American and US Airways Give Up Very Little to Gain Merger Approval

So much for taking a writing break this week. I’ve reshuffled this week’s sponsored posts because of yesterday’s big news: American and US Airways will now be allowed to merge thanks to a deal with the Department of Justice (DOJ). (You can read the full settlement here.)

While the deal itself is full of a lot of promises and divestitures, it’s mostly just fluff. Basically, the airlines did exactly what we all expected before the lawsuit was filed. They gave up a chunk of slots at Washington/National Airport, a few at LaGuardia, and that’s really about it. Oh sure, there was more, but none of the other stuff matters. Of course, that won’t prevent me from talking about it.

AA US Merger Approvedsmall city service will remain largely intact thanks to an agreement with the Department of Transportation (DOT). Overall, the new American will still be slightly larger than US Airways is alone today at National.

Who will get these slots? Certainly Southwest and JetBlue are drooling over them. Virgin America and Alaska might be interested, but none of these slots can be used for flights beyond 1,250 miles, so that eliminates what you’d expect them to do. Spirit recently gave up its National slots in favor of Baltimore, so that’s unlikely. Maybe a little guy like Sun Country would try for it, but really, JetBlue and Southwest will be the big winners.

Give Up 12 Slot Pairs at New York/LaGuardia
Not that either airline holds any sort of dominant position at LaGuardia, but DOJ saw this as an opportunity to open up slots anyway. In this case, you may have heard the airlines have to give up 17 slot pairs, and that is true. But five of those are already operated by Southwest and will now be offered to them for sale. So it’s a net reduction of 12 daily roundtrips from where American and US Airways are today. That’s not a lot.

Where will those 12 come from? There are so many options. I’d probably start in Charlotte where US Airways operates 13 a day and American has 5. For the rest, does American need 6 flights a day to Columbus? Does US Airways need 13 to Philly? It won’t be hard to cut that back as needed, so this is pretty minor.

Give Up 2 Gates in Miami
US Airways will have to give up two of the gates it leases in Terminal J in Miami. This is pretty laughable. Who is going to want those? No low cost carrier I know wants to touch that airport. And I haven’t heard about international carriers having trouble getting space.

Give Up 2 Gates at Dallas/Love Field
Wait, American still has gates at Love Field? Yep, it does. It has 2 gates even though it doesn’t fly there anymore. It was supposed to resume flying after the new terminal is fully open, but please, we all know that was just a way to sit on gates so Southwest couldn’t use them. The gates are currently leased out to Delta, but I would expect that Southwest would find a way to gobble them up and further dominate that airport. That’s right, this divestment would actually hurt competition if that plays out.

Give Up 2 Gates in Boston
This was another one that I had no idea was constrained. JetBlue seems to be having no problems growing its operation mightily, so is there really an issue if a new entrant wanted in? Neither American nor US Airways have to care very much about this. I’m sure they’ll be able to run their operation just fine from 2 fewer gates.

Give Up 2 Gates at Chicago/O’Hare
I liked this one, but I expected it to happen anyway. With US Airways in 5 gates in Terminal 2 and American dominating Terminal 3, it didn’t seem like it would make much sense to keep those few gates. But then I saw in the settlement that they’re actually talking about giving up gates L1 and L2 (combined from L2A/L2B) in American’s Terminal 3. That’s a surprise, but it’s also not an issue. This is good since O’Hare is gate-constrained and it frees up some openings for others. But it should have no impact on the combined airline.

Give Up 2 Gates in Los Angeles
US Airways was scheduled to move to Terminal 3 at LAX so that Southwest could take over all of Terminal 1, but the move hasn’t happened yet. Still, US Airways is giving up rights to gates 31A and 31B in Terminal 3. That means nothing since American is going to want to consolidate its operation in Terminal 4 and the Bradley Terminal anyway. And it’s that Bradley Terminal where American is supposed to get more gate space once the current expansion is fully opened next year. But this gate cut may actually benefit American. It gives the combined airline the ability to cut back on flying a little in LA since it will have 2 fewer gates. It might have wanted to do that anyway but couldn’t because…

Maintain hubs in Charlotte, New York/JFK, LA, Miami, Chicago/O’Hare, Philly, and Phoenix for 3 Years
This might sound like quite a commitment, but it’s what the airline was planning anyway. Now it just has to keep service at the same historical levels it has had previously, after accounting for the above divestitures. US Airways has publicly said that it sees LA and New York as important points for local traffic. I had expected to see reduced flying in those cities (not that it would really be a competitive issue in these markets), but now that won’t happen for three years except in LA where the 2 fewer gates mean they can cut a little. Instead, we’ll see flying levels stay where they are, and I would expect to see the destinations and frequencies change around a fair bit. The rest of the hubs have never seemed to me like they should be in danger anyway. But if they are, well, then in 3 years they can go away anyway.

Maintain Service From 1 Hub to Each Currently-Served Airport in 6 States for 5 Years
Remember, it wasn’t just DOJ in this lawsuit but some states as well. This provision basically gives these states what the combined airline already offered in Texas to get that state’s attorney general to pull out of the lawsuit. The list of cities served by at least one of the airlines today is:

  • Arizona – Flagstaff, Phoenix, Tucson, Yuma
  • Florida – Daytona Beach, Key West, Ft Lauderdale, Gainesville, Jacksonville, Orlando, Miami, Melbourne, West Palm Beach, Pensacola, Ft Myers, Sarasota, Tallahassee, Tampa, Ft Walton Beach
  • Michigan – Kalamazoo, Detroit, Flint, Grand Rapids, Marquette, Traverse City
  • Pennsylvania – Allentown/Bethlehem, Wilkes/Barre/Scranton, Erie, Williamsport, Harrisburg, Philly, Pittsburgh, State College
  • Tennessee – Nashville, Chattanooga, Memphis, Tri-Cities, Knoxville
  • Virginia – Charlottesville, Washington/National, Washington/Dulles, Lynchburg, Norfolk, Newport News, Richmond, Roanoke

Remember, this just guarantees the airline will serve each city from at least one hub with daily service, so it can adjust service levels as it sees fit. It just can’t pull out completely, but American wouldn’t want to do that anyway.

So that’s the deal. There are a lot of promises in here, but these are things that I can’t imagine the combined airline wanting to break even if it could. This agreement says nothing about controlling so-called Advantage Fare pricing or about the 1,000 plus markets that DOJ said would be too concentrated after the merger. The way I see it, DOJ didn’t like its chances of winning enough to take this to trial. Instead, it crafted a deal with all kinds of fluffy promises that made it look like it was protecting consumers. It tried to save face, but that’s quite a thin veil. If I’m at DOJ, I’m hoping people don’t see through the fluff and think that something amazing has been done here.

At the same time, the combined airlines were nervous enough about their chances of winning in court that they decided it was worth it to give up slots to avoid the chance that they lose entirely. If I’m at American/US Airways, I’m pretty happy with this deal. In fact, I would have been happy before the friggin’ lawsuit was filed in the first place. But hey, at least the lawyers are all rich now, right?

Of course, if I’m at JetBlue or Southwest, I’m pretty damn happy right now since I’ll get more slots in congested airports. If I’m Southwest, double bonus! I have a chance to increase my dominance at my home airport, Dallas/Love Field. That’s particularly helpful since, by agreement, they are prohibited from physically adding new gates.

Now it’s time for the fun part. I’ve always believed that this merger was a good idea. But good ideas don’t always get implemented properly. Once this closes in December, it will be time to turn the microscope on to the integration. Let’s see if they can do this better than others before them.

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