US Airways Group Inc. (LCC) and American Airlines Inc, a subsidiary of AMR Corporation (AAMRQ) got the green signal from Department of Justice (:DOJ) for their proposed merger, which will create the largest global carrier.
In Aug 2013, the merger suffered a setback following opposition raised by the DOJ along with attorneys general of six states and the District of Columbia. The regulatory body stated that the merger will result in concentration of power in the hands of a few airlines thereby posing difficulties for travellers. The clearance came around a week ago before the court hearing of the DOJ case.
Both the carriers have now cleared all litigations against them. Additionally, they also signed an agreement with U.S. Department of Transportation (:DOT) to use all the commuter pair slots at Washington Regan National Airport (DCA) to service small and medium-size markets.
The carriers have to pay a price for the settlement, however. The airlines have to give up 52 take-off and landing slots at DCA and 17 pairs at La Guardia airport in New York (:LGA). Further the carriers have to divest two gates and related facilities at each of the Boston, Chicago, Dallas, Los Angeles and Miami airports.
The divesture process will occur through a DOJ approved process following the completion of the merger, which is expected in Dec 2013. Carriers like Southwest Airlines Co. (LUV) and JetBlue Airways Corp. (JBLU), Virgin America and Spirit Airlines Inc. (SAVE) are considering participation in the divesture process.
Post divesture, the merged entity’s share of slots at DCA will come down to 57%, while at LGA it will have 12 less flights than the normal 175 daily departures. However, the combined entity will generate more than $1billion in annual synergies from 2015.
Over the last few years, the U.S. aviation industry has seen several consolidations the latest being United and Continental’s merger. However, with major and legacy airlines of the U.S. joining hands, the total number of carriers operating within the industry is becoming less. This is resulting in less competition, higher airfares and increased fees.
Though it still remains uncertain why the DOJ changed its stance on the AMR-LLC merger, but they have argued that opening up the various slots will induce more competition within the industry. Despite the nod from DOJ the carriers need approval to the settlement from the U.S. bankrupt court to complete the amalgamation.
Although the merged entity will have more pricing power and control over a larger number of slots we believe it will have little effect on the dynamics of the U.S. aviation industry as 80% of the same market will be dominated by the new American, United, Delta and Southwest.
AMR Corp. and U.S. Airways both currently carry a Zacks Rank #1 (Strong Buy).