Airline Merger Settled: Let the Fighting Begin

The biggest news in the airline industry last week was the settlement that allows the merger between US Airways and American Airlines parent company AMR to go forward. But while the battle for the merger is largely over, another fight is brewing and it involves airlines from across the industry.

Valuable assets
Part of the terms of the merger settlement involves having US Airways and American Airlines give up slots at certain major airports. Washington National Airport was a clear front-runner for slot divestitures, even rising to investor attention before the lawsuit's initial filing.

The airlines will divest 52 slot pairs from Washington National, along with 17 from New York LaGuardia Airport. They'll also divest two "gates and related support facilities" each at Boston Logan International Airport, Chicago O'Hare International Airport, Dallas Love Field, Los Angeles International Airport, and Miami International Airport.

But these slots don't just disappear into oblivion; they will be made available to other airlines. And judging by the value of these slots, there is an industry shaping battle ahead.

Tossing their hats in the ring
Before the settlement of the lawsuit, JetBlue Airways CEO Dave Barger noted his opinion that the merged American Airlines Group should be able to retain only the same number of slots as the current US Airways, which would require significant slot divestitures.

Southwest Airlines has also noted its interest in slots the airlines divest. Southwest even went as far as to ask permission to file a "friend of the court" brief with the basis that allowing Southwest to obtain divested slots at Washington National and New York LaGuardia would be beneficial to consumers.

Even legacy carrier Delta Air Lines is trying to position itself to acquire these valuable slots. Shortly after the settlement announcement, Delta put out a press release encouraging the Department of Justice "to consider all airlines, including those that serve small- and medium-sized communities, in the process for divesting airport slots and assets related to the proposed settlement of litigation challenging the merger of American Airlines and US Airways."

DOJ goals
The number of major airlines in the industry has been greatly reduced over the past several years, as airline mergers have formed larger carriers. US Airways and America West Airlines merged in 2005 as US Airways exited its second bankruptcy that decade, Delta Air Lines merged with Northwest Airlines, United Airlines merged with Continental Airlines, and even low-cost carriers joined the trend as Southwest Airlines merged with AirTran.

Obviously, the DOJ wanted to maintain competition in the industry, and with United Continental and Delta set up as two massive players, there was an argument to be made that allowing the US Airways/AMR merger would be the most effective way to counter the size of United Continental and Delta.

But the DOJ doesn't want legacy carriers to get all the slots divested by US Airways and American Airlines, as that would just amount to a slot transfer between established and powerful players.

The DOJ is looking to have most divested slots go to low-cost carriers that can keep the legacy airlines in check. This was great news for JetBlue, which saw its shares among the leading gainers in the industry on the day of the settlement announcement. Southwest also stands to benefit as slots become available for perhaps the best-known low-cost carrier -- and one that is hungry for slots.

Delta's fight
Never wanting to give up on valuable assets, Delta Air Lines is expected to continue pressing for slots. However, Bloomberg Businessweek reports that Renata Hesse, a senior official at the DOJ's antitrust division, is maintaining the position that the divested slots are meant for low-cost carriers. While the DOJ will still allow Delta to try, Hesse sees the chances that Delta will get these slots as very slim.

Industry effects
But how bad are things really for Delta? Its stock is near all-time highs, and the merger between US Airways and American Airlines provides additional stability and removes the risk that an independently reorganized American Airlines would drive up capacity.

Meanwhile, opportunities have opened up for Southwest and JetBlue. But neither should get too complacent. The two airlines are still major rivals, and the fight for these valuable slots will have major effects on the route networks of each airline. As a result, all airline investors should keep an eye on how these slot auctions play out.

Beyond the merger
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The article Airline Merger Settled: Let the Fighting Begin originally appeared on

Alexander MacLennan owns shares of AMR and Delta Air Lines and also has options on Delta Air Lines and 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 don't 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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