How Serious Are the Airline Merger Talks With the DOJ?
When the battle over the proposed merger between US Airways and American Airlines parent company AMR is discussed, it is usually done in terms of the biggest opposition party, the U.S. Department of Justice. But the DOJ was joined in its lawsuit by several states Here we will look at how settlement talks could be progressing with the merger-opposed states.
About a month ago, the state of Texas settled the merger case with the airlines in exchange for continued service guarantees on certain routes serving small cities. But Texas was never seen as the biggest challenge to the merger. The new American Airlines Group would end up creating its largest hub at Dallas/Fort Worth International Airport, and adding an array of new flight choices from US Airways.
Additionally, Southwest Airlines would help to prevent the Dallas/Fort Worth market from becoming monopolized. Known as a price-setting discount carrier, Southwest provides some competition for flights, and is set to expand its presence in the Dallas/Fort Worth market when the Wright Amendment restrictions are lifted in 2014 allowing Southwest to operate longer distance flights from Dallas Love Field.
If there's going to be another state settlement in the near future, the betting money would be on Florida. Recent reports are showing that the airlines have been talking to Florida attorney general Pam Bondi in a meeting the AG called "extremely productive."
Florida also lacks much of the same concerns over service cuts with more of a focus on American Airlines' hub at Miami International Airport, and fair competition.
This state is one of the few states without a major American Airlines or US Airways hub. However, Tennessee is still seeking to preserve fair prices and service alongside hub states.
This may be because Tennessee used to have a hub for Delta Air Lines until the airline merged with Northwest Airlines in 2008, and recently took away the hub status of Memphis International Airport. In seeking to preserve remaining competition and service to the state, Tennessee would likely require some major service guarantees from the new American Airlines Group.
The reasons for this state joining are a little less clear. The Detroit International Airport was also involved in the Delta-Northwest merger, but fared pretty well. Michigan is generally pursuing the lawsuit from the angle that less competition means higher prices and dominance over certain routes. The state was also the last to join the lawsuit, becoming the only state to join after the initial complaint was filed.
Arizona and Pennsylvania
These two states both share one characteristic: a major US Airways hub near one or more American Airlines hubs, and the fear the US Airways hub would be downsized. In Arizona's case, it's Phoenix Sky Harbor International Airport located between Dallas/Fort Worth International and Los Angeles International. In Pennsylvania, it's Philadelphia International Airport, close to American Airlines' substantial New York operations.
But both the mayors and airports of Phoenix and Philadelphia have endorsed the merger showing that at least some officials view the merger as a positive for air travel in these two cities. Quite likely, a settlement here would require some service guarantees.
Virginia and the District of Columbia
These two states share another characteristic about airport control -- and it's actually over the same airport. Washington National Airport has been a persistent sticking point in the merger, as a merged American Airlines Group with no concessions would control nearly 70% of the airport's slots. With the airport being both the most central airport for Washington, DC, and technically being in Virginia, this matter is of high importance to these attorney generals.
But concessions at Washington National Airport are already being discussed as part of a possible settlement with the U.S. Department of Justice. If the DOJ accepts a slot concession offer from the airlines, Virginia and the District of Columbia may agree to it, as well.
Each state has its own citizens to serve, but with enough service guarantees and slot concessions, it does not seem impossible for the airlines to reach settlements with more states. Although the DOJ itself could pose the greatest challenge, if a settlement can be reached with the DOJ, more states may join the settlement.
Investors in this industry should keep an eye on developments surrounding this merger case, as its mass scale is bound to shape the industry for decades to come.
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The article How Serious Are the Airline Merger Talks With the States? originally appeared on Fool.com.Alexander MacLennan owns shares of AMR and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2015 $17 calls on US Airways Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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