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As DOJ Talks Possible Settlement over American Airlines/US Airways, We Talk Possible Concessions

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As DOJ Talks Possible Settlement over American Airlines/US Airways, We Talk Possible Concessions

As DOJ Talks Possible Settlement over American Airlines/US Airways, We Talk Possible Concessions
August 30
12:53 2013

MIAMI — The following timeline will provide you with up to date coverage of the US Department of Justice’s (DOJ) lawsuit to block the proposed merger between US Airways and American Airlines.

Update 8: Thursday November 7, 2013: 15:00 EST


 

Several updates to this timeline

Firstly, here is a link to the amended complaint which features a few tweaks and an amended list of 1,008 markets with increases in HHI greater than 250. This list actually overstates the number of markets affected by separating out airports within the same metro area (such as Orange County, Ontario, and Los Angeles being considered as three separate markets).

Now the following report from Bloomberg quotes Attorney General Eric Holder as saying:

What we have tried to focus on is to make sure that any resolution in this case necessarily includes divestitures of facilities at key constrained airports throughout the United States

Vinay’s Take


This makes me cautiously optimistic that the two parties can settle this out of court. Using the word facilities allows for the carrier to pair gate divestitures at airports with gate constraints along with slots at the four slot restricted airports in the US to create a settlement proposal that alleviates the DOJ’s antitrust concerns. With that in mind, here is a settlement package that I can see working:

*Note, all slot sales must occur at prices agreed upon by the DOJ. The gates would be available for use by competing airlines under a common-use scheme. The merged carrier would be allowed to continue using these gates when not requested by other airlines.

  • Sell to JetBlue the eight Washington Reagan slot pairs that they are currently leasing from American
  • Divest 37 additional slot pairs at Washington Reagan, generated by eliminating overlapping routes between the two carriers’ networks, reducing frequency on the New York JFK to double daily from 6x daily, equalizing frequencies to all hubs of the merged carrier with the current 9x daily to Philadelphia, and spreading 17 flights worth frequency reductions across the existing US Airways operation
  • Divest 10 slot pairs at New York La Guardia by eliminating American’s current 6x daily flights to Charlotte and equalizing frequencies to all hubs of the merged carrier with the current 14x daily on US Airways to Charlotte
  • Sell to Virgin America the 15 Newark slots (7.5 slot pairs) that they are currently leasing from American at a price of $150,000 per month
  • Make available 10 gates at Chicago O’Hare, 5x US Airways gates at Terminal 2 and 5x American gates at Terminal 3, Concourse G
  • Give up access to American’s gates at Terminal B, Pier 2 at Washington Reagan
  • Make available American’s gates on Concourse A, plus 5 gates at Concourse B in Charlotte
  • Give up access to US Airways’ gates at Terminal 1 in Los Angeles, as well as access to two of the four gates at the Bradley International Terminal that American will get after the expansion is completed
  • Give up access to Terminal A-East at Philadelphia entirely (gates are common use)
  • Give up access to US Airways’ gates at Terminal 1 in San Francisco
  • Give up one gate at Terminal B North in Boston

Dallas-Fort Worth, Miami, and Phoenix both have competitive markets with no gate constraints and free entry, the former driven especially by the end of the Wright Amendement.

I used the table below in putting together this package. It lists the number of markets (corrected for overlaps and double counting within metro areas) that are on the DOJ list of 1,008 at each merged carrier hub and the two gate constrained airports mentioned above.

City Routes Involved
Charlotte 36
Dallas Fort Worth 63
Philadelphia 33
Chicago 30
New York City 28
Phoenix 44
Miami 43
Los Angeles 34
Washington 22
San Francisco 27
Boston 32

These represent more than 40% of the affected city pairs and more than 75% of the affected passengers.

Separately, I’ll peg the odds that this is settled out of court at about 65%

Update 7: Monday September 30, 2013: 15:45 EST


 

American Airlines and the Texas Attorney General’s office today announced a settlement that will result in the Texas Attorney General, Greg Abbott, withdrawing his participation in the DOJ lawsuit against the merger.

The settlement addresses the Texas specific antitrust concerns of the merger by requiring the following commitments for a duration of at least three years

  1. Dallas Fort Worth International Airport remain a “large hub airport” for the merged carrier
  2. The combined carrier will keep its headquarters in the Dallas Fort Worth metropolitan area
  3. The combined carrier will maintain at least scheduled daily service into the following 22 communities: Abeline, Austin, Brownsville, Corpus Christi, Dallas Fort Worth, East Texas Regional (Longview), El Paso, Houston Hobby, Houston Bush, Port Arthur, Kileen, Laredo, Lubbock, McAllen, Midland, Amarillo, San Angelo, San Antonio, Tyler, Waco, Wichita Falls

Abbott and American CEO Tom Horton held a joint press conference in Dallas Fort Worth to announce the deal. At the press conference, the Texas Attorney General said that the “overt antitrust issues” which had caused his office to join the lawsuit had been alleviated. Mainly, this meant “ensuring no disruption in air service to rural Texas.” (Though Austin, Houston, El Paso, and San Antonio hardly qualify as “rural Texas”) American CEO Horton stated that the deal with Texas could provide a “template” for broader negotiations with the DOJ.

Vinay’s Analysis: This deal did not really achieve anything for the Texas Attorney General – Dallas Fort Worth was going to remain a hub and retain the headquarters of the merged company, and the smaller Texas communities are high fare monopoly/duopoly markets – the merged carrier wasn’t going to withdraw from them anyway. If anything, the merger might have expanded service in these cities with strong American frequent flyer bases by making viable service to Charlotte to replace connections over Dallas Fort Worth to the East Coast. But the Texas Attorney General has succeeded in raising his political profile in advance of a run at the governor’s office, and ironically enough, has decided to give his full support to American/US Airways against the DOJ lawsuit. American should try to put something in place with the AGs in some of the other states involved in the suit. At this point, I give American about a 55% chance of winning the trial if it makes it to open court.

Separately, the DOJ’s motion to extend the trial date due to the government shutdown has been denied by the judge. It will be interesting to see how the shutdown affects the DOJ’s trial preparation if at all.

Update 6: Monday September 23, 2013: 0927AM EST

The boards of AA & US have agreed to extend their merger past the original mid-December termination date. The new framework allows AA or US to bail on the deal at any time up to January 18th. Should the DOJ lawsuit rule in favor of AA/US the termination date is reset to 15 days following the day of the ruling.

Had the termination date not been reset the deal risked the possibility of functionally defaulting as the DOJ trial loomed. The deal is set to automatically terminate should the stock-swap combination not receive regulatory approval by the merger termination date, if they lose the DOJ suit or the government otherwise prohibits the deal, or if either party wants to bail.

Tom Horton, chairman, president and CEO of AMR, and Doug Parker, chairman and CEO of US Airways, said in a press release, “The Boards and management teams of AMR and US Airways remain committed to completing this combination to create the new American, and the extension of this outside date is a reflection of this commitment. Our focus is on mounting a vigorous defense and winning our court case so the new American can enhance competition, provide better service to our customers and create more opportunities for our employees.”

In related news AA/US also held a rally on the Capitol steps in DC last week with members of Congress. In what amounted to a nice photo op both airlines and their respective supportive representatives in Congress publicly lobbied the DOJ to either settle or drop the suit. Given that the suit has not been dropped, it appears not to have worked so far. While originally AA went into this whole mess reluctantly it’s fair to say that all parties involved from the airline side have become full forced advocates. The stunt, along with today’s merger termination extension, underscore how joined at the hip the two carriers now are.

Update 5: Wednesday September 11, 2013; 12:54AM E.S.T.


American and US Airways jointly filed their answer to the DOJ’s complaint today in a fifty page response, the full text of which can be found here via Dallas Morning News. Basically, once boiled down, the document centers around the DOJ’s complete lack of consideration of LCC’s, Southwest, and Hawaiian – none of which meaningfully factored into the DOJ’s analysis. We’re going to pull out a few segments here that really struck us:

The Complaint’s focus on legacy airlines causes it to ignore the most meaningful competitive development in the airline industry since deregulation: the emergence of low cost carriers. These carriers, together with Southwest and regional competitors Alaska Airlines and Hawaiian Airlines, now transport over 40% of all domestic passengers…The demonstrable success of low cost carriers is a market driven response to consumer demand, but the Complaint inexplicably ignores their profound and permanent effect on industry competition.

This underscores what Airchive has been arguing from day one: faulty DOJ analysis based on a fantasy aviation industry. But we thought the answer said it better:

The Court’s review of the plaintiffs’ challenge to this merger should not be an evaluation of the few aspects of the intensely competitive airline industry plaintiffs do not like, or a comparison to some hypothetical state of the airline industry that plaintiffs would prefer.

As we look toward the coming trial, presently set for November, we can only hope that this embarrassment will end quickly in favor of the merger.

In a related development, both US Airways and American (via AMR) have said they will ask their boards to extend the termination date of the $11 billion merger due to concerns over the lawsuit. A new termination date was not been announced, but it was originally set for December 17, 2013.

Update 4: Friday, September 6th – 10:15AM E.S.T


Michigan has joined the list of states on the antitrust lawsuit against the merger. The DOJ, along with seven states (now including Michigan), filed an amended lawsuit Thursday, which added Michigan to the suit, and made slight changes to the list of markets, adding some and subtracting some others. The amended complaint has a list of just 1,008 markets where the initial complaint listed 1,044. The amended complaint gave an explanation on the Herfindhal – Hirschman Index:

Concentration in relevant markets is typically measured by the Herfindahl-Hirschman Index (“HHI”). Markets in which the HHI exceeds 2,500 points are considered highly concentrated. Post-merger increases in HHI of more than 200 points are considered to be significant increases in concentration.

In more than 1,000 of the city pair markets in which American and US Airways currently compete head-to-head, the post-merger HHI would exceed 2,500 points and the merger would increase the HHI by more than 200 points. For example, on the Charlotte-Dallas city pair, the post-merger HHI will increase by 4,653 to 9,324 (out of 10,000).

 In a statement to the press, US Airways and American noted Michigan’s entry into the case:

The decision of the Attorney General of Michigan to join the Department of Justice does not diminish the strength of our case, nor our determination to complete this transaction and deliver the benefits of the combination to the customers and communities we serve. Both American Airlines and US Airways want the opportunity to compete together to enhance competition with the largest airlines in the U.S. – United, Delta and Southwest – and a number of fast-growing low-cost carriers.  We look forward to our day in court.

The entrance of Michigan into this merger is a curious one. Neither US Airways nor American has a large operation in the state, and Michigan came out relatively unscathed in previous mergers (probably even gaining from the Delta merger thanks to the new long haul routes opened from Detroit). This appears to mostly be a political play from the attorney general.

Update 3: Monday, September 2nd – 10:40 E.S.T


It appears that the DOJ lawsuit against the merger has already claimed one (albeit small) victim. US Airways’ planned resumption of Phoenix-Miami with daily service on board Airbus A320 equipment from the end of October has been cancelled.

The flight, a morning departure from Miami and afternoon departure from Phoenix with schedules as shown below, was designed to complement American’s existing late afternoon and early evening departures from Miami to Phoenix (1x daily year round, 2x daily during high season). The morning departure would have timed perfectly for connecting passengers to and from South America due to the red-eye heavy nature of US-South America flights.

US433 ~ MIA-PHX ~ D: 0710 A: 1022 ~ A320 ~ Daily
US458 ~ PHX-MIA ~ D: 1550 A: 2205 ~ A320 ~ Daily

However, this flight was contingent on US Airways having a code share with American in place by October 27th (the date of the inaugural). The merger has initially been scheduled to close by the end of the 3rd quarter, so October would have marked the beginning of the code share. But the DOJ’s lawsuit threw that timeline (no pun intended) into disarray, and the carrier cancelled the planned service resumption during the August 24th schedule update.

This type of “fill in the gaps” growth connecting pre-merger American and pre-merger US Airways stronghold is just one of several new routes I expect US Airways and American to open post-merger leveraging their combined scale and strengths. But the DOJ’s lawsuit throws such an expansion of network connectivity into doubt.

Update 2: Friday, August 30th – 14:00 E.S.T


 

The US District court has set a November 25th court date for the trial of the DOJ lawsuit against the US Airways – American merger. The Department of Justice had asked for a court date in early March, which would have effectively killed the merger. However, the setting of a November court date is an early victory for US Airways and American

The joint letter below from American CEO Tom Horton and US Airways CEO Doug Parker discusses the decision:

August 30, 2013

Dear Fellow Employees:

We just heard that the U.S. District Court for the District of Columbia set a trial date of Nov. 25, 2013, in connection with the lawsuit filed by the Department of Justice (DOJ).

We are pleased the Court has set a schedule that will enable us to resolve this litigation in a reasonable timeframe. Given the significant benefits this merger will deliver to consumers, employees and other stakeholders, and that the creation of the new American Airlines will provide much-needed competition, our duty remains clear: We are more committed than ever to bringing our airlines together and look forward to making our case for the new American in court.

The people of American Airlines and US Airways simply want the opportunity to compete together for customers and to enhance competition with the largest airlines in the U.S.  – United, Delta and Southwest – and a number of fast-growing low-cost carriers.

We continue to be invigorated by the outpouring of support we have received from all of you in the past few weeks. It’s clear that you share our conviction that the new American is about growth and bringing new choices to the customers we serve. We will have more information soon about ways that all of you can participate in actively showing your support for the merger. In the meantime, let’s continue to do what we do best: running great airlines and providing the outstanding service our customers have come to expect from us.

Thank you for your continued hard work and dedication and all that you will be doing this weekend to keep our operations running smoothly over a busy holiday. We look forward to the day when we will stand together as one airline to deliver the compelling benefits of the new American.

Additionally, the federal judge overseeing American’s bankruptcy case has set another hearing on September 12th on motions to approve American’s exit from bankruptcy (including the merger). American released the following statement in response.

“We are pleased the judge found our arguments in favor of confirmation persuasive. While we await the Court’s decision on our Plan of Reorganization, we are focused on the need for a mid-November trial and challenging the DOJ’s position so we can complete our planned merger with US Airways.”

Update 1 – Friday, August 30th – 14:00 E.S.T


Airways has a pair of analyses on the lawsuit with a third to come early next week. The first was our analysis the day of the suit in which we provided some analysis on the DOJ’s motivations, and analyzed the language in the DOJ’s press release and conference call.

 

First, US Airways and American have filed a motion requesting a November 12, 2013 trial date. Doug Parker sent out the following memo to US Airways employees on that subject:

Dear US Airways Employees,

Together with American Airlines, we just filed a motion with the US District Court requesting a November 12, 2013 trial date to hear the complaint by the Department of Justice (DOJ) attempting to block our proposed merger. We are eager to get to court so that we can make our case and explain exactly how this merger enhances competition across the US and the globe, and begin creating the new American Airlines as soon as possible. The DOJ will now respond with a similar filing requesting a later trial date. Ultimately it will be up to the judge to decide on the schedule. Along with our colleagues at American Airlines, we are looking forward to proving in a Court what all of us have known all along – that this merger is good for competition and as a result, extremely good for consumers.

I also want to take this opportunity to thank the employees of US Airways and American who have reached out with encouragement and support since last week’s announcement by the DOJ. I have been invigorated by the outpouring of emails and by those of you that have gone out of your way to stop me in airports to say “go get ‘em” and explain how important this merger is to you and your families. We know that all the employees of US Airways and American desire is a chance to better compete with Delta, United, Southwest and the rest of this industry. We are committed to make that happen.

We also know all of you want to help. In the coming weeks, we will provide more information on how US Airways and American employees can best support this effort. For now, we have complete confidence in our Court system and expect that we will have a quick and fair opportunity to make our very compelling case. We, like you, are looking forward to that opportunity.

As we have said before, we are mounting a vigorous and strong offense in federal court in order to bring our airlines and talented team members together as the new American. The facts support us, and we are quite confident in our quest to become the new American. Thank you again for all you are doing in support of that effort. Thanks also for what you do every day to take care of our customers. We are running a terrific and reliable operation thanks to you, and I know we will continue to do so as we close out the busy summer travel season. Along with our colleagues at American, we look forward to the day when we will stand together. Thank you so much for your support.

Doug

Even though Florida and Texas both have attorneys general in the DOJ lawsuit, officials from those two states, along with ones from North Carolina are fighting back against the DOJ, citing the economic benefits the merger will bring to their states. Texas and Florida’s presence in the lawsuit never made sense in the first place given that Texas will get a larger headquarters and Miami is poised to grow as the primary Latin American gateway for the combined carrier. This story from Reuters has more details, including quotes from the officials.

Finally, unions representing more than 70,000 American and US Airways employees from the Allied Pilots Association (APA), the US Airline Pilots Association (USAPA), the Association of Professional Flight Attendants (APFA), Association of Flight Attendants-CWA (AFA), the Transport Workers Union (TWU) and the Communications Workers of America (CWA)issued a joint statement in support of the merger. It is pretty interesting to see the current federal government (through the DOJ) going head to head with labor unions, given its political leanings. Read the statement below:

We urge the U.S. District Court and the Department of Justice to begin the trial on November 12, 2013 in order to get to a speedy resolution to this exciting merger.

Our message to consumers everywhere is simple: “Let us compete for your business” starting as soon as possible.

Our members want a fair shot at competing in the marketplace. The airlines we work for, US Airways and American Airlines, can together succeed in a way that neither airline can alone, bringing new competition to the domestic and international airlines that serve Americans. The improved network and higher quality product will attract new customers, allowing the airlines to compete with the megacarriers in a way neither airline can do alone, creating greater job security for our members as a result.

Delaying a trial puts our families and our customers at further risk. For American and its employees, the uncertainty of the last two years in bankruptcy has already exacted a heavy toll. Employees at US Airways have had similar hardships with two bankruptcies since 9-11. In order to make new American competitive, that uncertainly should be ended as soon as possible.

The livelihoods of hard-working aviation professionals at American and US Airways hang in the balance. Jobs are at stake if this merger does not go through. For our members, job security that comes with truly competitive airlines is on hold as we wait for trial.

Our members have borne the brunt of the severe turbulence in the aviation industry. Justice delayed is justice denied for our members. This merger makes sense for competition, customers, and the members we represent who want nothing more than to compete aggressively on a level playing field to serve those customers.

Original Story – Tuesday, August 13th – Modified from original version to take into account events up until the 21st of August


On August 13th, the US Department of Justice (DOJ), along with six state attorney generals and the District of Columbia filed an antitrust suit challenging the proposed merger between US Airways Group Inc. and American Airlines parent AMR Corp. The lawsuit to block the merger was filed in the US District Court for the District of Columbia, and was filed by the DOJ’s Antitrust Division in conjunction with the attorneys general of Texas (home of AMR’s headquarters), Arizona (home of US Airways’ headquarters), Florida, the District of Columbia, Pennsylvania, Tennessee, and Virginia.

The lawsuit marks the first time the Department of Justice has sued to stop an airline merger since the proposed merger between US Airways and United was blocked in 2000. Earlier this decade, the DOJ approved large mergers between America West and US Airways, between Northwest Airlines and Delta Air Lines, between United Airlines and Continental Airlines, and between AirTran Airways and Southwest Airlines. In the case of the United-Continental merger, the merger was approved after the merged airline agreed to divest 18 slot pairs at slot controlled Newark Liberty International Airport to rival Southwest Airlines.

In its press release announcing the suit, the DOJ states its belief “that the merger, which would result in the creation of the world’s largest airline, would substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service.” Beginning in late July, US Airways and American held meetings with the DOJ where they offered antitrust concessions to the DOJ in an effort to win approval for the merger. The merger already won European Union antitrust approval after the carrier agreed to lease out a pair of slots used on Philadelphia-London Heathrow services – a route where the new American Airlines would hold a monopoly in conjunction with joint venture partner British Airways. However, the new American’s proposed concessions clearly did not match the DOJ’s expectations, leading the DOJ to file suit.

Much of the concern from the DOJ (and from its federal government counterpart the Government Accountability Office [GAO]) surrounds the combined carrier’s slot holdings at Washington’s Reagan National Airport, where the new American would hold a 69% share of take-off and landing slots, a 49% market share, and a monopoly on 63% of the nonstop routes from the airport. Current US Airways and future American Airlines CEO Doug Parker appeared to accept the need for some slot divestitures at Reagan at US Airways Annual General Meeting (AGM) in Phoenix in mid-July, however he warned that small cities would be the first cities to lose service in that scenario. He further questioned whether US Airways should even have to divest slots at all, saying:

There is no such standard in antitrust law that says airlines can’t have that size of departures from any given airport.

On August 15th, US Bankruptcy Court Judge Sean Lane was scheduled to rule on whether or not he confirmed American’s plan to exit bankruptcy (including the merger). However, due to the lawsuit, Lane delayed the confirmation to a later days. He gave interested parties until the 23rd of August to file briefs on whether he should or shouldn’t move forward with evaluating the plan of reorganization. Assuming that the schedule remains unchanged, the issue will be debated at the next bankruptcy hearing on 29th August.

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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