AMR, US Airways, and the Government Go to Counseling

Editors Note: This article previously incorrectly stated the London Philadelphia route was still up in the air for AMR & US Airways. This route has actually already been given up as part of a settlement with the EU. The incorrect section section has since been removed. The Motley Fool apologizes for and regrets this error.

AMR and US Airways are still waiting to merge. Photo credit: AMR.

Ever since the U.S. Department of Justice sued AMR (UNKNOWN: AAMRQ.DL  ) and US Airways (UNKNOWN: LCC.DL  ) to prevent their planned merger, the two sides have dug in, vigorously defending their viewpoints.

Assistant U.S. Attorney General Bill Baer told reporters that nothing short of a full injunction against the merger could protect consumers. Meanwhile, AMR and US Airways have been working tirelessly to line up support for the merger among congressmen, state and local officials, chambers of commerce, and even their own employees.

Now, the two sides will go to "counseling." On Monday afternoon, AMR, US Airways, and the federal government stated in a court filing that they have agreed to work with a mediator to try to settle the case. The two sides are scheduled to go to trial in just four weeks, but this development significantly increases the likelihood that they will reach a settlement before then.

Risky business
While lawyers for both sides have each projected an air of confidence, going to trial would be a risky move for both sides. The DOJ has made a strong case that consolidation has been a contributing factor in recent fare increases, and that another merger would make it even easier for airlines to tacitly coordinate on pricing.

On the other hand, the pre-2008 airline landscape -- which featured frequent price wars -- was not healthy or sustainable. AMR and US Airways also have a solid case, as they can argue that the improved financial health of U.S. airlines is a good thing. Moreover, while consolidation may be leading to higher ticket prices, consumers still might be better off with three strong network carriers, rather than two strong ones and two weaker ones.

With both sides having reasonable arguments, it makes sense to settle the case if possible, rather than risk an all-or-nothing verdict. Indeed, AMR and US Airways executives have stated from day one that they would be open to a settlement. However, Monday's news was the first sign of progress in that direction.

What needs to happen
Much of the DOJ's complaint dealt with competition on one-stop connecting routes. Given the scale that a merged American and US Airways would have, it is inevitable that there will be hundreds of routes that lose a one-stop competitor in a merger. As a result, the DOJ will need to drop that complaint as part of a settlement.

The main issue that will need to be resolved in a settlement is market share in congested airports. Washington's Reagan National is the one airport where the combined carrier will definitely need to shrink in order to win DOJ approval. US Airways already holds a 55% share of the slots there, enough for more than 200 daily departures, while AMR holds a fair number of slots, too -- enough to support roughly 50 daily departures.

Since Reagan Airport is slot-controlled, other carriers cannot add flights there without buying or leasing slots, which rarely become available. The top two low-cost carriers in the country -- Southwest Airlines (NYSE: LUV  ) and JetBlue Airways (NASDAQ: JBLU  ) -- have both expressed a keen interest in expanding there.

On Southwest's earnings call last week, CEO Gary Kelly stated that he expects the AMR-US Airways merger to eventually be approved, but only with slot divestitures. He noted that AMR and US Airways might have to give up slots at New York's LaGuardia Airport (where they have a much lower combined market share) as well as at Reagan Airport. Kelly said that Southwest was very interested in expanding at both airports.

JetBlue CEO Dave Barger has also been adamant that US Airways and AMR should have to give up slots at Reagan Airport if they merge. In fact, Barger has argued that no carrier should be allowed to have more than the 55% of slots that US Airways already holds. In other words, he wants the two carriers to give up all of American's current slots. JetBlue is also excited about the possibility of expanding at Reagan National Airport. In fact, back in 2011, the company paid $40 million for eight slot pairs there .

Let's make a deal
The decision by AMR, US Airways, and the DOJ to work with a mediator significantly increases the chances that they will settle the antitrust lawsuit. As is typically the case in litigation, a settlement makes sense for both sides, as it allows each side to get something it wants while avoiding the risk of an all-or-nothing verdict.

The exact parameters of a settlement are unclear, but the centerpiece will undoubtedly be a divestiture of slots at Reagan Airport. I expect that AMR and US Airways will ultimately agree to give up 20-30 slot pairs, or roughly half of AMR's current slot portfolio. These are small concessions to smooth the path of a merger that could deliver big long-term benefits to AMR and US Airways.

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The DOJ's lawsuit has created massive uncertainty for the major airlines, particularly AMR and US Airways. But two airlines are set to earn enviable profits no matter what happens. The Motley Fool's special report on the airline sector names these two companies and explains how they are leading a revolution in the airline industry. Click here for your free copy!

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  • Report this Comment On October 30, 2013, at 5:55 AM, eaglelocksmith13 wrote: about a real reporter do a list of ALL airlines and where they are the dominate carrier and what % they own!

    Thanks, Steve N.

  • Report this Comment On October 30, 2013, at 12:33 PM, TMFGemHunter wrote:

    Steve: The only comparable example is United Airlines at Newark Airport, where I believe it has somewhere between 70% and 75% of the slots. As part of the United-Continental merger, the combined company had to lease 18 slot pairs to Southwest to improve competition. That's still not a great situation, but it's not quite comparable to the situation in DC because 1) Newark has more capacity than Reagan to begin with; and 2) Newark is not a universally preferred airport for business travelers in the same way that Reagan Airport is.

    There are other airports where one carrier is dominant (United in Houston, Delta in Atlanta, Detroit, and Minneapolis, US Airways in Charlotte, American in Dallas-Fort Worth all come to mind). However, none of those airports are slot-constrained. In other words, if other carriers want to expand their they can.

    The difference with Reagan Airport (along with Newark, LaGuardia, and JFK in New York) is that it is slot constrained. Unlike the other airports, there are plenty of airlines that would love to expand significantly at these 4, but can't do so. US Airways currently flies tons of inefficient 50 seat planes from Reagan Airport to cities that could support service on much larger aircraft. Why? Because it needs to use all 200+ slots it holds in order to keep competitors out.


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