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From Antitrust Law Daily, November 12, 2013

Proposed settlement of US Airways-American Airlines merger challenge requires divestitures, other concessions

By Tobias J. Gillett, J.D., LL.M.

The Department of Justice and the attorneys general of six states and the District of Columbia have reached a proposed settlement that would resolve their challenge to US Airways Group, Inc.’s $11 billion acquisition of AMR Corp., the parent corporation of American Airlines, in exchange for the airlines’ agreement to divest slots and gateways at key airports and certain other concessions, the Justice Department announced today. The merger would combine two of the four major “legacy” air carriers and provide American with a path out of bankruptcy.

Under the terms of the proposed final judgment, the airlines must divest slots and gates at Boston Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport, Miami International Airport, New York LaGuardia International Airport, and Ronald Reagan Washington National Airport. The Justice Department intends these divestitures to provide greater opportunity for low-cost carriers to compete with the combined entity and the other two remaining legacy carriers, Delta Airlines and United Airlines; to permit entry or expansion of airlines at key airports; and to eliminate a substantial increase in slot concentration at Reagan National.

The Department of Justice Antitrust Division, six states (Arizona, Florida, Pennsylvania, Tennessee, Texas, and Virginia), and the District of Columbia filed acomplaint to block the merger on August 13 in the federal district court in Washington, D.C. An amended complaint was later filed, adding the State of Michigan as a plaintiff. The attorney general of Texas later moved to dismiss its claims pursuant to a settlement agreement with the airlines. A trial in the matter was scheduled to begin on November 25 (U.S. v. US Airways Group Inc., Case 1:13-cv-01236).

Specific divestitures required by the proposed final judgment include:

  • 104 air carrier slots (slots not reserved for use only by smaller, commuter planes), including two currently held by US Airways and 102 held by American, at Reagan National, as well as facilities necessary to support use of the slots;

  • 34 slots at LaGuardia and facilities necessary to support those slots; and

  • Two gates and associated ground facilities at each of Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International, and Miami International.

The Reagan National and LaGuardia divestitures would have to be made within 90 days of entry of the order, while the remaining divestitures would have to be made within 180 days. The airlines would have to give JetBlue Airways, Inc. the opportunity to acquire the 16 slots it currently leases from American, and to give Southwest Airlines, Inc. the opportunity to acquire the 10 slots at LaGuardia it currently leases from American. The remaining 88 slots at Reagan National and 24 slots at LaGuardia, together with any slots JetBlue and Southwest may decline to acquire, will be grouped into bundles and sold with associated ground facilities. The assets must be transferred on commercially reasonable terms and subject to approval by the Justice Department.

In addition, the settlement agreement permits the Justice Department to appoint a trustee to monitor the airlines’ compliance with the terms of the final judgment and to perform inspections of the airlines relating to matters contained in the final judgment. The judgment would bar the defendants from reacquiring any of the divested assets during the 10-year term of the judgment. The airlines would be required to provide advance notice of any future slot acquisitions at Reagan National, regardless of whether that transaction would ordinarily be reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The proposed judgment provides for waiting periods and opportunities for the Justice Department to obtain additional information about the transaction.

“This agreement has the potential to shift the landscape of the airline industry,” said Attorney General Eric Holder. “By guaranteeing a bigger foothold for low-cost carriers at key U.S. airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country.”

“The department’s ultimate goal has remained steadfast throughout this process—to ensure vigorous competition in airline travel,” he added. “This is vital to millions of consumers who will benefit from both more competitive prices and enhanced travel options.”

As a condition on joining the Justice Department’s proposed settlement, the six state attorneys general entered into a supplemental stipulated order with the airlines. Under the terms of the order, the combined entity would have to maintain for three years following entry of the order, in a manner consistent with historical operations, its hubs at Charlotte Douglas International Airport, John F. Kennedy International Airport, Los Angeles International Airport, Miami International Airport, Chicago O’Hare International Airport, Philadelphia International Airport, and Phoenix Sky Harbor International Airport. The entity also would have to continue, except for service discontinued as a result of the divestitures, its service to certain airports in Arizona, Florida, Michigan, Pennsylvania, Tennessee, and Virginia for five years after entry of the order.

A proposed asset preservation order filed with the settlement would require the airlines to maintain the divestiture assets in operable and saleable condition until the divestitures have been completed. The order would stay all deadlines in the litigation until further order of the court.

In a competitive impact statement filed with the settlement, the Justice Department explained the reasons for its challenge to the merger and for the proposed settlement of that challenge. According to the statement, the transaction would combine two of the four remaining major legacy carriers, thus presenting increased opportunities for those airlines to cooperate, rather than compete, on price and service. The Department also observed that the transaction would eliminate head-to-head competition between American and US Airways on numerous routes and expressed particular concern about the transaction’s impact on Reagan National, where the combined entity would control 69 percent of the takeoff and landing slots. The Department noted that the market contained significant barriers to entry, including a lack of available slots at major airports, the need to obtain access to gates, corporate discount and frequent flyer programs offered by major carriers, the widespread recognition of the major carriers’ brands, and the risk of aggressive responses to entry by incumbent airlines.

The statement contends that the proposed settlement would “deliver benefits that could not be obtained by enjoining the merger” by “imped[ing] the industry’s evolution toward a tighter oligopoly by requiring the divestiture of critical facilities to carriers that will likely use them to fly more people to more places at more competitive fares.” The settlement would provide low cost carriers with access to slots and facilities that would permit them to offer “greatly expanded service on numerous routes.” The statement notes that past antitrust enforcement “demonstrates that providing LCCs with access to constrained airports results in dramatic consumer benefits,” as demonstrated by reduced fares on flights from Newark after Continental and United transferred slots to Southwest at the time of their merger.

“The extensive slot and gate divestitures at these key airports are groundbreaking and they will dramatically enhance the ability of LCCs to compete system-wide,” said Assistant Attorney General Bill Baer of the Department of Justice’s Antitrust Division. “This settlement will disrupt the cozy relationships among the incumbent legacy carriers, increase access to key congested airports and provide consumers with more choices and more competitive airfares on flights all across the country.”

The competitive impact statement noted that the entry of the proposed final judgment would “neither impair nor assist the bringing of any private antitrust damage action.”

The Justice Department had been under intense pressure to reach a resolution of its challenge to the acquisition. In recent weeks, numerous parties had expressed opposition to the Department’s challenge or announced their intent to file amicus briefs in support of the merger, including American’s unsecured creditors, the mayors of seven cities with airline hubs, the Attorney General of Oklahoma68 Democratic Members of the House of Representatives, theTransport Workers Union, and other parties.

Airline statement. The airlines issued a joint press release, announcing the terms of the proposed settlement and expressing the airlines’ support for it. The companies expect to complete the transaction in December 2013.

“This is an important day for our customers, our people and our financial stakeholders,” said Tom Horton, chairman, president, and CEO of AMR, and incoming chairman of the board of the combined company. “This agreement allows us to take the final steps in creating the new American Airlines. With a renewed spirit, we are about to create the world’s leading airline that will offer, along with our oneworld partners, a comprehensive global network and service by the best people in the business. There is much more work ahead of us but we’re energized by the challenge and look forward to competing vigorously in the ever-changing global marketplace.”

“This is very good news and we are grateful to all who have made it happen,” said Doug Parker, chairman and CEO of US Airways, and incoming CEO of the combined airline. “We are pleased to have this lawsuit behind us and look forward to building the new American Airlines together.”

The case is No. 1:13-cv-01236-CKK.

Attorneys: Michael D. Billiel for the United States of America. Nancy M. Bonnell for State of Arizona. Bennett Rushkoff for District of Columbia. Lizabeth A. Brady for State of Florida. James A. Donahue for Commonwealth of Pennsylvania. Victor J. Domen, Jr. for State of Tennessee. Sarah Oxenham for Commonwealth of Virginia. D.J. Pascoe for State of Michigan. Richard G. Parker (O’Melveny & Myers LLP), Paul T. Denis (Dechert LLP), and Charles F. Rule (Cadwalader, Wickersham & Taft LLP) for US Airways Group, Inc. John M. Majoras (Jones Day) and Mary Jean Moltenbrey (Paul Hastings LLP) for AMR Corp.

Companies: AMR Corp.; US Airways Group, Inc.

MainStory: TopStory Antitrust AntitrustDivisionNews

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