The Justice Department announced Tuesday that it has cleared the $11 billion merger of American Airlines and US Airways to form the world’s largest airline, but it did so only after both agreed to surrender enough slots for discount carriers to operate dozens more flights at seven major airports.
Attorney General Eric Holder and his antitrust chief touted the settlement as possibly game changing after a sweeping round of consolidation that concentrated control of the nation’s commercial airline industry.
Under the agreement, detailed in a proposed settlement that still requires the approval of a federal judge in Washington, the airlines must divest gates and slots to low-cost carriers at airports in Boston, Chicago, Dallas, Los Angeles, Miami, New York and, most of all, at Reagan National Airport outside the nation’s capital.
The new airline would divest slots for 52 roundtrip flights by low-cost carriers at Reagan. American and US Airways would operate 44 fewer flights from that airport than their current joint total of 290. New York’s LaGuardia Airport could host 17 more daily flights by discount carriers.
As part of the agreement, the airlines will maintain a hub at Charlotte Douglas International Airport in North Carolina for at least three years. They also will maintain their hubs in New York at John F. Kennedy International Airport, in Los Angeles, Miami, Phoenix, Philadelphia and at Chicago O’Hare International Airport for the same length of time.
In the newly combined airline, Dallas/Fort Worth International Airport, where it would be headquartered, would be the busiest hub, followed by Charlotte Douglas.
Striking a deal with the Justice Department was expected to be the final hurdle for the US Airways-American merger. Shareholders have approved the deal, and a federal bankruptcy court judge overseeing American’s Chapter 11 case earlier signed off on the plan.
The settlement is likely to climax a tumultuous period in which several of the nation’s biggest airlines, beset by overcapacity and soaring jet fuel prices, filed for Chapter 11 bankruptcy protection. Assuming the latest deal is approved, six of the largest airlines will have since merged to create three mega carriers – the new American, Delta and United.
Despite that concentration of pricing power, Holder said in a statement that the settlement “has the potential to shift the landscape of the airline industry.”
“By guaranteeing a bigger foothold for low-cost carriers at key U.S. airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country,” he said.
Bill Baer, chief of the department’s Antitrust Division, called the settlement “groundbreaking” and predicted that it would “dramatically enhance the ability of (discount carriers) to compete system-wide.”
“This settlement will disrupt the cozy relationships among the incumbent legacy carriers, increase access to key congested airports and provide consumers with more choices and more competitive airfares on flights all across the country,” he said.
Baer said that low-cost carriers that acquire the slots and gates can compete not just on direct flights, but also on connecting flights nationwide.
“How do we know this?” he asked. “Because, in the past, providing even modest competitive opportunities for the (low-cost carriers) has made a real difference. A few years ago, when JetBlue started service from Reagan National, prices to Boston dropped 30 percent and consumers saved $50 million per year. And those savings came from just 16 slots, or eight round trips a day.”
The Justice Department, six state attorneys general and the District of Columbia sued in August to block US Airways’ acquisition of American, leading to negotiations over what divestments might satisfy the concerns of antitrust regulators.
American’s parent, Fort Worth-based AMR Corp., and Tempe, Ariz.-based US Airways Group Inc., hailed the agreement.
“With a renewed spirit, we are about to create the world’s leading airline that will offer … a comprehensive global network and service by the best people in the business,” said Tom Horton, AMR’s chief executive, who will serve as chairman of the combined company.
Doug Parker, chairman and CEO of US Airways who will serve as CEO of the new airline, expressed gratitude to employees “who throughout this process continued to believe in a better future as one airline and who voiced their support passionately and consistently.”
Under the settlement, American and US Airways said, the new airline must surrender:
– Enough slots to operate 52 daily flights at Reagan National, though 13 of those “slot pairs” are already leased to lower-cost carriers JetBlue and Southwest.
– Slots to operate 17 daily flights at New York’s LaGuardia Airport, reducing the approximate 175 daily flights on American’s and US Airway’s current schedules by a dozen daily flights.
– Two gates and related support facilities at each of Boston’s Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport and Miami International Airport.
In a joint notice to their employees, the airlines’ management said that the merger still will produce more than $1 billion in annual net synergies by 2015, as they estimated in announcing their merger plans in February.
The newly released slots at Reagan and LaGuardia would be sold under procedures approved by the Justice Department. JetBlue would be given the right to purchase slots that it leases for eight daily roundtrip flights at Reagan, and Southwest Airlines would have first dibs on slots that it leases for five daily flights at LaGuardia.
American, along with its American Eagle and AmericanConnection subsidiaries, serves 260 airports in more than 50 countries with 3,300 daily flights, and also has united with other airlines to form Oneworld Alliance, reaching 900 destinations with more than 10,000 daily flights.
US Airways operates more than 3,100 flights per day and serves 198 communities worldwide.