Any proposed settlement with the
U.S. Department of Justice to allow American Airlines and US Airways to consummate
their merger would require slot divestitures at Washington National Airport,
several airline analysts had expected. The settlement announced Tuesday that DOJ
and the airlines agreed to, however, extends to six other U.S. airports and
necessitates a slightly diminished position in some markets for the carriers.
Yet, both sides are walking away claiming at least a partial victory: AA and US
Airways can close their merger with synergies intact, while DOJ can cite a win
for consumers as it expands low-cost carrier penetration at key airports. Both
sides, too, avoid the uncertainty of trial.
The airlines' merger—once
viewed as a virtual lock, then thrown into doubt as DOJ and several state
attorneys general in August filed suit to block it—now is officially on,
and should be consummated next month, pending closing conditions and court
approvals.
US Airways and AA noted that
even taking settlement conditions into account, they still would deliver
"more than $1 billion in annual net synergies beginning in 2015, as was
estimated when the merger was announced in February." As the carriers view
it, the settlement barely diminishes the net value of their merger, and they
still will be better suited to compete, especially for corporate business, at a
scale to match Delta Air Lines, United Airlines and other global carriers.
DOJ, meanwhile, positioned
the settlement as a win for consumers, noting that additional low-cost entrants
at major airports will challenge the dominance of the Big Three, keep fares in
check and expand service and competition.
The Settlement
As part of the settlement
reached Tuesday, the airlines agreed to divest 52 slot pairs at Washington Reagan
National and 17 slot pairs at New York LaGuardia. "The airlines also will
divest two gates and related support facilities" at Boston Logan, Chicago
O'Hare, Dallas Love Field, Los Angeles International and Miami International,
according to a joint statement from the airlines.
"As you know," said
Bill Baer, assistant attorney general for DOJ's Antitrust Division, during a
Tuesday press conference, "we filed a lawsuit to block this merger out of
concerns about the potential reduction in competition for air travel throughout
the country. This settlement addresses those concerns and opens up the
marketplace as never before. It will disrupt today's cozy relationships among
the incumbent legacy carriers and provide consumers with more choices and more
competitive airfares."
While DOJ initially sought an
outright injunction of the merger, the department appeared to warm to a
settlement as it entered talks with the airlines. Just last week, an
out-of-court resolution seemed promising, as attorney general Eric Holder expressed a willingness to settle if the
carriers agreed to "divestures of facilities at key constrained airports."
Indeed, Baer on Tuesday
claimed the settlement was "better than a full-stop injunction," with
the agreement "eliminating barriers to entry and barriers to compete and
expand," particularly for carriers like JetBlue Airways and Southwest
Airlines.
About Those Slots
Prior to the DOJ challenge,
US Airways CEO Doug Parker in July pushed back at the premise of slot
divestitures at Washington National, but as a means to get the deal done, the
carrier ultimately agreed to those and more.
While Parker during a Tuesday
press conference said he was "not trying to minimize the fact that we had
to give up some divestitures to get this done," he said the agreement
would "by no means compromise everything that we talked about on February
14 when we announced this merger."
JP Morgan airline analysts in
a research note put it more bluntly: "Why mince words?" they wrote. " 'A
win for the airlines' is how we view the negotiated settlement."
Still, the settlement does come with a somewhat diminished presence in
Washington and New York, but not enough to rattle bullish analysts.
According to a joint statement
by the airlines, "After completion of the required divestitures, the
combined company expects to operate 44 fewer daily departures at DCA and 12
fewer daily departures at LGA than the approximately 290 daily DCA departures
and 175 daily LGA departures that American and US Airways operate today."
DOJ will lead the process of
divesting those slots to what Baer called "low-cost"
competitors.
Parker said the airlines now
"will need to go do the work of determining what 52 departures that
currently exist between the two airlines from D.C. won't exist after this. What
I can tell you for certain is the hub-to-hub flying that American brings is
best of the flying, so that will remain."
Meanwhile, the carriers also
agreed with the U.S. Department of Transportation to maintain commuter-slot
service to "small- and medium-sized markets" at Washington National,
according to the airlines.
Baer trumpeted the slot
divestitures as "the largest ever in an airline merger." Even so,
Cowen and Company airline analyst Helane Becker noted that they "would
have minimal impact on the merged company." JP Morgan analysts shard a
similar view.
Among the 52 slot pairs at
Washington National, 16 are "already being used by JetBlue,"
according to Becker. Of the 17 slot pairs at LaGuardia, five are already used
by Southwest.
"Boston and Miami were
two airports with excess gates, so there will be no impact on flying from those
airports," according to Becker. "Dallas Love Field gates are already
subleased to Delta Air Lines, resulting in no impact. The biggest impact will
be felt in Los Angeles and Chicago, as the combined company was looking to grow
in those markets. We believe L.A. and Chicago growth is possible but will be
slower than previous expectations."
The Suit, Settled
DOJ's lawsuit was a
head-scratcher for some industry watchers, considering the department in recent
years had approved mergers between Delta and Northwest Airlines, United and Continental
Airlines, and Southwest and AirTran Airways.
AA and US Airways repeatedly
bemoaned that their merger agreement was held to a different standard than those
previous deals, and DOJ clearly changed its calculus in assessing this merger.
In particular, the lawsuit, unusually for DOJ airline merger analysis, focused
on connecting markets, bag fees and US Airways' Advantage Fares. Yet, the
settlement does not appear to directly address those issues, as DOJ has cast
low-cost competition as the overarching remedy.
Both JetBlue and Southwest
have expressed interest in new slots at constrained airports, and now are in
line to gain an expanded footprint.
"Under the terms of the
settlement, JetBlue at Reagan National and Southwest at LaGuardia will be given
the opportunity to acquire the slots they currently lease from American,"
according to DOJ. "The remaining 88 slots at Reagan National and 24 slots
at LaGuardia plus any JetBlue or Southwest decline to acquire will be grouped
into bundles, taking into account specific slot times to ensure commercially
viable and competitive patterns of service for the recipients of the divested
slots."
What's Next?
As DOJ begins the process of
selling off the carrier slots, AA and US Airways finally can complete their
merger and embark on integration, for which planning has long been in motion.
Indeed, US Airways president
Scott Kirby on Tuesday suggested that the "silver lining" of DOJ's
intervention gave the carriers even more time for integration planning.
Kirby today said the merged
carrier expects to deliver some customer benefits as soon as Jan. 7, 2014, when
they expect to enable reciprocal frequent-flyer benefits. Also, US Airways in
the first quarter of 2014 expects to make progress transitioning from Star
Alliance to AA's Oneworld alliance. The carrier already has stopped selling
tickets via its Star Alliance partners.
Meanwhile, all the changes
envisioned by the merged entity's leadership—detailed throughout this year by
Parker and his management team—now are set take effect.