Texas has become the first state to settle with US Airways (NYSE:LCC) and American Airlines parent company AMR (NASDAQOTH:AAMRQ) in the airline merger case. But observers always expected that the new airline would remain in Fort Worth, sparing Texas from major job and service cuts. Yet the state US Airways calls home is also part of the lawsuit -- and officials there quite likely have a different perspective.
Arizona: US Airways headquarters
The settlement in Texas was helped by the merged airlines' plans to make Fort Worth their new headquarters. But Arizona's likely suing for the same reason: the threat this merger would pose to US Airways' operations at the Phoenix Sky Harbor Airport and to the airline's headquarters in Tempe, Ariz. Sitting between the highly popular Los Angeles airport, where American Airlines has substantial operations, and the newly merged airlines' Fort Worth headquarters, it's easy to envision the new airline reducing service to Phoenix.
But not everyone agrees that the new American would forget about Phoenix. The Centre for Aviation cites a higher percentage of Phoenix's passengers as origin-to-destination passengers than in Dallas or Los Angeles. This carries a particular significance since it implies that many of the passengers using the Phoenix airport actually have Phoenix as either their origin or final destination and that shifting all of these operations to Los Angeles and Dallas would not serve this market segment. The Centre further notes strong demand for business travel among Phoenix area employers.
However, a past airline merger presents a more pessimistic scenario. When Delta Air Lines (NYSE:DAL) merged with Northwest Airlines in 2008, it made many of the same promises as US Airways and American Airlines. But service to Delta's Cincinnati hub has substantially dropped off as operations shift to Northwest's Detroit hub. And while Cincinnati at least maintained its hub status, Delta steadily shrank the former Northwest hub of Memphis until the airport lost its hub status a few months ago.
These moves have allowed Delta to better set up its operations and build a more economical route network. But Arizona likely cares about far more than the new American Airlines' bottom line, which may mean that any settlement with the state will require more concessions from the airlines.
Evolution of a settlement
If Arizona state officials are trying to extract some major concessions from the airlines, the merger lawsuit is a good place to start. For guidance on possible solutions, look to the agreement between United Airlines, Continental Airlines, and Ohio officials.
Concerned about service to the Cleveland airport, Ohio officials got the new United Continental to agree to continue service at 90% for at least two years and maintain Cleveland's hub status. Any settlement reached in Arizona will likely include provisions for maintaining a certain level of service to Phoenix and the airport's hub status.
While the new American Airlines Group may have otherwise wanted to cut more from Phoenix to reduce costs, concessions forcing the airline to maintain service to Phoenix should not be a deal breaker. We've already seen from the Centre for Aviation that Phoenix does carry with it certain advantages. Furthermore, it is still quite possible that the airline will be allowed to slightly reduce Phoenix service to right-size operations similar to how the concessions in Ohio mandated that United Continental retain only 90% of its Cleveland service. By being allowed to drop a small percentage of service, the new American would be able to select the least economical routes while retaining the ones more to the airline's advantage. Therefore, I would still view a settlement on these terms with the state of Arizona as a positive sign for advancing the merger.
Although both Arizona and Texas have one party in this airline merger based in their state, the outlooks without concessions are very different. While Texas wanted to protect what would become the merged airlines' new headquarters, Arizona may lose a major airport hub unless the airlines grant it concessions.
Therefore, a settlement with Arizona is still possible. However, it will almost certainly come with conditions that the new American Airlines Group still provide a significant level of service to the Phoenix Sky Harbor Airport. Investors should continue to monitor which other states reach settlements with the airlines to get a better feel for how out-of-court developments are going.
Editors Note: article previously stated Dallas was the headquarters of the airline. This has been corrected to Fort Worth. The Motley Fool apologizes for and regrets this error.
Alexander MacLennan owns shares of Air Canada, AMR, Delta Air Lines, and Gol Linhas. He is also long the following options: $22 January 2015 Delta calls, $25 January 2015 Delta calls, $30 January 2015 Delta calls, $17 January 2015 US Airways calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.