WASHINGTON/NEW YORK (Reuters) - US Airways Group Inc and American Airlines will be allowed to merge to become the world's largest airline after they agreed to give low-cost competitors more access to several key U.S. airports, including in New York and Washington.
The agreement, subject to court approval, ends a U.S. Department of Justice lawsuit filed in August. The government opposed the merger of US Airways and AMR Corp, parent of bankrupt American Airlines, on the grounds it would hinder competition and lead to higher fares.
Department of Justice officials termed the settlement a major boost to the competitiveness at key major airports, while some analysts said the number of flights affected - only about 112 out of about 6,700 daily flights - indicated the change would be incremental.
Shares of AMR soared 26 percent on the settlement. The merger, now expected to close in the first half of December, is central to American's effort to emerge from a two-year bankruptcy process.
The two airlines agreed to give up 52 pairs of takeoff and landing slots at Reagan National Airport, just outside Washington, D.C., and 17 pairs at New York's LaGuardia Airport, both busy airports with limited capacity.
"It really started with a divestiture at DCA (Reagan National) and once we became agreeable to that piece of the puzzle we got a look at the rest of the proposed settlement," said Tom Horton, chief executive of American Airlines.
The two airlines currently control about 69 percent of the slots at Reagan, an airport used by many members of Congress to travel to their home districts. After giving up the slots, they will have about 57 percent, according to Cowen & Co analyst Helane Becker.
The Justice Department will select which airlines are eligible to buy slots that the airlines must sell as part of the proposed settlement, according to a source close to the deal who was not authorized to speak publicly.
The government has said the divestiture at Reagan National and LaGuardia would deliver "substantial additional benefits," specifically to Southwest Airlinesand JetBlue, and that low-cost carriers would be able to acquire spots at the Washington and New York airports, as well as Boston Logan, Chicago O'Hare, Dallas Love Field, Los Angeles International and Miami International.
"The biggest impact will be felt in Los Angeles and Chicago, as the combined company was looking to grow in those markets," Becker said in a research note.
US Airways CEO Doug Parker, who will lead the new combined carrier, hinted that the divestitures would mean some routes now flown by smaller aircraft would be scrapped. "We now have a constrained asset," he said.
Smaller regional cities are still likely to face higher ticket prices because of a lack of competition, said Rick Seaney, CEO of FareCompare.com, which tracks air fares.
Government negotiators said competition would thrive.
"The extensive slot and gate divestitures at these key airports are groundbreaking and they will dramatically enhance the ability of low cost carriers to compete system-wide," said Assistant Attorney General Bill Baer of the Department of Justice's Antitrust Division.
But one antitrust expert said the deal fell far short of the game-changer claimed by the government, and others agreed, based on the minor impact on the new carrier's routes.
"I am very surprised that the Justice Department would agree to this settlement given the fact it had filed a very strong complaint. It stood a strong likelihood of winning at trial," said Seth Bloom, a veteran of the Justice Department now at Bloom Strategic Counsel.
Robert Mann, an airline consultant in Port Washington in New York, said the divestitures amounted to a "miniscule impact" on the combined carrier. "These are minor gives and the ability to maintain the billion-dollar network benefit is reflective of that," he said.
Shares of US Airways briefly surged to the highest point since late 2007 before closing up 1.1 percent at $23.52 on the New York Stock Exchange. AMR shares finished 26 percent higher at $12.
The companies' shares, hit hard when the government suit was announced in August, have rallied for weeks on confidence that the merger would, in the end, be approved.
Investors bid up on Tuesday low-cost carriers that stand to benefit from greater access. Shares in Southwest rose 1.2 percent and JetBlue shares jumped 6.1 percent.
Delta Air Lines made a bid for expansion at Reagan, saying it was "best positioned to continue competitive nonstop flights from Reagan National to small- and mid-sized cities."
But the source close to the deal said JetBlue is expected to buy the Reagan National slots that it is leasing from American, and that United Airlines and Delta are not expected to be on the list of qualified buyers.
Tuesday's settlement came as the airlines and the government stared down a November 25 deadline, at which point the antitrust case would have gone to trial in District Court.
"This is the price of admission," said George Hamlin, an airline consultant based in Fairfax, Virginia. "It was a necessary evil to get the deal done."
"Both sides blinked" or there would not have been a deal, Hamlin said.
In remarks last week, Holder said the Department of Justice was prepared to settle before the trial. A source close to the talks said that the settlement talks began in earnest a little more than two weeks ago.
Analysts judged the settlement a win for smaller cities in the six states that joined the Justice Department's suit in August. Those cities will walk away with a five-year guarantee of daily service.
In a side agreement with the Department of Transportation, the airlines agreed to dedicate their commuter slots at Reagan National to medium, small and non-hub cities.
Arizona, Florida, Michigan, Pennsylvania, Tennessee and Virginia, as well as the District of Columbia, stayed with the suit until the end. Texas dropped out on October 1 after its attorney general struck a deal with the airlines.
Losing Texas from the coalition had been seen as a crack in government's armor, and was followed by weeks of pressure from mayors and business groups in key hub cities, urging that a settlement be reached.
"It was helpful that the Texas attorney general decided to make a settlement with us," said American's Horton.
AMR has a bankruptcy hearing scheduled for November 21. Its restructuring plan has already been endorsed pending a resolution of the federal antitrust suit.
The case at the U.S. District Court for the District of Columbia is No. 1:13-cv-12346
Reporting by Soyoung Kim, Diane Bartz, Karen Jacobs and Alwyn Scott; Writing by Ros Krasny; Editing by Gerald E. McCormick, John Wallace and Tim Dobbyn