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US Airways, American reach merger settlement, keeping Charlotte as hub

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US Airways and American Airlines on Tuesday announced they’ve reached a deal with the Justice Department to let their merger proceed, clearing the way for a $17.2-billion merger that will make Charlotte Douglas International the second-busiest hub in the world’s biggest airline.

Charlotte could see more flights as a result of being part of a bigger route network, executives said. But consumer advocates also warned that ticket prices could rise, as fewer carriers means less competition on many routes.

“I think this is great for Charlotte,” said US Airways CEO Doug Parker, who is set to lead the combined carrier. “The Charlotte hub is going to be an important part of a bigger airline now.”

The deal must still be approved by a judge. Once that happens, the airlines expect to complete their merger in the first half of December. The new carrier will be called American Airlines and remain headquartered in Fort Worth.

To win the Justice Department’s approval, US Airways and American agreed to give up 44 daily flights at Washington’s Reagan National and 12 daily flights at New York’s LaGuardia. US Airways and American will also give up two gates and the related support facilities at Boston Logan International Airport, Chicago O’Hare, Dallas Love Field, Los Angeles International, and Miami International.

The deal doesn’t require the airlines to give up any gates at Charlotte Douglas, where the combined carrier will operate more than 650 daily flights – more than 90 percent of the total. That will make Charlotte Douglas one of the most concentrated major airports in the nation.

As part of the agreement, US Airways and American agreed to keep Charlotte, and their other hubs, at their present service levels for the next three years.

The government first sued to block the merger in August, a move Parker admitted Tuesday had shocked him.

Both sides tried to paint the settlement as a victory.

Bill Baer, the assistant U.S. attorney leading the government’s case against the merger, said the divestitures would ensure more low-cost carriers have access to the airports, keeping the cost of tickets down even as the airline industry consolidates further.

“These divestitures are the largest ever in an airline merger,” said Baer. “It provides more competition than exists today in this industry.”

Parker said the settlement contains “nothing at all we view as a financial risk to the company.”

“We think it’s a fantastic merger for the traveling public,” said Parker.

J.P. Morgan analyst Jamie Baker called it “a win for the airlines” in a note to investors, noting that out of their hundreds of different gates at airports spread throughout the nation, the combined carrier has to give up only 10. The divested flights from Washington and New York aren’t expected to hurt the airline’s earning potential, Baker said.

The settlement “would have minimal impact on the merged company,” wrote analyst Helane Becker, of Cowen and Company.

Too focused on Washington?

Although the airlines will take years to fully merge their operations, passengers will notice some changes quickly.

American and US Airways will start offering reciprocal frequent flier programs on Jan. 7. US Airways will also leave its international Star Alliance – it stopped selling Star Alliance tickets several months ago – and join the American-led Oneworld alliance sometime in the first quarter next year.

Consumer advocates said the Justice Department’s settlement doesn’t go far enough. Diana Moss, vice president of the American Antitrust Institute – which strongly opposes the merger – said the deal’s heavy focus on Washington Reagan National Airport and minimal changes elsewhere in the country mean cities such as Charlotte are likely to see higher fares.

“The remedy is loaded up on Washington National,” Moss said. “To hell with the rest of the U.S.”

“(The settlement) just completely obscures the harms that would impact other parts of the country, including Charlotte,” she said. “Having Charlotte not make the short list of remedied airports is glaring.”

Baer said the slots divested will be given to low-cost carriers such as JetBlue. Even though no slots or gates are being given up at Charlotte Douglas, Baer said any boost to low-cost carriers will help keep prices down everywhere.

“The best answer we can give is that by providing more opportunities for (low-cost carriers) to fly more places, we create the opportunity for more competition at hubs that are particularly concentrated,” such as Charlotte Douglas, said Baer.

Moss said she doesn’t believe that, and thinks ticket prices and fees are likely to rise.

“I think it’s a stretch for the government to ask us as consumers to believe JetBlue will save the day,” she said. “I think consumers should be angry.”

‘Bullish about Charlotte’

At Charlotte Douglas, US Airways senior vice president of marketing and planning Andrew Nocella said he hopes to see growth.

“I’m bullish about Charlotte,” Nocella told the Observer. “I think I’d like to see the hub at 700” daily flights.

There will be some changes, Nocella said. The airlines will continue the same schedule for flying from Washington Reagan National to Charlotte. But they might eliminate some smaller regional jets, flown by American, on the route between New York-LaGuardia and Charlotte, instead relying on larger US Airways jets to serve the route.

As a result of shifting from the Star Alliance to Oneworld, Nocella said the new American could tweak its European flying. Oneworld includes British Airways and Spanish carrier Iberia, but doesn’t include German carrier Lufthansa, a Star Alliance member.

“There may be a little bit less German capacity going forward and a bit more capacity to Spain and the UK,” he said. For example, instead of two nonstop flights to Frankfurt, the new American could operate one and add more flights to London.

Nocella said the combined carrier will examine whether to expand Latin American service through Charlotte, or through American’s Miami hub.

“We’re going to have to do a complete assessment of all of those things,” Nocella said. “We’re going to review all those opportunities and make sure we get it right.”

Nocella declined to say whether the Justice Department had pushed the combined airline to give up any gates at Charlotte Douglas.

Parker said Charlotte shouldn’t read anything into the three-year time frame the settlement outlines for keeping the hub airports.

“We fully intend to keep the hub and spoke structure we have forever,” said Parker. “Of course things can change so you can’t agree to that forever.”

US Airways’ master lease at Charlotte Douglas runs through 2016. The airline and airport are preparing to negotiate a new lease.

Labor supportive

Labor leaders generally praised the merger settlement. About 7,600 US Airways employees are based in Charlotte.

“While the merged airline will give up some takeoff and landing slots, the overall synergies of the combined airline will be good for employees,” said Capt. Gary Hummel, president of the Charlotte-based US Airline Pilots Association, which represents US Airways pilots.

A higher pay scale and the promise of a more stable future were major reasons labor unions lined up to support the merger. Like many employees, pilots stand to get a raise as soon as the merger takes effect. Spokesman Capt. James Ray said US Airways pilots will see raises of 25 to 40 percent, retroactive to February, as soon as the merger closes.

The airlines coordinated shows of support to pressure the Justice Department and some state attorneys general into settling. Employees lobbied Congress and held a rally on Capitol Hill, while the mayors of hub cities, including Charlotte mayor Patsy Kinsey, wrote letters to U.S. Attorney General Eric Holder voicing their support.

Tuesday, Baer said that pressure didn’t make a difference in the Justice Department’s decision to settle.

“That doesn’t drive our decision making,” said Baer. “Our decisions have to be made on competition, what’s good for competition and what’s good for consumers.”

Parker put it differently. “The overall outpouring of support was, a phenomenal, phenomenal effort and couldn’t help but be noticed,” he said.

Portillo: 704-358-5041; Twitter: @ESPortillo
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