With less than two weeks to go before trial, the Justice Department has reached a proposed settlement with American Airlines and US Airways, allowing their $11 billion merger to go forward in exchange for major divestitures.
The airlines agreed to give up takeoff and landing slots and gates at seven major airports, including Washington Reagan National, where the combined airlines would have controlled 69 percent of the flights. Those 104 slots would be sold to low-cost carriers approved by the government, such as JetBlue and Southwest.
“This settlement provides a real opportunity for more competition,” antitrust division chief William Baer said during a conference call with reporters. “In important ways, this outcome is better than a full-stop injunction.”
The airlines would also give up 34 slots at La Guardia in New York, plus the rights to two airport gates at Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International and Miami International. The companies also reached an agreement with the Department of Transportation to use certain slots at Reagan for service to smaller airports.
“These divestitures are the largest ever in an airline merger and will allow low-cost carriers to fly more direct and connecting flights throughout the country each day,” Baer said. “This is a game changer.”
Still, the deal would leave the merged airline in control of 57 percent of slots at Reagan. American and US Airways said it would means they’ll have 44 fewer daily departures from that airport.
Despite the divestitures, the two airlines in a news release said the deal would still generate more than $1 billion in annual net synergies beginning in 2015, unchanged from when the merger was announced in February.
Doug Parker, chairman and chief executive officer of US Airways and incoming CEO of the combined airline, in the news release called the settlement “very good news and we are grateful to all who have made it happen.”
US Airways was represented by O’Melveny & Myers partners Richard Parker, Henry Thumann and Kenneth O’Rourke; Dechert partner Paul Denis; and Cadwalader, Wichersham & Taft partner Charles “Rick” Rule. American parent company AMR Corp. turned to Jones Day partners John Majoras, Joe Sims, J. Bruce McDonald, Paula Render and Michael Fried and Paul Hastings partner M.J. Moltenbrey.
The Justice Department and six state attorneys general filed suit in U.S. District Court for the District of Columbia on Aug. 13 to block the merger, warning it would result higher fares, higher fees and less service.
Baer in the conference call stressed that if the Justice Department had taken the case to trial and won, the government could have blocked the merger, but US Airways and American would have kept all their slots at Reagan. A victory would merely have preserved “a problematic status quo,” he said.
Giving low-cost carriers an opportunity to expand their service, he said, “is good news for consumers all across the country” and will increase competition in the industry.
Low-cost carriers JetBlue and Southwest would play a key role the settlement. Under the terms of the deal, JetBlue at Reagan and Southwest at LaGuardia would gain the opportunity to acquire the slots they now lease from American.
The remaining 88 slots at Reagan National and 24 slots at LaGuardia would be grouped into bundles and divested to DOJ-approved buyers.
JetBlue was represented by Dow Lohnes partner Parker Erkmann, who referred a request for comment to the company. Southwest retained Vinson & Elkins partner Alden Atkins, who did not respond to a request for comment.
To Mark Ostrau, an antitrust partner at Fenwick & Wick who is not involved in the case but has followed it closely, the settlement is “ a good example of an ‘if you build it, they will come’ fix. Rather than specifically create through a directed divestiture another competitor to replace the one lost through the merger, the DOJ is hoping that enough key slots and gates across the country will get into the hands of Southwest and/or JetBlue to make it an attractive alternative” to the three remaining legacy carriers—United, Delta and the new American, he said.
“It’s not without risk, since if the slots end up getting dispersed among too many carriers you may solve some individual city pair problems but don’t address the problem of too few networked carriers.”
The proposed settlement must still be approved by U.S. District Judge Colleen Kollar-Kotelly. The companies expect to complete the merger in December 2013.
Contact Jenna Greene at email@example.com.