On Tuesday, AMR (NASDAQOTH:AAMRQ), US Airways (NYSE:LCC), and the U.S. Department of Justice announced that they had settled their antitrust case. American and US Airways agreed to a variety of concessions -- most notably, giving up slots covering 44 daily round-trips at Washington's Reagan National Airport -- in return for the DOJ dropping its opposition to the merger.
In the wake of the settlement, some major media outlets have reported that the terms were a big win for the airlines -- and a humiliating defeat for the Department of Justice. However, this perspective has no basis in reality. In fact, the settlement seems like a fair resolution of the case, one in which both sides made big compromises on issues they once refused to negotiate about.
Tallying winners and losers
The most biased take on the merger settlement came courtesy of The Wall Street Journal, which describes the settlement as a "humiliating retreat," and gleefully points out that the settlement does not address concerns about the disappearance of low US Airways "Advantage" fares, which was a major element of the DOJ's original complaint.
The article does acknowledge that the settlement includes provisions to transfer slots to low-cost carriers at Reagan Airport. However, it implies that regulators focused on this issue for purely personal reasons: "To offer Washington residents [like themselves] more affordable options to Florida."
Bloomberg Businessweek at least attempted to maintain an unbiased viewpoint. However, it still concluded that the concessions were minimal in the grand scheme of things. Businessweek noted that American and US Airways projected that the concessions would have no major financial impact. It also theorized that low-cost carriers would not have much power to keep airfares down among the "Big Three" legacy carriers.
It's perfectly fair to say that the settlement was good for American and US Airways; after all, it will allow them to merge. If the projected merger synergies materialize, they will easily outweigh the cost of the concessions. However, it's also worth noting that US Airways CEO Doug Parker spent a long time arguing that the merged company should not have to give up anything to merge. Ceding 44 slot pairs at Reagan Airport is a major concession on his part.
In fact, the divestitures called for at Reagan Airport are unprecedented in scale. In the United Continental merger, the DOJ had similar concerns about competition at Newark Airport, which is also slot controlled. Continental's market share at Newark was even higher than US Airways' current market share at Reagan Airport.
Yet, the combined carrier was able to satisfy those concerns by leasing just 18 round-trip slots to Southwest Airlines (NYSE:LUV). This left United with nearly 75% of the slots in Newark, whereas the new American will hold just 57% of the slots at Reagan Airport after completing the slot divestitures.
The divestitures also go well beyond what the DOJ required for last year's slot swap between US Airways and Delta Air Lines. In that transaction, US Airways picked up 42 slot pairs at Reagan Airport, and the two legacy carriers had to give up just eight slot pairs to low-cost carriers. By contrast, under the current deal, the new American will barely have more slots at Reagan Airport than US Airways did alone.
At a higher level, the settlement should help ease many of the competitive issues addressed in the DOJ complaint, too. In addition to the major divestitures required at Reagan Airport, American and US Airways will also have to give up gates at airports in New York, Chicago, Dallas, Los Angeles, Boston, and Miami. This will allow low-cost carriers to grow in those gate-constrained airports, providing more competition, and lowering airfares.
Even the DOJ's concern about the disappearance of "Advantage Fares" was partially mitigated by the settlement. US Airways traditionally offered significant discounts for connecting flights relative to competitors' nonstop ticket prices. This strategy was designed to pull more connecting traffic through US Airways' hubs, which are in smaller metro areas (with less origin and destination traffic) than the other legacy carriers' top hubs.
However, as part of the settlement, American and US Airways agreed to maintain the same level of service at all of its hubs for at least three years. Moreover, executives stated on a conference call this week that they expect to grow in all of American's new hubs. Since the former US Airways hubs are still in smaller metro areas, the company will have to continue offering cheaper connecting flights to keep flights into those hubs full.
This is not to say that there will be no fare increases associated with the merger. However, the provisions made for increased competition in Washington, and the other cities mentioned above, will offer offsetting benefits for consumers.
While it makes a great story to say that one side humiliated the other in the recently announced merger settlement, that story doesn't fit the facts. It's true that the government gave in on some of the big issues despite taking a hard-line stance early on. However, it's equally true that the airlines agreed to unprecedented concessions, despite arguing that any concessions would actually be bad for consumers.
This is the essence of a successful negotiation. Both sides came in with seemingly incompatible agendas and non-negotiable demands. At the end of the day, both sides made big compromises, but still walked away happy. The result will be good for the traveling public over the long term.
Adam Levine-Weinberg is short shares of United Continental Holdings. 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.