Why Reagan National Could Make or Break the American-US Airways Merger

When US Airways and AMR's American Airlines agreed to merge back in February, proponents of the $11 billion deal believed that it would allow both the bankrupt American and the undersized US Airways to become competitive with the much larger Delta Air Lines and United Continental . Yet even though regulators had approved the Delta-Northwest and United-Continental mergers that created the two largest U.S. airlines in the industry, the Department of Justice challenged the American-US Airways proposal on anti-competitive grounds, and one of the biggest bones of contention came from a single airport: Washington's Reagan National.

With the merger in jeopardy, US Airways and American are now reportedly seriously considering giving up part of their combined presence at Reagan National if it will lead to a settlement with the Justice Department prior to its trial late next month. Let's take a closer look at why Reagan National has become the key bargaining chip in the merger and what's at stake for the industry.

Reagan National Airport at night. Source: Wikimedia Commons.

The peculiarities of Washington airspace
From an antitrust perspective, one big question for American and US Airways hinges on how you define the market. The two airlines have argued that when you consider all three airports that serve the Washington metropolitan area, including both Dulles in Virginia and Baltimore-Washington in Maryland, the combined entity would only control about a quarter of the available seats in the market. On the other hand, if you look just at Reagan alone, US Airways and American would own more than two-thirds of the airport's available slots.

Slots are especially important at Reagan National for a couple of reasons. First, air-traffic congestion led the FAA to set limits on takeoffs and landings at five major airports, including Reagan National, in 1969. Reagan National's slot rule initially set a limit of 62 landings and takeoffs, and several rounds of federal legislation added a total of 54 new slots between 2000 and 2012. Even with the expansion, the slot rule produces almost impenetrable barriers to entry to new airlines seeking to serve the airport without bargaining with existing slot holders.

Second, Reagan National is subject to what's called the "Perimeter Rule," which limits flights to within a 1,250-mile radius of the airport. The federal government has established limited exceptions to the Perimeter Rule, with US Airways having the most beyond-perimeter slot exemptions of any airline. The combined US Airways would have exclusive rights to serve Phoenix, Las Vegas, and San Diego from Reagan National, as well as a key flight-pair between Washington and Los Angeles.

Can it really get any worse?
One key issue, though, is that even the existing situation at Reagan National is far from competitive by the Justice Department's definition. Overall, American controls a relatively small portion of the total slots that the merged entity would have at Reagan National and already US Airways has more than half of the total slots available. By that standard, it's hard to determine just how much more of an anticompetitive effect American's loss of independence would have on the market -- or whether the Justice Department would be seek to reduce the combined entity's presence at Reagan National even below what US Airways currently has.

Meanwhile, interested parties from both sides of the debate are eagerly awaiting a final outcome to the controversy. Among rival airlines, Southwest would clearly like to gain more of a presence at Reagan National, as it currently relies largely on the much less convenient Baltimore-Washington Airport. Other airlines like JetBlue stand to gain if moves from US Airways and American to give up slots improve their competitive position on their own routes. Unions are largely in favor of the merger, as the companies have granted concessions that would include pay raises for many employees. Other key cities where US Airways and American have substantial presences have lobbied for the merger as well.

Perhaps the most interesting thing, though, is that even after shares of both AMR and US Airways plunged after the Justice Department challenged the deal, both stocks have since reached new multiyear highs. Even as a January 18 deadline to complete the merger looms, it could be that thanks to the big improvement in economic conditions in the airline industry, investors have the least to lose even if the deal doesn't go through.

Aerial view of Reagan National Airport. Source: U.S. Geological Survey.

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The article Why Reagan National Could Make or Break the American-US Airways Merger originally appeared on Fool.com.

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