marketplace will result in competitive prices.”
The merger will shrink the ranks of U.S. full-service carriers to just three, with American, United and Delta, and leave Southwest, the biggest discounter, in fourth place by traffic. JetBlue is No. 5.
The deal also will widen the size gap between the largest airlines and the low-fare carriers that the government seeks to nurture in Washington, New York and elsewhere. Traffic through September at Spirit Airlines Inc. (SAVE:US), for example, was about 6 percent of the combined total for American and US Airways.
“We think it would have been better to just stop the merger,” said Bert Foer, president of the Washington-based American Antitrust Institute, which advocates strong enforcement of antitrust laws.
“The Justice Department seems to have traded a strong national player in return for a future hope -- the hope that some of these low-cost carriers will grow into much more significant competitors,” Foer said.
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