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Proposed Spin-offs at Seven Major Airports Satisfy DOJ in US Airways/American Merger

Monday, November 18, 2013
By Cecelia M. Assam

Nov. 12 --A proposed consent decree, filed on Nov. 12 in the U.S. District Court for the District of Columbia, will require US Airways Group Inc. and bankrupt American Airlines' parent corporation, AMR Corp., to divest slots, gates and other assets at seven major U.S. airports to remedy the loss of competition projected by the Justice Department in its August complaint (U.S. v. US Airways Group, Inc., D.D.C., No. 1:13-cv-01236 (CKK), 11/12/13).

The airport assets--at Boston Logan International, Chicago O'Hare International, Dallas Love Field, Los Angeles International, Miami International, New York LaGuardia International and Ronald Reagan Washington National--will be sold to “low cost carrier airlines (LCCs) in order to enhance system-wide competition in the airline industry resulting in more choices and more competitive airfares for consumers,” according to a DOJ statement describing the proposed settlement.

American Airlines and its parent AMR Corp. filed for Chapter 11 protection in November 2011 .

Judge Sean H. Lane of the U.S. Bankruptcy Court of the Southern District of New York formally confirmed Oct. 21 Chapter 11 debtor AMR Corp's plan of reorganization to exit bankruptcy via its proposed merger with US Airways, offering the caveat that the confirmation did not amount to judgment on the looming antitrust lawsuit that could derail the plan's implementation .

During a Nov. 12 press conference, Assistant Attorney General William J. Baer, Chief of DOJ's Antitrust Division, noted that these divestitures “are the largest ever in an airline merger and will allow low cost carriers to fly many more direct and connecting flights throughout the country each day.”

Specifically, US Airways and American would be required to divest or transfer to LCC purchasers approved by DOJ:

• all 104 air carrier slots (i.e., slots not reserved for use only by smaller, commuter planes) at Reagan National and rights and interest in other facilities at the airport necessary to support the use of the slots;

• 34 slots at LaGuardia and rights and interest in other facilities at the airport necessary to support the use of the slots; and

• rights and interests to two airport gates and associated ground facilities at Boston Logan, Chicago O'Hare, Dallas Love Field, Los Angeles International and Miami International.

 

Attorney General Eric Holder declared that this settlement “has the potential to shift the landscape of the airline industry. 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.”

He added that DOJ's “ultimate goal has remained steadfast throughout this process--to ensure vigorous competition in airline travel. This is vital to millions of consumers who will benefit from both more competitive prices and enhanced travel options.”

Parties
Seven attorneys general joined in DOJ's proposed settlement.

The attorneys general include: Arizona, US Airways' home state; Florida, which is a large hub for American; Pennsylvania, home to one of US Airways' largest hubs; Michigan, added in the amended complaint; Tennessee; Virginia; and the District of Columbia. Texas, American's home state, was a party in the original complaint and dropped out last month.

US Airways, based in Tempe, Ariz., is a major U.S. airline as well as one of the nation's four remaining network or “legacy” airlines, DOJ maintained. With hubs in Phoenix, Charlotte, Philadelphia, and Washington, D.C., US Airways carried over 50 million passengers to approximately 200 locations worldwide and earned “record profits” on more than $13 billion in revenue last year.

The other legacy carriers are American, United and Delta, DOJ observed. The original complaint alleged that these four carriers “have extensive national and international networks, connections to hundreds of destinations, established brand names, and strong frequent flyer reward programs.”

AMR Corp., American's parent company, is based in Fort Worth, Tex. With hubs in New York, Los Angeles, Chicago, Dallas and Miami, it transported over 80 million passengers to approximately 250 locations worldwide last year and took in more than $24 billion in revenue. American also has the distinction of having one of the most recognized brands in the world, according to the complaint.

Complaint of DOJ, Attorney Generals4
On Aug. 13, DOJ and several attorneys general filed a complaint alleging that the $11 billion acquisition of American by US Airways would lessen competition substantially for commercial air travel in local markets throughout the United States and would tend to create a monopoly, in violation of Clayton Act §7, 15 U.S.C. §18.

DOJ projected higher airfares and less service for the flying public. The complaint also anticipated that the merged firm would be entrenched as the dominant airline carrier at Reagan National, where it would control 69 percent of take-off and landing slots--thereby effectively foreclosing entry or expansion by competing airlines.

Proposed Settlement
Baer declared that the settlement not only addresses the anticompetitive concerns in the complaint but also “opens up the marketplace like never before.” He added that it also “will disrupt today's cozy relationships among the incumbent legacy carriers.”

While it is undisputed that New York, Washington, D.C., Los Angeles, Chicago, Boston, Miami, and Dallas “are among the largest, most important business centers in the country,” Baer suggested that access limitations, “such as slot constraints and gate constraints, airports in these cities are among the most difficult for an airline to enter and establish a meaningful presence.”

The proposed settlement is crafted to open the door for LCCs to compete and is expected to result in more choices and more competitive airfares for consumers. DOJ estimated that “[p]roviding the LCCs with the incentive and ability to invest in new capacity and permitting them to compete more extensively nationwide will enhance meaningful competition in the industry and benefit airline travelers.”

All slots and assets to be divested must be sold under procedures approved by DOJ. The proposed settlement states that JetBlue and Southwest will be afforded the opportunity to acquire the slots they currently lease from American at Reagan National and LaGuardia, respectively. The agency explained:

The remaining 88 slots at Reagan National and 24 slots at LaGuardia plus any JetBlue or Southwest decline to acquire will be grouped into bundles, taking into account specific slot times to ensure commercially viable and competitive patterns of service for the recipients of the divested slots. The parties will divest these slot bundles and all rights and interests in any gates and other ground facilities (e.g., ticket counters, baggage handling facilities, office space and loading bridges) as necessary to support the use of the purchased slots.

The gates at the five airports will be transferred on commercially reasonable terms to the new acquirers. The acquirers of the slot and gate divestitures also require approval of the department. Preference will be given to airlines at each airport that do not currently operate a large share of slots or gates.

 

Under the proposed settlement, a monitoring trustee would be appointed to oversee the divestitures or transfers of the slots and gates. There also is a prohibition against the merged company reacquiring an ownership interest in the divested slots or gates during the 10-year term of the decree. Moreover, the parties must notify DOJ “of any future slot acquisition at Reagan National regardless of whether or not it is a reportable transaction under the premerger notification law and further provides for waiting periods and opportunities for the department to obtain additional information in order to review the transaction.”

Reaction
The parties released a joint statement about the proposed settlement.

Tom Horton, chairman, president and CEO of AMR, and incoming chairman of the board of the combined company, asserted:

This is an important day for our customers, our people and our financial stakeholders. 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.

 

Doug Parker, chairman and CEO of US Airways and incoming CEO of the combined airline, responded:

This is very good news and we are grateful to all who have made it happen. In particular, we are thankful to our employees, who throughout this process continued to believe in a better future as one airline and who voiced their support passionately and consistently. We also want to thank the elected officials in the states and communities we serve, the business leaders in our hub cities, and the thousands of customers who endorsed and supported this effort. Thank you as well to the U.S. Department of Justice, the state attorneys general and the U.S. Department of Transportation. We are pleased to have this lawsuit behind us and look forward to building the new American Airlines together.

 

Texas Attorney General Greg Abbott, who dropped out of the case about six weeks ago, was delighted that the settlement would bring “economic opportunities that will arise from having the world's largest airlines headquartered in Texas.”

This proposed settlement, Abbott maintained, “builds upon the initial agreement Texas reached with the airlines last month.”

He added: “Because of our early and ongoing efforts, we've secured an agreement that will leave Texas in a much better position, ensuring that Texas jobs will stay in Texas.”

Counsel for plaintiffs: Michael D. Billiel, DOJ, Washington, D.C.; Nancy M. Bonnell, Phoenix, Ariz.; Bennett Rushkoff, Washington, D.C.; Lizabeth A. Brady, Tallahassee, Fla.; James A. Donahue, III, Harrisburg, Pa.; Victor J. Domen, Jr., Nashville, Tenn.; Sarah Oxenham Allen, Richmond, Va.; and D.J. Pascoe, Lansing, Mich.; counsel for defendants: Richard G. Parker, O'Melveny & Myers LLP, Washington, D.C.; Paul T. Denis, Dechert LLP, Washington, D.C.; Charles F. Rule, Cadwalader, Wickersham & Taft LLP, Washington, D.C.; John M. Majoras, Jones Day, Washington, D.C.; and Mary Jean Moltenbrey, Paul Hastings LLP, Washington, D.C.

By Cecelia M. Assam

To contact the reporter on this story: Cecelia M. Assam in Washington at cassam@bna.com

To contact the editor responsible for this story: Sheldon B. Richman at srichman@bna.com


The amended complaint is available at http://www.justice.gov/atr/cases/f300400/300479.pdf -- on DOJ's website.

The proposed consent decree is available at http://op.bna.com/atr.nsf/r?Open=casm-9ddp8d -- on BNA's website.

The competitive impact statement is available at http://op.bna.com/atr.nsf/r?Open=casm-9ddp35 -- on BNA's website.

The asset preservation and stipulation is available at http://op.bna.com/atr.nsf/r?Open=casm-9ddp5b -- on BNA's website.

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