The big news in the airline industry today came from American Airlines parent AMR (UNKNOWN:AAMRQ.DL) and US Airways (UNKNOWN:LCC.DL), which got good news about their pending merger from the federal government today. The two airlines reached an antitrust settlement with the Justice Department today, resolving a dispute that had threatened to end the $11 billion deal to combine the two airlines and help them surpass United Continental (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) to become the largest airline in the world.
As you'd expect, AMR stock was up substantially, climbing about 25% as investors no longer needed to fear what the bankrupt airline would do without the US Airways merger going through. But surprisingly US Airways didn't climb nearly as much as Delta Airlines, United Continental, or JetBlue (NASDAQ:JBLU). With the US Airways-American merger going forward, why did their peers actually cheer the bigger competitive threat that the combined entity will represent? Let's take a closer look to find out what sent those stocks soaring today.
Dividing the spoils
The primary reason Delta, United Continental, and JetBlue picked up so much ground today was that investors expect that they and other airlines will end up with some of the valuable assets that American and US Airways will have to sell off as part of the antitrust settlement. Delta in particular, which rose 2.4% today, specifically welcomed the settlement, saying that it "looks forward to the opportunity to acquire slots that will be divested under the agreement."
In particular, Washington's Reagan National Airport remains a huge part of the settlement, with US Airways and American having to give up 52 slot pairs there. In addition, the two airlines will give up slots at New York's LaGuardia and also give up gates in Boston, Los Angeles, Chicago, Dallas, and Miami. Delta argued its case in a press release for why it deserves the valuable Reagan National slots, saying that it is "best positioned to continue competitive non-stop flights from Reagan National to small- and mid-sized cities that could otherwise see service reduced or eliminated."
JetBlue, which soared 6%, is already a winner under the terms of the agreement. JetBlue had already been leasing eight of the Reagan National slot pairs from American, and the settlement will allow the budget airline to purchase those slots outright without having to face competition. The Federal Aviation Administration will distribute the other 44 slot pairs to various airlines, with similar situations in the past having involved auctions that favored smaller airlines over top carriers. US Airways Executive Vice President Steve Johnson told reporters earlier today that "we anticipate it will be only low cost carriers" that will be eligible to participate in the buying process, and that "we don't expect the list will include any of the legacy carriers."
So why are Delta and United up?
Even if United, which rose 4% today, and Delta end up not directly benefiting from the merger, having one less independent carrier gives them a better chance of having future fare increases stick. Part of why American and US Airways pushed so hard for the merger was to have the chance to boost fares further. United and Delta should be able to reap the greater profits from higher fares.
Admittedly, if smaller discount airlines pick up some coveted slots at LaGuardia and Reagan, then the legacy carriers could see more competition on some routes. But with small airlines unable to match the breadth of service that the legacy carriers offer, the net impact is likely to be positive, and that's why so many airlines beyond just American and US Airways climbed so far today.