US Airways-American concessions boost discount airlines

(MoneyWatch) Other carriers may be the biggest winners now that the Justice Department has cleared the way for US Airways and American Airlines to complete their $11 billion merger. 

To get federal approval for the deal, US Airways (LCC) and American (AAMRQ) had to give up gates or takeoff and landing slots at seven of the busiest airports in the nation. That is aimed at preserving competition along key routes, ensuring that the merger does not result in a fare increase for travelers.

The Justice Department in August filed a lawsuit to stop the merger, claiming that it would hurt airline industry competition.

Specifically, the companies agreed to divest two gates and ground facilities at Logan Airport in Boston, O'Hare International Airport in Chicago, LAX in Los Angeles, Miami International Airport and Dallas's Love Field. The combined airline, which will now fly as New American Airlines, will also give up 104 takeoff and landing slots at Washington Reagan National and 34 at New York's LaGuardia airport.

"New York, Washington, Los Angeles, Chicago, Boston, Miami and Dallas are among the largest, most important business centers in the country," said U.S. Assistant Attorney General William Baer at a press conference to discuss the government's deal with US Air and American. "But due to access limitations, such as slot and gate constraints, key airports in these cities are among the most difficult for an airline to enter and establish a meaningful presence."

The government plans to offer the valuable slots at Reagan and LaGuardia to discount carriers like Southwest Airlines (LUV) and Virgin America, rather than to two other legacy airlines, United Continental (UAL) and Delta (DAL).

"Making slots and gates available to low-cost carriers will lower barriers to entry, providing the incentive and ability for those carriers to invest in new capacity, and positioning those carriers to provide significant new competition system-wide," Baer said. "The low-cost carriers that acquire the slots and gates will be able to offer increased competition not just on direct flights to and from these key airports, but also on connecting flights nationwide."

A bankruptcy court must approve the deal because American remains under court supervision after filing for Chapter 11 protection in 2011. Assuming that is granted, US Air-American would supplant United and Delta as the world's biggest airline.

On Monday, Virgin America filed a legal brief objecting to the merger of USAir and American. Virgin said in the filing that the reduced competition from the deal could be offset by the merging companies offer discount airlines better access to their route networks. 

Virgin, the newest airline to enter the U.S. market, has complained for years about its difficulty securing gates and takeoff and landing slots at major U.S. airports. It only started flying into O'Hare in Chicago, the nation's busiest airport, in 2011 after years of trying get access to it. The company has not responded to requests for comments on the settlement.

Southwest Airlines, which had also previously opposed the USAir-American merger, said Tuesday that it approves of the concessions.

"We congratulate all the parties on a tentative settlement that preserves vigorous competition in the U.S. Airline industry," Brad Hawkins, a Southwest Airlines spokesman, said in an email. "We look forward to working with [the Justice Department] on a fair and transparent process by which Southwest can expand our low-fare competitive presence at Washington Reagan National and New York LaGuardia."

Under the agreement, JetBlue (JBLU), another major low-cost airline, will get to keep the slots it is currently sub-leasing from American at Reagan and may also get access to the new slots that are opening up.

"We're very happy with the outcome, and are interested in growing our presence at DCA," a JetBlue spokesman said in an email. "We'll be looking through court documents and awaiting [Justice Department] guidance on how slots will be divested."

The Justice Department has not said how it intends to distribute the slots and gates the merged airline are divesting and whether smaller low-cost carriers will get access to them.