How Budget Cuts are Helping the AMR-US Airways Merger

For the most part, federal budget cuts caused by the 2013 "sequester" have been bad for business. Airlines felt the impact in April when FAA furloughs briefly snarled U.S. air traffic, leading some travelers to avoid flying. However, the airline industry is now poised to benefit from the sequester.

Last week, a federal judge set a Nov. 25 trial date for the antitrust case that could block the proposed merger between AMR's (UNKNOWN: AAMRQ.DL  ) American Airlines and US Airways (NYSE: LCC  ) .

American Airlines and US Airways are looking to merge (photo courtesy of AMR)

This expedited trial date gives the two companies a big advantage over the Department of Justice, which has been struggling through a multiyear hiring freeze. The DOJ may feel pressure to settle in order to conserve resources. This could pave the way for the merger to be approved with relatively few concessions.

Long hiring freeze

The Department of Justice first implemented a hiring freeze in early 2011, after congressional deadlock forced the DOJ to hold its budget at prior-year levels . The DOJ has become increasingly short-staffed since then, unable to fill positions that open up as employees leave.

The DOJ's budget problems were worsened by the sequester that hit most federal government agencies earlier this year. The DOJ's share of the 2013 budget cuts amounted to $1.3 billion . Through a variety of "extraordinary measures," the organization was able to avoid furloughs. That said, Attorney General Eric Holder stated in April that the department was likely to run out of options by the beginning of FY14 -- which starts Oct. 1 -- forcing employee furloughs.

Attorneys at the DOJ are thus under considerable pressure due to short-staffing, and furloughs could soon worsen this problem. To ease the staffing burden, the DOJ has gone so far as to recruit "special attorneys" for one-year unpaid positions, according to a ProPublica report.

Time to compromise?

Last week, the DOJ requested a March 3 trial date in order to have ample time to prepare its case. This came shortly after the two carriers suggested a Nov. 12 trial date . While lawyers for AMR and US Airways have tried to frame the government's proposed timeline as obstructionist, it's far more likely that staffing issues are the problem. (Furthermore, the judge's calendar is already filled in January and February for another trial.)

Now that the judge has scheduled the trial to begin in less than three months, DOJ lawyers will have to scramble to prepare their case. If they are forced to cut corners due to staffing constraints, AMR and US Airways will gain a big advantage. .

This pressure may also force the DOJ to seriously consider a settlement. While the airlines have cautiously floated compromise options -- including selling off some slots at Washington's congested Reagan National Airport -- Assistant Attorney General Bill Baer has been pushing for a "full-stop" injunction against the merger . If he feels that he does not have enough time to prepare a strong case, he may opt for the "bird in the hand" by allowing AMR and US Airways to merge if they agree to a few concessions.

Foolish bottom line

Judge Colleen Kollar-Kotelly's recent decision to set the AMR-US Airways antitrust trial for Nov. 25 was a significant win for the two companies. A speedy trial gives the airlines a better shot at holding their deal together until the verdict. Moreover, it allows the two companies to take advantage of severe budget cuts that have left the DOJ understaffed.

Meanwhile, antitrust lawyers for the government are now faced with an unpalatable choice between caving in by agreeing to a settlement, or rushing to court with a half-baked case. The first point in the battle between the DOJ and AMR/US Airways thus goes to the airlines.

Meanwhile, in Friendlier Skies...

The future of American Airlines and US Airways depends heavily on the outcome of their upcoming trial.  But two airlines are poised to profit no matter what happens.  These innovative companies have paved the way for enviable profit growth by keeping costs low and avoiding direct competition. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2619269, ~/Articles/ArticleHandler.aspx, 9/22/2014 2:23:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement