The day before Thanksgiving, the US bankruptcy judge in the American Airlines bankruptcy case approved the proposed merger between American Airlines and US Airways, thus clearing the way for American to exit bankruptcy and for the merger to close in accordance with an earlier settlement with the US Department of Justice (DOJ) and attorney generals from six US states. In doing so, the court rejected a separate antitrust lawsuit led by a group of private consumers. The merger is now scheduled to close on 9 December 2013.
At the 11th hour before the scheduled start on 25 November 2013 of trial in the antitrust case brought by the DOJ and attorneys general from six US states to block the merger, a settlement agreement was announced by the parties on 12 November 2013. Although the DOJ denied the agreement was prompted by political pressure, it is noteworthy that employee unions, elected officials in hub cities that stood to benefit from the merger and a group from the US House of Representatives made known their support for the merger.
As noted in our September Update, the European Commission had previously cleared the proposed merger with commitments, in a Phase 1 decision on 5 August 2013. Both the European Commission approval and the US settlement require divestitures and other commitments aimed at increasing competition in markets where competition was deemed to be significantly threatened. The European Commission concluded that the merger would lead to a monopoly on the London-Philadelphia route, where US Airways and American Airlines (through its joint venture with British Airways and Iberia) were the only carriers offering non-stop flights. However, to alleviate competition concerns, the Commission agreed to accept commitments that included an agreement to release one daily slot at each of London Heathrow and Philadelphia airports, as well as an agreement by the parties to provide incentives for a possible new entrant to acquire certain rights and entering into special feed traffic agreements with any likely new entrant airline.
The US divestitures agreed were significantly more wide ranging and indeed were characterized by the DOJ as “the largest ever in an airline merger.” These include departure gates and 138 take-off and landing slots at New York’s LaGuardia, Washington DC’s Reagan National, Boston’s Logan International, Chicago’s O’Hare, Los Angeles International, Miami International and Dallas’s Love Field.
All American Airline slots at Reagan National alone must be divested, reducing the combined airline’s slots to something over 50%. Certain slots and gates are to be made available to low cost carriers Jet Blue and Southwest, and it is low cost carriers that are expected to benefit from other divestitures.
Although Delta Airlines, one of the remaining legacy or network carriers, has expressed an interest in acquiring some slots, DOJ officials have expressed doubt that this would offer the kind of competition that the divestiture is hoped to provide. Instead, the regulators hope to see the kind of competition that occurred when Southwest Airlines acquired 36 slots at New Jersey’s Newark Liberty International Airport following the merger of Continental and United Airlines in 2010. As a result of that acquisition, Southwest reportedly was able to add nonstop service to six cities and connecting flights to others, apparently lowering fares along the direct routes and increasing passenger traffic.
If the combined airline has not divested the slots, gates and facilities within the time frames set out in the agreement, on application of the DOJ, the Court is required to appoint a Divestiture Trustee, who will have the right to sell the assets, including arrangements related to associated ground facilities. The United States also has the discretion to appoint a Monitoring Trustee, subject to approval by the Court, to monitor compliance with the judgment approving the settlement agreement.
Time will tell whether these divestitures will increase competition or could serve as a precedent for mergers in other industries with networks and systems that present difficult competition issues.