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The Deal: American, US Airways Come Out Ahead on Settlement

NEW YORK (The Deal) -- The Department of Justice extracted its pound of flesh from merger partners AMR Corp.  and US Airways (LCC), but the settlement deal with regulators announced Tuesday does little to change the competitive position of what is now on track to become the world's largest carrier.

US Airways and AMR, parent of American Airlines, when announcing their $11 billion combination back in February said the deal was necessary if the airlines were to compete against larger rivals United Continental Holdings (UAL) and Delta Air Lines (DAL). The deal, which involves US Airways acquiring the larger AMR out of bankruptcy but keeping the American name, was put in doubt in August after regulators cried foul over the combination's heft and amid fears of diminished competition.

Justice managed to win weighty carve outs in a settlement announced on Tuesday, forcing significantly more to be divested than was required for Delta to win approval to buy Northwest Airlines in 2008 or what United's UAL Corp. gave up in 2010 to buy Continental Airlines Inc. Regulators also scored a major victory in their ongoing battle to open up crowded, slot-controlled airports in the Northeast to discount competition.

But for all the fear at the time that the lawsuit was announced that Justice's action could derail consolidation or require sacrifices too severe to make the deal palatable, an initial analysis of the settlement shows that the airlines, which post-deal will combine under the name American Airlines Group (AAG), got off relatively easy.

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"Why mince words? 'A win for the airlines' is how we view the negotiated settlement," JP Morgan analyst Jamie Baker wrote Tuesday, while Raymond James & Associates managing director James D. Parker said "the settlement in our opinion is not onerous to AAG and does not diminish its prospects."

Baker said that the agreement was not material to pro forma earnings of the combination, perhaps because the airlines said that the settlement should not impact their projections for more than $1 billion in cost and revenue synergies. The settlement, which targets asset sales at specific U.S. airports and requires the companies to keep all of their hubs in place for three years, complements the airlines' goal to use the deal to expand their domestic and international route networks and grow without having to invest heavily in new equipment.

Even where the airlines were forced to cut, they emerged largely unscathed. At Washington's Reagan National Airport the combination is required to shed slots good for 104 landings and takeoffs. But post-deal AAG will still operate 250 daily departures -about 57% of the total at the airport-compared to US Airways current 55% share or 243 flights, leading Fitch Ratings to conclude the merged airline will maintain "a competitive advantage in the D.C. market."

The airlines currently compete from Reagan National to both Raleigh and Nashville, and can reach at least a third of the required slot divestiture total by simply discontinuing the redundant flights and selling those slots. 

Justice officials on Tuesday expressed a strong preference for discounters to win the slots at Reagan, a mandate that might help to strengthen AAG's position there. Analysts say selling the entire bundle to a Delta or United would be the best chance of creating a strong number two at the airport that could challenge the market leader on a broad number of routes.

Elsewhere the cuts were even less significant. American was not using five of the 17 slot pairs it is required to sell at New York's LaGuardia, and AAG can easily shed a few of US Airways' 13 daily nonstops from New York to Philadelphia or the two airlines' combined 18 daily flights to Charlotte to appease the government yet not damage its core operations.

Some of the divestitures bordered on bizarre. At Miami International Airport the airlines are being forced to surrender two gates. But the airport has been unsuccessful in the past in attracting and expanding discounter service despite having ample room to support such expansion. 

"At worst in these markets the status quo was maintained," one airline banker said. "Justice can argue the new American was not able to expand its dominance, but nothing was done to break up powerful positions."

With regulatory issues now behind it the company expects to close the deal before year's end and shift the focus to integration. Management is hopeful that having most labor groups on board will ease the transition, but there are still some holdouts.

Rich Delaney, president of the US Airways chapter of the International Association of Machinists & Aerospace Workers, in a statement said that the airline's "celebration is premature," noting that after three years of negotiations the union has requested the National Mediation Board declare an impasse. The IAM represents mechanics and other ground workers at the airline.

"Until the carrier negotiates new contracts for its own IAM-represented employees, the new American Airlines will not get off the ground," Delaney said.

Tom Higginbotham, president of IAM's American counterpart the Transport Workers Union, noted that at present American employees cannot maintain or load US Airways planes, and vice-versa.

"The synergies and seamless operation the airlines promised shareholders and passengers will not exist until our members get new contracts," Higginbotham said. "US Airways has chosen to start this merger off with major labor unrest."

Written By Lou Whiteman

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