While American Airlines bid to merge with US Airways got a shot in the arm after the Texas attorney general dropped its challenge to the deal, plenty of hurdles still remain.
Plans for the merger were surprisingly derailed in August when the US Department of Justice, joined by the district attorneys from Arizona, Florida, Pennsylvania, Tennessee, Texas, Virginia and Washington DC, filed a suit challenging the proposed merger.
But Texas attorney general Greg Abbott has now dropped his opposition to the deal in exchange for guarantees that the resulting airline would continue flying to 22 cities in the state and maintain its headquarters in Fort Worth for three years.
“It’s encouraging that there are discussions and that there is willingness to settle,” says Savanthi Syth, an analyst at Raymond James who covers US Airways. Other states may be willing to take the same path, for example Florida, but that still leaves the DOJ challenge to the merger, she says.
Bill Baer, assistant attorney general for the antitrust division at the agency, was firm in his position in filing the challenges in August. “We think the right solution here is a full-stop injunction,” he said when asked about the possibility for a settlement.
“The DOJ [US Department of Justice] itself is a little different,” says Syth. “Maybe if one-by-one of the attorney generals fall off that may push the DOJ to make an agreement.”
Tom Horton, chairman and chief executive of American, says he would "like to think this is a template for discussions" with other attorney generals regarding dropping their suits but declines to comment on whether American or US Airways is in discussions with any other states.
Florida is likely the easiest state after Texas to bow out of the suit, says Syth. She cites American’s significant employee base in the state and large hub at Miami International airport. The Florida attorney general’s office says it remains part of the DOJ’s challenge.
Conversely, Virginia and Washington DC may be two of the toughest to change. Both jurisdictions are served by Ronald Reagan Washington National airport where American and US Airways are widely expected to have to give up slots in order to close their merger under either a favourable judge’s ruling or a settlement.
Most analysts see the DOJ’s concern with the airlines controlling 69% of the available slots at the airport as valid, though the number of slots they would have to divest is unknown.
Considering the carriers’ inability to provide service guarantees similar to those in Texas to either Virginia or Washington DC, an agreement with either jurisdiction may be difficult to uphold.
Both the attorney general’s offices in Virginia and Washington DC say that their position on the merger remains unchanged and decline to comment further.
The Texas deal shows that the door for concessions by the airlines is open, possibly improving the chances – if ever so slightly – of the merger closing. Keay says the probability of this is about 70%, Syth puts it at between 50% and 70% while Helane Becker, an airline analyst at Cowen Securities, says that the likelihood is 60%. None of the analysts has changed their expectations following the Texas deal.
“I definitely think there is opportunity to negotiate a settlement,” says Becker. “The focus is to do this one day at a time and not get overly aggressive.”