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Parker and Horton didn’t get everything that they wanted from the DOJ, but they still will end up with the largest airline on the planet. Not a bad position to be in.
American Airlines’ outgoing CEO Tom Horton called today’s settlement between US Airways, American Airlines and the U.S. Justice Department “A win win win.”
Whether or not it will be a win for customers still remains to be seen, but it is already looking good for the new American: What was a $13 billion combined market cap when the merger was announced has risen to $17 billion.
Horton set the tone of the conference. He often answered first and directed questions to American’s incoming CEO and current US Airways chief executive Doug Parker, as well as US Airways President Scott Kirby. Horton is scheduled to leave the CEO role following the merger and become chairman of the new American.
The settlement would have to be approved by the U.S. District Court for the District of Columbia, which appears likely considering the DOJ’s support for it, as well as the airlines’ stated desire to cooperate.
The next step for the new American Airlines is a hearing before the bankruptcy court on November 25. “Assuming all goes according to plan we expect we would be able to close the merger in the first half of December,” said Parker. If the bankruptcy hearing goes well, the airlines’ operations will become a single airline for customers on January 7, 2014. It will not officially be a single airline until they receive a single operating certificate.
Speaking of the delay caused by the Department of Justice’s action, Parker said “We’ve used the last three months to get even further ahead.”
Most of the interest in the settlement talks revolves around the selling of slots that will need to take place at major airports where the combined American and US Airways presence is overwhelming.
Southwest, JetBlue, and Delta have already said that they want shots at New York-LaGuardia and Washington’s Reagan-National Airport. In a statement Delta said, “Delta welcomes the settlement agreement and looks forward to the opportunity to acquire slots that will be divested under the agreement, particularly at Washington-Reagan National Airport. Delta is the airline best positioned to continue competitive nonstop flights from Reagan National to small- and mid-sized cities that could otherwise see service reduced or eliminated, which should be a strong consideration in the divestiture.”
The Department of Justice already informed JetBlue that it could bid on slots the airline currently leases from American Air. The DOJ issued similar instructions to Southwest for slots at LaGuardia.
Horton admitted that ridding themselves of the slots at Washington Reagan was the hardest part of the settlement.
US Air’s Kirby handled the questions about the new airline’s divestiture of slots. According to Kirby, the DOJ will provide a qualified list of bidders on the slots that American can then sell them to. “We can’t sell all the slots to one buyer,” Kirby said. Rather, the new American will sell to each buyer six to eight slots at a time.
Despite the loss of slots, Parker said that all of the economic benefits of the merger that were announced in February were still true. “Nothing at all in the agreement do we view as a financial risk to the company,” Parker said. “We will have the greatest network in the world and we still have over a billion dollars in net synergies.”
The new American Airlines will operate 6,700 flights a day in 56 countries.
Same Hubs, New Pilots
The DOJ settlement requires the new American to maintain historic levels of service at its former hubs for no less than three years. “This was one [concession] we were happy to give,” said Parker.
The agreement does not require the airlines to maintain a specific number of flights or maintain routes. “No specific metrics,” said Kirby. “Just to operate at levels consistent with history.”
What happens to hubs beyond three years has yet to be determined. “The intent is to maintain all of our hubs forever,” said Parker. “The fact that we agreed to three years is because it was a negotiated agreement. No one should read into the agreement that we intend to leave after three years.”
American’s Horton also said that the airline will hire new pilots in 2014.
Parker made relations with labor unions a priority while pursuing his merger with American, which put the new airline in a good position with pilots, ground crew, flight attendants, and mechanics.
“Our labor deals are largely done,” Parker said proudly.
Meeting the Merger Challenge
The executives portrayed the DOJ lawsuit as a challenge that better helped them prepare for the merger, even if it was an unexpected one.
“We were disappointed, let’s put it that way,” said Horton.
Parker and Horton both pointed to the broad support they received after the DOJ challenged the merger. “The overall outpouring of support was phenomenal,” said Parker. “It couldn’t help but be noticed. Most noteworthy by far was the employee support. Top of the list, but right behind that the letter from the mayors was incredibly helpful.”
Horton did a favor to Texas’ Attorney General, who initially opposed the merger after the DOJ’s challenge, and who reversed course after coming under political attacks in Texas. “Great credit goes to Texas Attorney General Greg Abbott who set the template for deals we made with other attorneys general.”
Horton said, “I don’t think this settlement is terribly different from what I would have anticipated early on. I think it’s a reasonable settlement that helps us go build the world’s best network.”
“We couldn’t be happier with the settlement,” said Parker.