Settlement terms won’t hurt American, US Airways, executives say

Posted Wednesday, Nov. 13, 2013  comments  Print Reprints
What’s next • American has asked the bankruptcy court to schedule a hearing Nov. 25 to approve the settlement • Federal judge Colleen Kollar-Kotelly has accepted the states’ settlements and is likely to give final approval to the DOJ settlement after a 60-day comment period as required under federal law. The merger can be completed during the 60-day period. • The carriers expect the merger to close by mid-December. • Frequent fliers will be able to earn miles on American and US Airways starting on Jan. 7.

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A settlement with the Justice Department that requires American Airlines and US Airways to give up slots at key airports as a condition of merging will not hurt their ability to compete with Delta Air Lines and United Airlines, the airlines’ top executives said Tuesday.

“This network will be the best network in the world and would have been before and will be after this [settlement],” said US Airways chief executive Doug Parker, who will become CEO of the new American Airlines once the airlines combine. “These divestitures, while something we wish we weren’t doing, don’t come close to have any impact on a [market share] chart because it’s just not that big.”

The settlement agreement, announced on Tuesday morning, calls for the airlines to divest 52 takeoff and landing slot pairs at Reagan National Airport in Washington, D.C., and 17 slot pairs at New York’s LaGuardia Airport. The carriers are also giving up rights and interests to two gates each at Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles and Miami.

In exchange, the Justice Department and six states agreed to drop their opposition to the merger, which they blocked with a lawsuit in August.

“We think we made a very common-sense deal here with the DOJ that addresses their concerns and allows us to get on with a really great merger,” said American chief executive Tom Horton. Once the deal is approved in court, the airlines should be able to complete their merger in mid-December and form the largest airline in the world

For American, it will mark the end of a tumultuous two years in bankruptcy court, and a new beginning as a bigger company faced with integrating two workforces.

As part of the deal, American and US Airways agreed to maintain major hubs in Charlotte, New York JFK Airport, Los Angeles, Miami, Chicago O’Hare, Philadelphia and Phoenix for a period of three years. In Texas, the airlines previously pledged to keep its headquarters in North Texas and maintain service from DFW to a dozen Texas airports over the next three years in a settlement with Attorney General Greg Abbott.

In Washington, Justice Department officials said the settlement will allow discount carriers to boost their presence at key airports and provide pressure to hold down fares.

“This settlement improves on a problematic status quo. It provides more competition than exists today in this industry,” said Bill Baer, U.S. assistant attorney general in charge of the antitrust division.

Southwest Airlines, JetBlue Airways and Delta Air Lines all expressed interest in acquiring the slots at Reagan and LaGuardia. However, the Justice Department stressed that it was interested in low-cost carriers acquiring the slots, not legacy airlines like United Airlines and Delta that are currently the two biggest U.S. airlines. The DOJ will have final approval on who will be able to acquire those slots.

Of the slots that the airlines are releasing at Reagan, eight slot pairs are already leased and used by JetBlue Airways. Of the 17 slots at LaGuardia, five are currently leased and used by Southwest Airlines.

“We see the legacy carriers, in our complaint issued in August, makes this pretty clear as part of the problem and we see low-cost carriers as a key part of the solution,” Baer said.

An antitrust trial had been scheduled to begin on Nov. 25 in federal court in Washington. The settlement was approved by federal Judge Colleen Kollar-Kotelly on Tuesday afternoon; however, there is a 60-day comment period during which the merger will still be able to close.

Even after the slot divestitures, the executives said the merger will still create $1 billion in net synergies. Combined, the new airline will have more than 6,500 daily flights to 336 destinations in 56 countries. American Airlines Group will have its headquarters in Fort Worth and will employ over 100,000 workers. Only 112 flights will be affected by the settlement deal, the carriers said.

The DOJ filed its antitrust complaint in August, just weeks before the airlines expected to close the merger, saying it would harm consumers and raise airfares. In response, both airlines mounted a public campaign that included an employee rally at the U.S. Capitol and letters sent to the DOJ from politicians and local business leaders in support of the merger.

“This is not a process any of us wanted to go through or that we thought we had to go through but it sure has been nice to see the outpouring of support for our merger from so many people,” Parker said.

Horton said the settlement was a great outcome for American’s employees, who previously agreed to concessionary contracts as part of the airline’s bankruptcy restructuring. The merger was unveiled in February, only after US Airways spent months convincing creditors, unions and ultimately Horton and American’s board that a combination was the best path forward.

“The people of both companies have stood very tall to get us here through many distractions,” Horton said.

The combined carrier will have a market capitalization over $17 billion. Creditors and shareholders of American’s parent company, AMR Corp., will receive 72 percent of the new entity, with US Airways shareholders obtaining 28 percent. A bankruptcy hearing has been scheduled for Nov. 25 to approve the settlement agreement.

US Airways plans to exit the Star alliance led by United Airlines “quickly” in 2014 and join American’s Oneworld alliance. The frequent flyer programs of both airlines will have reciprocity starting on Jan. 7.

Wall Street applauded the settlement as investors sent shares of AMR soaring. The stock closed at $12, up $2.48 or 26 percent. Shares of AMR (ticker: AAMRQ) are traded in over-the-counter markets since the stock was unable to maintain listing requirements for the New York Stock Exchange after it filed for bankruptcy.

Shares of US Airways (ticker: LCC) only modestly improved on Tuesday, up 25 cents, or 1 percent, to close at $23.52.

J.P. Morgan analyst Jamie Baker called the settlement “a win for the airlines” and told investors that it doesn’t believe the concessions will have a material financial impact on the combined company’s earnings next year.

Helane Becker, an analyst at Cowen and Co., said the merger should never have been blocked by the DOJ in the first place and also sees little impact from the concessions.

“We believe the divestitures at Washington National and LaGuardia are in line with expectations, and will likely result in a reduction in regional flying,” Becker told investors in a research note on Tuesday. “The biggest impact will be felt in Los Angeles and Chicago, as the combined company was looking to grow in those markets.”

Parker said the carriers will announce what service it will cut at Reagan and LaGuardia at a later date when it gets closer to divesting the slots.

“We are going to have to go through and figure out what’s best for our network,” Parker said. “We’d like to fly them all but we can’t anymore.”

Andrea Ahles, 817-390-7631 Twitter: @Sky_Talk

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