AMR-US merger good for industry even with possible divestitures

Washington DC
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Wall Street analysts maintain their support for the proposed American Airlines and US Airways merger, even with some slot divestitures as a result of the US Department of Justice’s (DOJ) challenge.

“Absolutely some property will have to be relinquished at [Washington] Reagan National,” says Hunter Keay, a senior airline analyst at Wolfe Research, at an Airlines for America (A4A) event in Washington DC today. “What that is I don’t know.”

American and US Airways combined presence at the Washington airport was cited as an anticompetitive aspect by the DOJ in its challenge on 13 August. The carriers would control 69% of available slots at the airport following their merger, according to the agency.

Analysts anticipate that a settlement would likely maintain a number of slots around US Airways’ current 55% at the airport, which the DOJ approved as part of the carrier’s slot swap with Delta Air Lines in December 2011.

The merger remains good for the airlines and the industry, even with such divestitures. Andrew Davis, an investment analyst who covers airlines at T. Rowe Price, says that a duopoly of Delta Air Lines and United Airlines as the only two large, global network carriers based in the USA would be “more anticompetitive” than an American-US Airways combination, at the A4A event.

He calls the challenge one of the “least factually backed lawsuits related to mergers”.

The DOJ argues that the merger would allow the resulting three mainline carriers to engage in “tacit coordination” on fares and fees, and reduce competition on more than 1,000 connecting routes. It dismisses the competitive impact of low-cost carriers, including JetBlue Airways and Southwest Airlines.

Keay anticipates that the challenge will go to trial and that the likelihood of a settlement will be “much higher” as the parties wait for a ruling from US District Court for the District of Columbia judge Colleen Kollar-Kotelly after the trial.

Both Keay and Davis anticipate the merger to close, however, the former gave it a 70% chance of success. Jamie Baker, an airline analyst at JP Morgan, puts the deal’s chances at a more conservative 50%.

The trial is scheduled to begin on 25 November and expected to take at least 10 days.