By JAD MOUAWAD and CHRISTOPHER DREW
Published: November 4, 2013
The Justice Department has started talks with American Airlines and US Airways, seeking concessions on airport takeoff and landing slots in exchange for dropping an antitrust lawsuit aimed at blocking their merger, Attorney General Eric H. Holder Jr. said on Monday
Mr. Holder’s comments on the negotiations, which began just three weeks before a trial on the suit was scheduled to start in federal court in the District of Columbia, raised expectations on Wall Street and in the aviation industry that the merger would stay in place with relatively modest concessions.
The department sued in August to block the merger, which would create the nation’s largest airline. Claiming that the combination would harm consumers, Justice Department officials said that they had to take a tough stance because other big airline mergers had increased airfares.
Several legal and airline specialists said that despite that talk, the Justice Department’s case was relatively weak and that it now appeared to be narrowing its main concerns about competition to a few airports.
Robert A. McTamaney, a mergers and acquisitions lawyer at Carter Ledyard & Millburn in New York, said Mr. Holder seemed to be “holding out something of an olive branch.”
Mr. Holder told reporters in Washington that the government would insist, in any settlement, on “divestitures of facilities at key constrained airports throughout the United States.”
For example, Mr. Holder said the department had determined how many slots it would want American and US Airways to sell at Reagan National Airport near Washington, where the two airlines together control about two-thirds of the landing and takeoff slots. He declined to specify the number and did not name any other airports.
But while department officials initially talked in August about 1,000 pairs of cities where the combination of American and US Airways would dominate a route and could increase fares, Mr. McTamaney said a settlement might require them to sell slots to competitors at only a few airports.
One problem for the Justice Department, he said, is that many smaller airports do not produce enough traffic to sustain competition among airlines for a more than a few months.
“Historically, in a lot of these markets, two airlines cannot make money,” Mr. McTamaney said. “It doesn’t matter whose name is on the side of the plane.”
Mr. Holder said the department hoped for a settlement, but remained “fully prepared to take this case to trial.” He added, “We will not agree to something that does not fundamentally resolve the concerns that were expressed in the complaint.”
The Justice Department has approved several mergers in recent years, including the combination of Delta Air Lines and Northwest, United and Continental, and Southwest and AirTran. Government lawyers have said that given the growing concentration in the industry — the proposed merger would result in four airlines carrying more than 80 percent of the nation’s commercial air travel — an additional merger would hurt passengers.
But some airline analysts had expected the sides to settle before the case reached court. That view gained traction last week when the Justice Department, American Airlines and US Airways picked a mediator, as requested by the court.
“Justice will be unable to convince a judge the merger is anticompetitive, especially given that AMR and US Airways offer far less competitive overlap versus all three previous mergers approved by Justice,” according to a report last week by Vicki Bryan, an analyst at GimmeCredit.
Negotiations are a far cry from the Justice Department’s initial statements, after filing its challenge, when its lawyers vowed to take the case to court.
The government’s case against the merger has also suffered several small setbacks in recent months, which threaten to weaken its position before the Nov. 25 trial.
Last month, the attorney general of Texas, who had joined the federal challenge with five other states and the District of Columbia, withdrew his support after negotiating a separate arrangement with American Airlines. Under that deal, the airline promised to keep its headquarters in the Dallas-Fort Worth area, which it had promised repeatedly in the past, and agreed to maintain daily service to more than 20 airports in Texas.
Another defection might be looming. Pam Bondi, the attorney general of Florida, another state that had joined the challenge, said she had met with Thomas W. Horton, the chairman and chief executive of American Airlines, and indicated they were working on a “timely resolution.”
The Justice Department is facing a tight schedule to prepare for the trial and present evidence. It had initially sought a court date in March 2014, but was rebuffed by Judge Colleen Kollar-Kotelly, of the United States District Court for the District of Columbia, who set an earlier date.
The airlines argue that their merger would benefit passengers by providing more flights to more airports, in the United States and abroad, and offer a stronger counterweight to Delta and United.
The federal challenge to the merger followed a tumultuous period of restructuring for American Airlines, which filed for bankruptcy in 2011. The reorganization was approved by a federal judge in September, subject to Justice Department approval of the merger. As part of the plan, American agreed to merge with US Airways, a move that received the backing of creditors and its three main labor groups.
Shares of American’s parent, the AMR Corporation, jumped nearly 25 percent Monday on the news about the settlement talks.