Of the many situations that would allow a merger between US Airways (NYSE:LCC) and American Airlines parent company AMR (NASDAQOTH:AAMRQ), a settlement is seen near the top of the list. Recent reports indicate that the airlines have drawn up a proposed settlement to discuss with the Department of Justice. Let's take a look at a few factors to gauge what this could mean for investors.
Early this week, US Airways, American Airlines, and the DOJ agreed on a mediator for the merger battle. However, its significance was and is questionable. It's not uncommon for courts to ask both sides to have preliminary talks before trial so it remains unclear how serious these mediation discussions are.
Reports surfaced on Wednesday that the airlines were crafting a settlement proposal to present to the DOJ according to "two people familiar with the matter." These reports, though, remain unconfirmed by the airlines and the DOJ.
There is the possibility that no real settlement is being created. But if a settlement is being drafted or discussed, officials on both sides would likely not be at liberty to publicly disclose the matter.
From what the reports say, this proposed settlement would involve the merged carrier surrendering some slots at the Washington National Airport. This fits with previous concerns over the merger, whereby the DOJ raised concerns that the new American Airlines Group would control nearly 70% of the slots at the airport. The forfeiture of some of these slots is definitely something the DOJ would seek if it were to settle the case based upon its criticism of the airline's control in its legal complaint.
It is unclear how many slots the airline would give up at Washington National Airport. Rival carrier JetBlue Airways (NASDAQ:JBLU) has said that it wants the combined carrier to have no more slots than the current US Airways has -- about 55% of total slots. However, JetBlue has a motive of its own. With a large presence in the Northeast, JetBlue would be eager to pick up some slots at the highly popular Washington National Airport. But since slots are tightly held, the easiest way for the airline to do so would be if another carrier gave some up.
The settlement may pursue this angle but it is unlikely that a settlement would involve the combined carrier having fewer slots than the current US Airways since the current US Airways does not exert excessive control over the airport.
Ready for trial
Both sides are giving the outward appearance of being ready for the merger battle of the century at trial. The DOJ has always taken an aggressive stance, talking little about a settlement while the airlines continue to note they are ready to go to trial.
But even in a case where both sides plan to settle, each party will still say it is ready to fight in court. After all, who would expect to have any bargaining position after saying they are not ready to go to trial?
Because of this, I view these "ready for trial" statements as being of little value in determining whether a settlement is in the works. They could both be planning to go to court on Nov. 25 but even if settlement talks are serious, neither side is going to admit to not being prepared.
What about the states?
When the DOJ filed its lawsuit against the airline merger, it did so alongside several states. It is unknown how many of these states could be in the supposed settlement talks, but the issue of the states needs to be addressed by the airlines if their merger is to proceed.
With one state already settling, it is important to look at the challenges ahead for US Airways and American Airlines. I will further analyze these factors in the second part of this series: How Serious Are the Airline Merger Settlement Talks With the States?
Alexander MacLennan owns shares of AMR. He is also long the following options: long January 2015 $17 calls on US Airways Group. 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.