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American Airlines, US Airways Seal Deal with DOJ on Merger

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American Airlines, US Airways Seal Deal with DOJ on Merger

American Airlines, US Airways Seal Deal with DOJ on Merger
November 12
11:38 2013

MIAMI — American Airlines and US Airways have reached a settlement with the US Department of Justice Tuesday morning, ending what could’ve turned into a protracted court battle over whether to allow the two carriers to merge.

The settlement paves the way to introduce the world’s largest airline as early as December 2013, pending approval from bankruptcy court on November 25. The airlines hope to be operating as one on January 7, 2014.

The big news comes out of Reagan National (DCA), which will see 52 slot pairs given away. The airport, located in Washington, D.C., had been the centerpiece in the DOJ case against the merger as the combined carrier would have occupied some 70% of the available slots. The combined carriers existing 74 commuter slots (which can only be utilized with aircraft seating 76 passengers or less) are required to continue to serve small and medium sized cities within the perimeter.

Specifically, 75% of those slots are earmarked for service to small cities only, while the remaining 25% of slots can be used to serve both medium and small sized cities. Additionally, the merged carrier has to divest up to five gates from gates 24, 26, 28, 30, and 32 on Pier 2 of Terminal B at Reagan to support the divested slots.

Additionally, the terms of the deal include a large number of asset divestitures at key airports around the country. The new airline will give up 17 slot pairs at New York’s LaGuardia airport along with an unspecified number of gates and facilities.

Two gates and supporting facilities will be divested from a handful of airports around the US including Boston Logan, Chicago O’Hare, Dallas Love, Los Angeles International, and Miami International. Specifically, a pair of unspecified gates from the combined carrier’s holdings will be divested at Boston Logan, while existing US Airways gates will be divested at Terminal 3 in Los Angeles and on Concourse J at Miami.

Interestingly, at Chicago O’Hare the divested gates will not come from existing US Airways gates in Terminal 2, but rather on Concourse L at the American controlled Terminal 3. At Dallas Love Field, a pair of gates currently leased to Delta by American will be divested. Under the expiration terms of the Wright Amendment, total gates at Dallas Love Field will be capped at 20 from next year onwards, so the Love Field gates will certainly be hot commodities.

Gates and facilities include things like ticket counters, hold rooms, jet bridges, and operations space according to an internal email AA sent to employees.

Hub cities throughout the carrier’s combined network are likely breathing a sigh of relief today as well – for now. Considering the effects of mergers on cities such as Cincinnati, St. Louis, and Memphis, all of which were big airline hubs in the past twenty years, authorities put up red flags.

To assuage concerns, both parties agreed to maintain service “consistent with historical operations” at all seven hubs, though no specific details on what “consistent” meant were provided. Charlotte, Chicago, Los Angeles, Miami, New York (JFK), Philadelphia, and Phoenix all fall under the deal, negotiated with several state Attorneys General and the DOT.

The CEO’s of both carriers repeatedly noted during a conference call that they intended to keep all existing hubs past the three year requirement, with US Airways CEO Doug Parker going so far as to say that “the intent is to maintain all of our hubs forever.”

While the hubs are relaxing so too are a number of smaller cities that the new American will be required to serve. The DOT has mandated 46 cities, most of them smaller towns, such as Kalamazoo, Michigan and Roanoke, Virginia, continue to receive at least daily service from one of American’s hubs, though it does not specify where from.

Employees are likely also breathing a sigh of relief for the time being. In a joint statement issued by American Airlines CEO Tom Horton and US Airways CEO Doug Parker, the near-term future of the airline was laid out. “Fortunately, the divestitures required by the settlement are not expected to impact total employment at the new American.”

However, due to the selling off of certain slot pairs at major hubs, the CEOs indicated that some airline employees may need to be relocated. “Certain airports may be affected as a result of the divestitures, but we will offer those employees opportunities elsewhere in the system.

Most of the effects, according to the statement and reinforced later on a conference call, would be felt by regional carriers. “In addition, the reductions in DCA and LGA are expected to have little or no impact on mainline flying and will impact regional jet flying mostly done by contract partners (…) those regional jets will be deployed elsewhere in the new American’s network. ”

Besides AA and US, the other big winners are those who stand to gain the additional slots/gates being forced out of the new American’s hands. The slots at Reagan National and LaGuardia will be sold under procedures approved by the department. JetBlue and Southwest will have first dibs with an opportunity to purchase any slots they currently lease from American Airlines.

For the remaining 88 slots at Reagan National and 24 slots at LaGuardia, as well as any slots which JetBlue or Southwest decline to acquire, they will be grouped into bundles and sold off to other airlines. A number of carriers have made their intentions to get in on the action clear, including both Delta and Southwest.

The merged carrier will have a period of 180 days to carry out the divestitures including a “transition period.” To regulate compliance, the merged carrier will be required to provide a written report of its actions in that regard annually until the agreement terminates ten years from today.

For the average Jane and Joe it is yet unclear what benefits the merger will bring long term. Both CEO’s responded to questions on the matter by hammering home the combined company’s extensive route network. AA pointed to ongoing improvements in hard product, while US pointed to increased employee satisfaction as a result of the stability the merger would provide. Yet mergers in the past have generally led to higher prices and fewer flight options. Only time will tell.

At least in the short term the new American will surely be hoping to avoid the public relations disaster that was United/Continental merger. Major problems arose in everything from reservations to aircraft dispatching, among other issues, repeatedly created a nightmare for the new United and their passengers. US Airways President Scott Kirby assured folks that the integration “process will be much smoother than in other mergers.” At present many of the big chunks of the pie have been worked out, most important being the support of labor.

But much will still need to be worked out. Big items such as technology, reservations, and procedure manuals all need to assimilated. Smaller items can be just as time consuming as safety cards, bag policy minutiae, and customer service training all need to be realigned.

While today is no doubt a big win for the new American, it is only the beginning of a long road ahead for both itself and its customers.

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