US Airways’ Washington Airport Prize Hobbles AMR Merger

As U.S. regulators spent the better part of six months preparing to sue to stop the American Airlines-US Airways Group Inc. (LCC) merger, the carriers devised a plan to allay some antitrust concerns: an offer to cede flight slots at Washington’s Reagan National Airport.

While the proposal fell flat, three people with knowledge of the matter said, the talks show the stakes at an airport where a merged carrier would control 69 percent of the flights. The airlines’ overtures weren’t enough, said the people, who asked not to be identified because the discussions were private, and the Justice Department sued on Aug. 13 to block the deal.

If there’s a way to settle the case, one element would almost certainly have to be a loosening of the airlines’ grip at National, Washington’s only airport with federal flight caps. JetBlue Airways Co. (JBLU) and Southwest Airlines Co. (LUV) have said AMR Corp. (AAMRQ)’s American and US Airways should be forced to give up some slots, a step ordered in other mergers.

“The problem is you’ve got a dominant carrier at the only slot-controlled airport” in Washington, said Jeff Straebler, managing director for aerospace in John Hancock Financial Services’ bonds and corporate finance group in Boston. A merged airline’s market share would be “a big number, no question.”

The Justice Department, which also is concerned that a tie-up would boost fares, said yesterday that it hasn’t received a proposed settlement from the airlines that addresses antitrust issues raised by the merger.

‘Realistic Possibility’

There ought to be a “realistic possibility” of a settlement, the two carriers said yesterday in a joint filing with the government, spurring investor optimism that the deal creating the world’s largest airline may be salvaged.

US Airways rose 4 percent to $15.96 at the close in New York, the most since April 23, and AMR’s over-the-counter shares jumped 11 percent to $3.39, the biggest gain since March 12.

“We are not going to go into any specifics,” said Ed Stewart of Fleishman Hillard Inc., who acts as a US Airways spokesman. “The concessions we were willing to offer were designed to address competitive concerns that DOJ had raised during the investigation.”

Michael Trevino, a spokesman for American, declined to comment beyond the filing. Peter Carr, a Justice Department spokesman, declined to comment on the discussions between the airlines and the antitrust division.

‘Essential Ingredient’

With the National flight slots, American and US Airways would control too much of an “essential ingredient” in airline competition, the U.S. said in its suit. The carriers say that if Washington’s three airports are taken together, their combined market share would be 25 percent of available seats.

Also still unresolved are the Justice Department’s concerns that a merger would eliminate US Airways’ deeply discounted Advantage Fares. US Airways sells those tickets for connecting flights via its network of smaller hubs to undercut rivals’ nonstop trips to and from bigger airports.

US Airways, the fifth-largest U.S. airline, bulked up at National in 2011 as a defensive measure against bigger rivals, going to 55 percent of takeoff and landing slots from 44 percent in a trade that let Delta Air Lines Inc. (DAL) expand at New York’s LaGuardia airport. American, which is restructuring in bankruptcy, is the third-biggest U.S. carrier.

Washington is unusual because National is subject to limits on flights, while nearby Baltimore/Washington and Dulles airports don’t have those caps. All three of New York’s major airports also have federally imposed flight limits.

Newark Precedent

When United Airlines and Continental Airlines combined in 2010, they leased 18 slot pairs at New Jersey’s Newark Liberty International Airport to Southwest to settle U.S. regulators’ concerns that the new United Continental Holdings Inc. (UAL) would be too large at the former Continental hub there.

“Something along the lines of what United had to give up at Newark seems like what DOJ would demand,” John Hancock’s Straebler said.

Relinquishing slots at National would threaten the hub because the combined carrier’s operations there have “got to be pretty deep” to succeed, said Michael Boyd, a former airline executive who founded Evergreen, Colorado-based aviation consultant Boyd Group International Inc. in 1984.

“If not, game over” for the hub’s profitability, he said.

Near Downtown

National is less than 5 miles (8 kilometers) from the White House, making it more desirable than Dulles International Airport or Baltimore/Washington International Thurgood Marshall Airport, which are 26 miles and 35 miles away, respectively.

Passengers who use National “don’t consider Dulles or Baltimore/Washington a good substitute,” said Severin Borenstein, a professor at the University of California at Berkeley’s Haas School of Business who once worked at the U.S. Civil Aeronautics Board, the industry’s now-defunct regulator.

US Airways picked up more than three dozen pairs of Washington slots in the Delta swap. That helped Tempe, Arizona-based US Airways pare its money-losing operations at LaGuardia.

It also bolstered US Airways in Washington after two rounds of merger talks failed with United and a hostile bid for Delta collapsed in 2007 before that carrier bought Northwest Airlines Corp. the following year.

‘Made Sense’

“US Airways came up with this slot swap because they planned to be stand-alone and couldn’t make money at LaGuardia,” Straebler said. “This made sense for them.”

Slots at National are so valuable that JetBlue paid $40 million for eight pairs in a 2011 auction, 25 percent more than the $32 million price for eight pairs of slots at LaGuardia.

Antitrust regulators had concerns in October 2011 when the slot trade was approved. The Justice Department said at the time it would continue examining US Airways’ concentration at National. About a month after regulators approved the trade, Fort Worth, Texas-based AMR sought bankruptcy court protection.

That filing spurred US Airways management into the pursuit of American, a tie-up that seemed assured until the Justice Department’s lawsuit.

“At some point, it became political and someone said ‘Hold on. Do we want to let this go down without some divestitures?’” said George Ferguson, senior aerospace analyst for Bloomberg Industries in Skillman, New Jersey.

If US Airways had to give up Washington slots to other airlines, a new operator would probably fly high-traffic routes such as San Juan, Puerto Rico, or Orlando, Florida, said Robert Mann, a former American Airlines executive who now runs consultant firm R.W. Mann & Co. in Port Washington, New York.

Whether National needs more flights to areas such as Orlando, home to Walt Disney World Resort, is another question, he said.

“Do we really need more service to Mickey Mouse?” Mann said. “I don’t think so.”

The case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.