American Airlines (AA) and US Airways, the DOJ seemed to be drawing a line in the sand in order to stop further consolidation of the airline industry, which has already seen the mergers of Delta with Northwest and United with Continental. The DOJ said an AA-US Airways merger, like previous mega-airline deals, would lead to higher fares and less service to underserved communities around the nation.
In the end the U.S. Department of Justice (DOJ) blinked. When it filed its antitrust lawsuit on Aug. 13 seeking to prevent the merger between
Nevertheless, in the face of mounting pressure from U.S. congressmen, state authorities and local communities, as well as a massive lobbying effort by the unions for both AA and US Airways, the DOJ agreed to the settlement instead of going to trial when the two carriers said they would give up slots at seven major airports.
AA and US Airways also settled litigation brought by Arizona, Florida, Michigan, Tennessee, Pennsylvania, Virginia and the District of Columbia. Texas had already settled its lawsuit with AA-US Airways, which a number of analysts said effectively doomed the chances for success for the DOJ’s antitrust lawsuit. AA-US Airways also agreed with the U.S. Department of Transportation (DOT) to continue small community service from Washington Reagan National Airport (DCA).
What it all means is that AA and US Airways can now move forward to complete their merger, which will create the largest airline in the world. The deal is expected to close in December after AA goes to bankruptcy court on Nov. 25 with the final terms of the merger following the settlement with the DOJ. AA and US Airways executives were clearly relieved they didn’t have to go to court to litigate the DOJ antitrust lawsuit. They also said that while they would have preferred not to give up routes and slots, those divestures wouldn’t materially impact their merger plans.
“This is an important day for our customers, our people and our financial stakeholders,” said Tom Horton, chairman, president and CEO of AMR, parent of American, and incoming chairman of the board of the combined company. “This agreement allows us to take the final steps in creating the new American Airlines. With a renewed spirit, we are about to create the world’s leading airline that will offer, along with our oneworld partners, a comprehensive global network and service by the best people in the business.
Doug Parker, chairman and CEO of US Airways, and incoming CEO of the combined airline, gave thanks to all the constituents that made the settlement happen, especially the lobbying from unions for both airlines. “In particular, we are thankful to our employees, who throughout this process continued to believe in a better future as one airline and who voiced their support passionately and consistently,” he said. “We also want to thank the elected officials in the states and communities we serve, the business leaders in our hub cities, and the thousands of customers who endorsed and supported this effort. Thank you as well to the U.S. Department of Justice, the state attorneys general and the U.S. Department of Transportation. We are pleased to have this lawsuit behind us and look forward to building the new American Airlines together.”
Under the terms of the settlement, the two airlines will divest 52 slot pairs at Washington Reagan National Airport (DCA) and 17 slot pairs at New York LaGuardia Airport (LGA), as well as certain gates and related facilities to support service at those airports. The airlines also will divest two gates and related support facilities at each of Boston Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport and Miami International Airport. The divestitures will occur through a DOJ approved process following the completion of the merger. Those slots will then be put up for sale to carriers that have been approved by the DOJ.
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. The divestitures required by the settlement are not expected to impact total employment at the new American.
To ensure much of the service currently operated by the carriers to small- and medium-sized markets from DCA is maintained, the new American has agreed with the DOT to use all of its DCA commuter slot pairs for service to these communities. The new American intends to announce the service changes that will result from the divestitures in advance of the sale of the DCA and LGA slots, so that the airlines acquiring those slots have the opportunity to maintain service to those impacted communities.
Also as part of the settlement agreement with the state attorneys general, the new American has agreed to maintain its hubs in Charlotte, New York (Kennedy), Los Angeles, Miami, Chicago (O’Hare), Philadelphia, and Phoenix consistent with historical operations for a period of three years, though AA and US Airways executives said they expect to continue serving those hubs for long after that. In addition, with limited exceptions, for a period of five years, the new American will continue to provide daily scheduled service from one or more of its hubs to each plaintiff state airport that has scheduled daily service from either American or US Airways. The previous settlement agreement with the state of Texas will be amended to make it consistent with the settlement.
For its part, the DOJ said the divesture of slots and gates at “key constrained” airports across the country to low cost carrier airlines (LCCs) would enhance system-wide competition in the airline industry resulting in more choices and more competitive airfares for consumers. It also said settlement would increase the presence of the LCCs at Boston Logan International, Chicago O’Hare International, Dallas Love Field, Los Angeles International, Miami International, New York LaGuardia International and Ronald Reagan Washington National.
“This agreement has the potential to shift the landscape of the airline industry,” said Attorney General Eric Holder. “By guaranteeing a bigger foothold for low-cost carriers at key U.S. airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country. The department’s ultimate goal has remained steadfast throughout this process – to ensure vigorous competition in airline travel. This is vital to millions of consumers who will benefit from both more competitive prices and enhanced travel options.”
Assistant Attorney General Bill Baer of the DOJ’s Antitrust Division said the extensive slot and gate divestitures at these key airports are groundbreaking and will dramatically enhance the ability of low-cost carriers to compete system-wide. “This settlement will disrupt the cozy relationships among the incumbent legacy carriers, increase access to key congested airports and provide consumers with more choices and more competitive airfares on flights all across the country,” he said.
Despite the divestitures, American and US Airways executives were quick to point out, the new American is still expected to generate more than $1 billion in annual net synergies beginning in 2015, as was estimated when the merger was announced in February. Indeed, the combined stock price of the merged company has actually risen since the merger was announced in February, with the total value of the new American Airlines now set at $17 billion, compared to $11.5 billion when the merger was announced.
For the flying public, the settlement means the number of legacy carriers is now down to three – American, Delta and United. Whether so called low-cost carriers like Southwest, JetBlue, Frontier, Alaska Airlines, Virgin America and others can keep fares low and put the pressure on for the legacy carriers to serve underserved communities remains to be seen. For their part, however, AA and US Airways executives were quick to point out that consumers will now derive vast benefits from what will now be the largest airline network in the skies.
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