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Why Reagan National Could Make or Break the American-US Airways Merger

When US Airways (UNKNOWN: LCC.DL  ) and AMR's (UNKNOWN: AAMRQ.DL  ) American Airlines agreed to merge back in February, proponents of the $11 billion deal believed that it would allow both the bankrupt American and the undersized US Airways to become competitive with the much larger Delta Air Lines (NYSE: DAL  ) and United Continental (NYSE: UAL  ) . Yet even though regulators had approved the Delta-Northwest and United-Continental mergers that created the two largest U.S. airlines in the industry, the Department of Justice challenged the American-US Airways proposal on anti-competitive grounds, and one of the biggest bones of contention came from a single airport: Washington's Reagan National.

With the merger in jeopardy, US Airways and American are now reportedly seriously considering giving up part of their combined presence at Reagan National if it will lead to a settlement with the Justice Department prior to its trial late next month. Let's take a closer look at why Reagan National has become the key bargaining chip in the merger and what's at stake for the industry.

Reagan National Airport at night. Source: Wikimedia Commons.

The peculiarities of Washington airspace
From an antitrust perspective, one big question for American and US Airways hinges on how you define the market. The two airlines have argued that when you consider all three airports that serve the Washington metropolitan area, including both Dulles in Virginia and Baltimore-Washington in Maryland, the combined entity would only control about a quarter of the available seats in the market. On the other hand, if you look just at Reagan alone, US Airways and American would own more than two-thirds of the airport's available slots.

Slots are especially important at Reagan National for a couple of reasons. First, air-traffic congestion led the FAA to set limits on takeoffs and landings at five major airports, including Reagan National, in 1969. Reagan National's slot rule initially set a limit of 62 landings and takeoffs, and several rounds of federal legislation added a total of 54 new slots between 2000 and 2012. Even with the expansion, the slot rule produces almost impenetrable barriers to entry to new airlines seeking to serve the airport without bargaining with existing slot holders.

Second, Reagan National is subject to what's called the "Perimeter Rule," which limits flights to within a 1,250-mile radius of the airport. The federal government has established limited exceptions to the Perimeter Rule, with US Airways having the most beyond-perimeter slot exemptions of any airline. The combined US Airways would have exclusive rights to serve Phoenix, Las Vegas, and San Diego from Reagan National, as well as a key flight-pair between Washington and Los Angeles.

Can it really get any worse?
One key issue, though, is that even the existing situation at Reagan National is far from competitive by the Justice Department's definition. Overall, American controls a relatively small portion of the total slots that the merged entity would have at Reagan National and already US Airways has more than half of the total slots available. By that standard, it's hard to determine just how much more of an anticompetitive effect American's loss of independence would have on the market -- or whether the Justice Department would be seek to reduce the combined entity's presence at Reagan National even below what US Airways currently has.

Meanwhile, interested parties from both sides of the debate are eagerly awaiting a final outcome to the controversy. Among rival airlines, Southwest (NYSE: LUV  ) would clearly like to gain more of a presence at Reagan National, as it currently relies largely on the much less convenient Baltimore-Washington Airport. Other airlines like JetBlue stand to gain if moves from US Airways and American to give up slots improve their competitive position on their own routes. Unions are largely in favor of the merger, as the companies have granted concessions that would include pay raises for many employees. Other key cities where US Airways and American have substantial presences have lobbied for the merger as well.

Perhaps the most interesting thing, though, is that even after shares of both AMR and US Airways plunged after the Justice Department challenged the deal, both stocks have since reached new multiyear highs. Even as a January 18 deadline to complete the merger looms, it could be that thanks to the big improvement in economic conditions in the airline industry, investors have the least to lose even if the deal doesn't go through.

Aerial view of Reagan National Airport. Source: U.S. Geological Survey.

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Read/Post Comments (2) | Recommend This Article (6)

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.

  • Report this Comment On October 31, 2013, at 5:41 AM, Tyeward wrote:

    If direct market share is the problem at DCA and the DOJ´s whole basis is based off of just DCA (more than likely it is because there isn´t any other plausible justification for the block in the rest of the potential combined network), that´s fine. Court JetBlue and give them the slots and then go directly into a codeshare agreement with them and slap your flight number on them under the codeshare agreement. It´s better to do it that way than to have Southwest take too much of a bite out of it. Southwest more than likely will add only a couple of new routes (which would be wasting the slots really) and use the remainder of the slots to just enhance what they have, and that´s it. JetBlue is far more cozy with American and are already in agreement with it out of Boston and JFK. American would give up slots, however with JetBlue, the two out of DCA would be able to crossfeed one another with hardly any hassel. Legally The New American would lose marketshare but still have access to those slots by way of it´s carrier alliance. It would also give JetBlue direct access to The New Americans network as well. Southwest can take a hike. They are building up BWI which is just up the street. They don´t really need any significant slots out of DCA because of that, and they will not be a willing dance partner in any agreement.

  • Report this Comment On October 31, 2013, at 10:08 AM, AcuraT wrote:

    The funny thing about this is that US Airways percentage of seats out of Regan was greatly increased in the last two years when Delta and US Airways did a swap between LaGuardia and Regan. While US Airways got most (not all) of the Delta Regan slots, Delta got most (not all) of the US Airways slots in "restricted airspace" LaGuardia.

    Now Delta has about 50% of the flights out of LaGuaria and technically has a hub there split between its huge presence at LaGuardia and its big presence at JFK (due to its acquistion of Pam Am assets when that airline collapsed - they have about 20% of all JFK traffic as well). This allowed Delta to compete directly with United/Continental at Newark.

    So bascially, the government is now saying "We don't like what you did (US Airways/Detla) by exchanging slots, so we want to undo the damage done to competition by your deal." Prior to this exchange of slots, Delta and US Airways each had approximately 25% of the traffic at both Regan and La Guardia. Now one airline dominates each constrained airport. This deal, if it happens, would reduce the constraints at one airport, but for the other (Delta's LaGuardia) they would escape scott free with no slots lost. If this happens, you know who did better in that negotation in the end.

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