American Airlines and US Airways’ agreement with the US Department of Justice (DOJ) to divest some slots, gates and maintain service levels at select airports will have little impact on the combined airline.
The settlement is a “win for the airlines” and the “best-case outcome”, writes Jamie Baker, an equity analyst for JP Morgan, in a report.
American and US Airways agreed to divest 52 slot pairs at Ronald Reagan Washington National – eight are already leased to JetBlue Airways – for 250 slot pairs, or 55% of those available, at the airport as part of a deal with the DOJ to grant antitrust approval for their merger on 12 November. US Airways has 244 slot pairs at the airport currently.
The carriers will also relinquish 17 slot pairs at New York LaGuardia airport, of which five are leased to Southwest Airlines.
“The divestitures at Washington National and LaGuardia are in line with expectations, and will likely result in a reduction in regional flying,” writes Helane Becker, an airline analyst at Cowen Securities, in a report.
Delta Air Lines, JetBlue and Southwest have expressed interest in acquiring slots at both airports.
JetBlue and Southwest have small operations that they would like to expand at both airports, while Delta sees itself as the best airline suited to “provide nonstop service between DCA [National] and the small- and mid-sized cities”, which is an area that the Justice department and states would like to preserve existing levels of service.
“This agreement has the potential to shift the landscape of the airline industry,” said US attorney general Eric Holder on 12 November. “By guaranteeing a bigger foothold for low-cost carriers at key US airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country.”
American and US Airways’ agreement to divest two gates and related facilities at Chicago O’Hare International and Los Angeles International (LAX) airports may dampen future expansion. Becker says growth may be “slower than previous expectations” due to existing gate constraints at the airports.
American and American Eagle use the majority of the gates in terminal 3 at O’Hare while US Airways uses two gates in terminal 2 at the airport.
At LAX, American flights operate from terminal 4 and a remote commuter terminal with some of its international operations in the Tom Bradley International Terminal at LAX. US Airways use three gates in terminal 1. The remaining domestic terminals – three, five, six and seven – are fully occupied.
Gate and related infrastructure divestitures at Boston Logan International, Dallas Love Field and Miami International airports are not expected to impact the carriers, analysts say.
It is unclear whether the gate divestitures at key airports, including American’s Chicago, Miami and Los Angeles hubs, will benefit smaller carriers like Virgin America or other large incumbents. United could use US Airways’ gates at O’Hare to expand its adjacent regional operations in terminal 2, while Southwest similarly wants to acquire the Tempe, Arizona-based airline’s gates at LAX to expand its operations in terminal 1.
Virgin America had planned to file a brief with the US District Court regarding concerns that the merger would “leave most of the hub-hub routes as monopoly markets”, even with slot divestitures at constrained airports like LaGuardia and National.
American and US Airways have also agreed to maintain hubs at Charlotte-Douglas International, Chicago O’Hare, LAX, Miami, New York John F. Kennedy International, Philadelphia International and Phoenix Sky Harbor International airports, in a settlement with the attorney generals from six states and Washington DC who opposed the merger.
“The announcement is positive for the industry as it paves the way for American Airlines and US Airways to better compete with the expansive networks of Delta and United without adding excess capacity to the domestic market,” writes Savanthi Syth, an analyst for Raymond James, in a report. “Given the complimentary nature of the American Airlines and US Airway’s networks, we do not expect any significant decrease in domestic capacity.”
American has requested a 25 November bankruptcy court hearing to approve its revised reorganisation plan that includes the settlement. If approved, the airlines anticipate closing the merger in December and maintain their target of $1 billion in revenue synergies by the end of 2015.
Integration issues still loom for American and US Airways but agreements with most of their labour groups and a clear plan to move the smaller carrier (US Airways) onto the larger's technology systems will likely ease this process. United, which has suffered from integration woes since its merger with Continental Airlines in 2010, did not have labour agreements in place before the combination and opted to move the larger carrier (United) to the smaller carrier's reservations system with ensuing disruptions in 2012.