MIAMI — Attorney General Eric Holder confirmed on Monday that the Department of Justice has been in talks with American Airlines and US Airways about the possibility of a settlement to avoid trial. The discussions appear to revolve around slot controlled airports such as Washington Reagan National Airport. Holder, speaking at a briefing yesterday in Washington, noted that there is a “magic number” of slots that the combined carrier would need to divest, in addition to “facilities”, in order to gain approval for the merger.
Predictably, Holder declined to specify how many and where they might be. Not that it necessarily takes a lot to figure it out. The number of slot controlled airports in the US is pretty short, encompassing NY LaGuardia; Newark, NJ; NY, JFK; and Washington Reagan. Others such as Atlanta, Chicago O’Hare, and Los Angeles LAX are not slot restricted, but have such packed schedules that finding a suitable flight time can be a big challenge to newcomers.
While AA & US may wind up with a larger portion of the pie at many of these airports, nowhere will the piece be larger than at Washington Reagan. The combined carrier, each of which already owns a substantial chunk of the slot pie, would wind up possessing a whopping 70% of the slots. The airport’s proximity to Washington DC, in tandem with the slot issue, has turned it into one of the case-in-point examples in the DOJ’s case against the merger.
That the talks, first reported on Sunday night by the Wall Street Journal, are even happening at all suggests that the DOJ has softened to the idea of the merger. Prior to this point it appeared as though the only way the DOJ would agree to the marriage was by divesting an absolutely phenomenal number of slots or by plucking the certificate out of its cold dead hands. If the DOJ is open to increased flexibility there ought to be a lot more to discuss than the Reagan National flashpoint: the original complaint listed over 1,000 city pairs where a combined AA/US is likely to dominate the market. Should the parties fail to come to an agreement, the trial will begin on November 25th.
While the outcome of the trial has always been a bit up in the air, recent developments have made it appear a bit more complicated for AA/US. First, there is the matter of profitability. Both AA and US have contended from day one that they cannot survive on their own anymore against mega-giants United and Delta. Yet both have been posting profitable quarters this year that have undermined said claims. American has been particularly successful, posting $289 million in profit in the third quarter to cap an already successful first half of the year.
Delta (DL), meanwhile, may also prove problematic for the merger. The Atlanta-based mega-carrier posted a profit of $1.37 billion last quarter – mostly through higher ticket prices. Delta may prove to be the DOJ’s case-in-point for why the merger shouldn’t go through. The airline, which merged with Northwest (NW) in 2010, has risen ticket prices and cut back service significantly in several hubs (such as Memphis). DL/NW insisted back in 2008 that their merger would not result in service reductions, yet they happened anyways.
Even still, the lawsuit is not without its own problems. Critics of the suit, which include Airways Senior Business Correspondent Vinay Bhaskara, have contended that it is politically motivated and based on faulty analysis. In particular the statistical analysis used to determine traffic/market share do not count non-legacy airlines such as JetBlue and Southwest, the latter of which accounts for a substantial chunk of domestic travel and competes directly with both AA and US in a number of cities. In fact the DOJ suits effectively sidelines Southwest altogether, arguing that “Southwest and other small carriers have been less likely to participate in coordinated pricing or service reductions.” The remark prompted Bhaskara to question whether the “DOJ’s airline monitoring division has been hibernating for the past six years” as Southwest’s pricing model increasingly falls in line with existing legacy carriers.
The DOJ filed the suit back in August of 2013 to stop the merger, arguing that it would harm consumers.