How an American-US Airways Anti-Trust Settlement Might Work

There’s discussion of an interesting settlement rumor on Milepoint, ostensibly about a structure of a deal that could bring an end to the Justice Department’s anti-trust lawsuit to stop the merger between American Airlines and US Airways.

Here’s the gist:

Slots

Sell the 8 Washington Reagan slot pairs that JetBlue currently leases from American to JetBlue at a price approved by the DOJ
Divest an additional 37 slot pairs at Washington Reagan to the federal government for the DOT and/or DOJ to redistribute as they see fit.
Divest 10 slot pairs at New York LaGuardia to the federal government for the DOT and/or DOJ to redistribute as they see fit
Sell to Virgin America the 15 slots (7.5 slot pairs) that Virgin America currently leases from American at a price approved by the DOJ

Gates

The following 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.

Relinquish access to American’s gates on Terminal B’s Pier 2 at Washington Reagan along with the slot divestiture
Relinquish access to US Airways’ five gates at Terminal 2 of Chicago O’Hare and make available five gates at Terminal 3, Concourse G
Relinquish access to Terminal A-East at Philadelphia
Give up American’s gates at Concourse A at Charlotte, and make available 5 gates on Concourse B
Relinquish access to gates at Terminal 3 at Los Angeles, and give up the rights to 2 of the 4 new gates granted to American at the new Tom Bradley International Terminal

International Route Authorities and Slots

At London Heathrow, make available two peak-hour slot pairs to new entrants. If no airline decides to purchase the slot pairs within 3 years, the merged carrier would be allowed to keep the slot pairs without penalty and would continue operating to London Heathrow with the authority and slot pair during the sale period.
The merged carrier would be required to sell a Brazil route authority to serve Sao Paulo, along with a red-eye Sao Paulo slot pair to any carrier that desires it at a price approved by the DOJ. If no airline decides to purchase the slot pair within three years, the merged carrier would be allowed to keep the slot pair and route authority without penalty and would continue operating to Sao Paulo with the authority and slot pair during the sale period.

Domestic Route Guarantees

Require the merged carrier to commit to continue operating the following routes non-stop for a duration of at least 5 years from the date of the closing of the merger unless the market gains new non-stop service from a competing carrier and/or the merged carrier fails to record a net profit for six straight quarters.
Phoenix-Honolulu, Kona, Lihue, and Kahului (nearly 15% of the markets involve these four destinations)
St. Thomas-Charlotte, Philadelphia, Miami, and New York John F. Kennedy
St. Croix-Charlotte

The Washington National divestitures make sense, this was always the area of greatest contention and the place where the Department of Justice’s arguments are the strongest. US Airways is the dominant carrier at National. Together with American it would become more so.

I actually buy the airlines’ argument that requiring them to give up slots will mean less service to small communities. None of that matters, any deal will involve giving up slots at National and in some ways I’m surprised that this rumor doesn’t have them giving up more. Selling slots to JetBlue that that airline is already using isn’t much of a hurdle, and the rest of the divestitures are relatively modest.

Along with giving up slots they give up gates so other carriers might use those slots. Again, nothing major here.

The LaGuardia divestitutes are believable but they really do not make sense to me. US Airways is no longer a major force their, having given up the bulk of their presence outside of the DC/Boston shuttle to Delta. Combining American and US Airways there would seem to create a strong counterweight to Delta’s dominance. The argument for giving up National slots, aside from playing with numbers over market concentration, is really that this i a pound of flesh that other airlines want (especially Southwest) and the Department of Justice can give it to them.

Relinquishing gates at O’Hare, Philadelphia, and Charlotte make sense and won’t create much burden for the combined US Airways-American. Ensuring access to other carriers (who more or less have access now except at O’Hare) is mostly symbolic.

Constraining the combination at Los Angeles is likely to prove an operational challenge. United and Delta are strong competitors at LAX now, and so is Alaska, so this airport really shouldn’t be an area of DOJ focus, but it probably is, and the demands while inconvenient — especially for passengers who might fly on a merging American-US Airways — probably wouldn’t stand in the way of doing the deal given how badly Doug Parker wants to run the world’s largest airline.

The demands in this rumor over international route authorities and domestic route guarantees are somewhat stranger. Although all of this strikes me as plausible.

The European Union had concerns over London Heathrow – Philadelphia, given that US Airways flew the route as an independent competitor. They already extracted concessions from the carriers. There shouldn’t be meaningful additional market concentrataion at Heathrow as a result of the merger so extracting a couple of slots seems like it’s just that — extracting — but at a price low enough that the airlines could agree.

Similarly with Brazil, while US Airways has gotten some roue authority here, a merger doesn’t materially reduce competition between the US and South America so is a somewhat surprising area of focus. Nonetheless, giving up a single redeye slot pair if another airline wants to buy it isn’t sufficiently onerous to kill a deal I’d imagine.

The domestic route guarantees are bizarre. The area of greatest increased concentration and lack of competition in the Department of Justice filing centers around St. Croix — the DOJ materials suggest that combined airlines become truly dominant there. And yet this rumor has the airlines agreeing not to stop their service (unless they hit six quarters of losses). Demanding this, if true, undermines the logic of the argument (although not the court case) that the increased concentrations are bad for consumers and would generate monopoly returns. They want them to stay as market-dominant. The same story goes for the airlines’ Hawaii routes.

There are certainly heated rumors that a deal could be done to pave the way for the airlines to merge. I’m hopeful that it doesn’t happen, but the price speculated here doesn’t appear to high to stop it. Nor would it make much difference for consumers. But it would certainly let the DOJ say they had extracted a pound of flesh, it would make some competitors happy.

If I were betting I’d say there’s a 2-to-1 chance of a deal ending the lawsuit before the anti-trust trial concludes.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Seems excessive to me. Also I’m dumb but why would they need to give up foreign gates or slots for a US DOJ issue?

  2. It would still be non-enforcement of a clear anti-trust violation continuing the practice started under the GOP.

  3. One of the big arguments from the DOJ was regarding fees and award travel as well, based on DUI Dougie’s statements in the past. I don’t see anything related to that in all this, so unless they address that aspect as well I’m going to take all this with a grain of salt…

  4. @DaninSTL so the DOJ could satisfy other airlines that are lobbying them? They would say they are concerned about US consumers but there’s no real increase in market concentration in these foreign markets resulting from the merger.

  5. @Gary you say:

    “I actually buy the airlines’ argument that requiring them to give up slots will mean less service to small communities.”

    And I agree. Earlier this week you corrected my understanding that DCA slots are all city pair specific, e.g., a slot may be used by the awardee to fly to Buffalo, but not Syracuse. And perhaps that my perception was based on some predecessor regulatory scheme where DCA was treated almost as a utility which had to serve a fixed pool of customers.

    Slots are pretty dear commodities, and, given the value of a slot, US really assigns some tiny aircraft to mediocre markets – not the highest and best use. If the combined company loses 37 slots, I anticipate (1) they will generally apply larger aircraft to the scarce slots and (2) they will sacrifice secondary markets – particularly those it can serve through their PHL and CLT hubs. Think White Plains/Syracuse getting dropped with lost pax going through PHL, and Greenville, Augusta, and Chattanooga axed with lost pax going through CLT. I just pray that Charleston (SC) would not hit the chopping block – hoping to use Avios for short hauls on what is otherwise an expensive market.

    Indeed, until you corrected me, I perceived that US’s using the most limiting resource – slots – serving such dumpy markets with small aircraft reflected an obligation to do so.

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