Justice Department details deal for American, US Airways fight

By Diane Bartz

WASHINGTON (Reuters) - The Justice Department wants US Airways and American Airlines to divest landing and take-off slots at Reagan National and other "key" U.S. airports as a condition to drop its effort to block a proposed merger, Attorney General Eric Holder said on Monday.

Share prices in the airlines jumped as Holder seemed to offer a path to an agreement, three weeks before the scheduled start of a trial on November 25.

The bankrupt AMR Corp (AAMRQ.PK), parent of American Airlines, closed up 24.5 percent in heavy volume, while those of US Airways (LCC) at one point rose more than 5 percent to their highest in almost six years before retreating to close up 1.2 percent.

Holder said that talks with the companies were ongoing and he hoped for an agreement before the trial is due to start.

The Justice Department's complaint focused on the carriers' dominant position at Reagan National, outside Washington, and on more than 1,000 city pairings that American and US Airways now dominate. It said the merger would reduce choice for travelers and lead to higher fares.

Holder would not elaborate on Monday about whether the government has a specific number of slots in mind that the carriers need to sell to advance the deal. There were a "number of ways" to address the government's concerns, he said.

"What we have tried to focus on is to make sure that any resolution in this case necessarily includes divestitures of facilities at key constrained airports throughout the United States," Holder said.

"We hope that we will be able to resolve this short of trial, but if we do not meet those demands that we have, we are fully prepared to take this case to trial," he said. "We will not agree to something that does not fundamentally resolve the concerns that were expressed in the complaint."

Experts said it is unusual for an attorney general to comment at length in the middle of antitrust battle.

"I think it's a positive sign (of potential settlement), but it's important not to over-read it," Herbert Hovenkamp, an antitrust expert who teaches at the University of Iowa's College of Law, said of Holder's comments.

Several antitrust specialists were surprised by the share price increases, which suggested that investors saw Holder's utterances as a tipping point in favor of the merger.

Three said Holder essentially backed up previous comments from his antitrust deputy, Bill Baer, by insisting that the merger created antitrust problems in a number of markets nationally.

"Bill Baer can now sit there and say "'You heard from the boss. What can I do?'...This is a message to the parties," said Steve Axinn, a Justice Department veteran now at the law firm Axinn Veltrop and Harkrider LLP.

Seth Bloom, a former staffer for the Senate Judiciary Committee's antitrust subcommittee, agreed the comments did not necessarily signal that a quick settlement was in the works.

"He's saying you need divestitures nationally...and so the airlines have to make a fundamental change in their merger proposals," he said. "It's a very difficult case to settle."

Three weeks before the scheduled start of the trial, US Airways and American Airlines can agree to a package of divestitures, prepare to litigate, or abandon a merger that has been years in the making, Hovenkamp said.

"The government is asking for a lot and the parties want to give up as little as possible," Hovenkamp added.

DOMINANT AT REAGAN NATIONAL

The two carriers control a combined 69 percent of takeoff and landing slots at Reagan National, an airport used by many members of Congress to fly to their home districts.

Roughly 55 percent of slots at the airport are held by US Airways and 14 percent held by American. Airline officials have said privately that they are willing to cede some slots, but not scale back by the equivalent of the entire 14-percent American share.

US Airways declined comment on Holder's remarks. American Airlines did not respond to requests for comment.

(Additional reporting by David Ingram in Washington and Karen Jacobs in Atlanta; Editing by Ros Krasny, Lisa Von Ahnn, L Gevirtz and Ken Wills)

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What Does the DoJ Want from US Airways and American Airlines?

The Department of Justice is asking for more than US Airways (NYSE:LCC) and AMR Corp.’s (AAMRQ.PK) American Airlines may want to give in order for their planned merger to succeed. According to people familiar with the discussions who spoke to The Wall Street Journal, the Justice Department wants the airlines to give up takeoff and landing slots at airports around the country if the government agency is to drop its lawsuit blocking the merger.

Previous discussions focused on Ronald Reagan National Airport outside Washington, D.C., where the combined airline would own 69 percent of the takeoff and landing slots. It was expected that the DoJ would ask the airlines to give up space there, but a source who spoke to the Journal said the Department of Justice made a list of airports around the country where it wants US Airways and American Airlines to give up spaces.

The DoJ said that the merger, which will create the world’s largest airline by traffic, will result in only four carriers owning 80 percent of the U.S. flight market, which will reduce competition and potentially raise prices. The airlines say the merger will help them better compete with bigger airlines like United Continental (NYSE:UAL) and Delta Air Lines (NYSE:DAL), which will ultimately be good for consumers.

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Bull of the Day: Spirit (SAVE)

The airlines are flying high and so are their stocks. Spirit Airlines, Inc. (SAVE) recently posted record third quarter results as revenue jumped double digits over a year ago. This Zacks Rank #1 (Strong Buy) is expected to see double digit earnings growth in both 2013 and 2014.

Spirit Airlines operates a low-cost airlines based on ultra-low base fares which allows customers to buy the extras they value. The company has a $9 Fare Club program that costs $59.95 per year but gives customers access to special low fares and deals on baggage fees.

Spirit operates about 250 flights to 50 destinations in the U.S., Caribbean and Latin America. It is one of the few airlines offering service from the United States to the expanding markets of Panama and Colombia.

Big Beat in the Third Quarter

On Oct 30, Spirit reported its third quarter results and blew by the Zacks Consensus by $0.10. Earnings were $0.79 compared to the Zacks Consensus of $0.69. It was the fourth earnings beat in a row.

Revenue jumped 33.4% to $456.6 million. Total revenue per available seat mile ('RASM') was 12.55 cents, up 8.9% compared to the year ago quarter. The gain was due to higher load factors and higher average passenger yields.

Adjusted pre-tax margin rose to 20.3%, the highest quarterly adjusted pre-tax margin in the company's history.

Spirit is expected to have strong double digit earnings growth of 57% in 2013 and another 20.2% in 2014.

In the third quarter, Spirit added one new A320 aircraft, bringing its total fleet to 51 aircraft. It recently started several new routes including Dallas/Fort Worth to Phoenix Sky Harbor, Phoenix Sky Harbor to Chicago and Minneapolis/St. Paul to Tampa.

Shares At 2-Year Highs

After another solid earnings beat, shares jumped to new highs.

Even though shares are hitting new highs, the stock isn't super expensive. It trades with a forward P/E of 18.9 but given its strong earnings growth it has a PEG ratio of just 0.7. A PEG under 1.0 usually indicates that a company is undervalued.

For investors looking for a way to play the low-cost airlines, Spirit is one to keep on the short list.

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SPIRIT AIRLINES (SAVE): Free Stock Analysis Report

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United Airlines Posts Best Monthly Performance of the Year and Rewards Employees with Bonuses

CHICAGO, Nov. 4, 2013 /PRNewswire/ -- United Airlines today announced that it is rewarding its eligible employees with a $100 on-time bonus for exceeding the airline's domestic and international on-time arrival performance goals for the month of October. United achieved 85 percent on-time performance for domestic flights and 82.4 percent for international flights. The on-time arrival rate is based on flights arriving within 14 minutes of the scheduled arrival time.

The monthly domestic on-time performance was the airline's best of the year and the best since November 2012, while the international on-time performance was the highest monthly performance in nearly three years. On six days in October, the airline exceeded a 90 percent on-time arrival rate, and Oct. 26 was the second best day of the year with an average 93 percent on-time arrival rate.

"Across the system our co-workers are focused on running a reliable, on-time airline and delivering great customer service," said Pete McDonald, United's executive vice president and chief operations officer. "I'm proud of their hard work and determination – it is paying off."

While several of the airline's hubs experienced weather challenges ranging from thunderstorms and fog to the first light snow of the season, United employees continued to focus on good-weather performance and quick recovery from bad weather. United's Houston hub, in particular, was hit hard by bad weather several days in October, but despite the challenges, the team at Houston achieved nearly their best on-time departure performance of the year.

About United
United Airlines and United Express operate an average of more than 5,300 flights a day to more than 360 airports across six continents. In 2012, United and United Express carried more passenger traffic than any other airline in the world and operated nearly two million flights carrying 140 million customers. United is investing in upgrading its onboard products and now offers more flat-bed seats in its premium cabins and more extra-legroom, economy-class seating than any airline in North America. In 2013, United became the first U.S.-based international carrier to offer satellite-based Wi-Fi on long-haul overseas routes. The airline also features DIRECTV® on more than 200 aircraft, offering customers more live television access than any other airline in the world. United operates nearly 700 mainline aircraft and has made large-scale investments in its fleet. In 2013, United continues to modernize its fleet by taking delivery of more than two dozen new Boeing aircraft. The company will have launched 14 new international and 19 new domestic routes, including the addition of seven new cities to its network, by the end of 2013. Business Traveler magazine awarded United Best Airline for North American Travel for 2012, and readers of Global Traveler magazine have voted United's MileagePlus program the best frequent flyer program for nine consecutive years. According to the 4th annual Switchfly Reward Seat Availability Survey published by IdeaWorksCompany in May 2013, United has the most saver-style award-seat availability among the largest U.S. global airlines. Air Transport World named United as the Eco-Aviation Airline of the Year Gold Winner in 2013. United is a founding member of Star Alliance, which provides service to 195 countries via 28 member airlines. More than 85,000 United employees reside in every U.S. state and in countries around the world. For more information, visit united.com or follow United on Twitter and Facebook. The common stock of United's parent, United Continental Holdings, Inc., is traded on the NYSE under the symbol UAL.

(Logo: http://photos.prnewswire.com/prnh/20130404/MM89155LOGO)

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U.S. Justice Dept details deal for American, US Airways fight

* AMR Corp shares spike up 24.5 percent

* US Airways stock reaches highest level in nearly 6 years

* Holder - could resolve merger concerns before scheduled trial

By Diane Bartz

WASHINGTON, Nov 4 (Reuters) - The U.S. Justice Department wants US Airways and American Airlines to divest landing and take-off slots at Reagan National and other "key" U.S. airports as a condition to drop its effort to block a proposed merger, Attorney General Eric Holder said on Monday.

Share prices in the airlines jumped as Holder seemed to offer a path to an agreement, three weeks before the scheduled start of a trial on Nov. 25.

The bankrupt AMR Corp, parent of American Airlines, closed up 24.5 percent in heavy volume, while those of US Airways at one point rose more than 5 percent to their highest in almost six years before retreating to close up 1.2 percent.

Holder said that talks with the companies were ongoing and he hoped for an agreement before the trial is due to start.

The Justice Department's complaint focused on the carriers' dominant position at Reagan National, outside Washington, and on more than 1,000 city pairings that American and US Airways now dominate. It said the merger would reduce choice for travelers and lead to higher fares.

Holder would not elaborate on Monday about whether the government has a specific number of slots in mind that the carriers need to sell to advance the deal. There were a "number of ways" to address the government's concerns, he said.

"What we have tried to focus on is to make sure that any resolution in this case necessarily includes divestitures of facilities at key constrained airports throughout the United States," Holder said.

"We hope that we will be able to resolve this short of trial, but if we do not meet those demands that we have, we are fully prepared to take this case to trial," he said. "We will not agree to something that does not fundamentally resolve the concerns that were expressed in the complaint."

Experts said it is unusual for an attorney general to comment at length in the middle of antitrust battle.

"I think it's a positive sign (of potential settlement), but it's important not to over-read it," Herbert Hovenkamp, an antitrust expert who teaches at the University of Iowa's College of Law, said of Holder's comments.

Several antitrust specialists were surprised by the share price increases, which suggested that investors saw Holder's utterances as a tipping point in favor of the merger.

Three said Holder essentially backed up previous comments from his antitrust deputy, Bill Baer, by insisting that the merger created antitrust problems in a number of markets nationally.

"Bill Baer can now sit there and say "'You heard from the boss. What can I do?'...This is a message to the parties," said Steve Axinn, a Justice Department veteran now at the law firm Axinn Veltrop and Harkrider LLP.

Seth Bloom, a former staffer for the Senate Judiciary Committee's antitrust subcommittee, agreed the comments did not necessarily signal that a quick settlement was in the works.

"He's saying you need divestitures nationally...and so the airlines have to make a fundamental change in their merger proposals," he said. "It's a very difficult case to settle."

Three weeks before the scheduled start of the trial, US Airways and American Airlines can agree to a package of divestitures, prepare to litigate, or abandon a merger that has been years in the making, Hovenkamp said.

"The government is asking for a lot and the parties want to give up as little as possible," Hovenkamp added.

DOMINANT AT REAGAN NATIONAL

The two carriers control a combined 69 percent of takeoff and landing slots at Reagan National, an airport used by many members of Congress to fly to their home districts.

Roughly 55 percent of slots at the airport are held by US Airways and 14 percent held by American. Airline officials have said privately that they are willing to cede some slots, but not scale back by the equivalent of the entire 14-percent American share.

US Airways declined comment on Holder's remarks. American Airlines did not respond to requests for comment.

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Let's Make a Deal: AMR Corp., US Airways Fly on DoJ Talks

Remember when the DoJ said it wouldn’t make a deal with US Airways (LCC) and AMR Corp. (AAMRQ)? Well, it looks like they’re willing to make a deal after all.

Associated Press

The Wall Street Journal has the details:

U.S. antitrust authorities want to see a broad package of divestitures from AMR Corp. and US Airways Group Inc. as part of any deal to settle the government’s challenge to their merger plan, people familiar with the matter said.

The people said talks are under way between the two sides three weeks before a trial of the antitrust challenge is set to open in Washington…

A person familiar with the Justice Department’s thinking said department lawyers insist that any settlement should include divestitures at key airports throughout the U.S. The department believes that the two airlines would need to divest assets at those airports to ensure that their merger wouldn’t limit consumer choices on nonstop and connecting flights or harm consumers by raising fares, this person said.

Shares of AMR Corp. have jumped 23% to $9.70 at 12:11 p.m., while US Airways has gained 4% to $23.35. They’re not the only one’s gaining today, as Delta Air Lines (DAL) has risen 3.8% to $27.65, Spirit Airlines (SAVE) has advanced 3% to $44.16 and United Continental (UAL) is up 2.3% at $36.37.

Morgan Stanley’s John Godyn and team see the good times continuing for airline stocks. They write:

It continues to be abundantly clear that we’re in an airline bull market supported by two key pillars: (1) an airline macro goldilocks scenario based on the view that fuel prices are likely to trend flat to down while US GDP is upwardly biased favoring domestically levered companies, and (2) belief in the power of industry discipline, long a pillar of our Stronger For Longer thesis on the cycle. With commentary suggesting these pillars will remain intact for the foreseeable future, we reiterate our Attractive Industry View…

Amplifying this upside is what we believe is a strong case for multiple expansion. Margin stability and healthier balance sheets have materially altered tail-risk across airlines and this has yet to be priced in. Simply put, as airline fundamentals converge toward higher valued peers, so should their multiples.

Godyn says United, Delta and Spirit are “poised to move significantly higher” through the end of 2014.

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Airlines Merger Needs Divestitures to Settle U.S. Suit

American Airlines and US Airways Group Inc. (LCC) will have to divest assets at key airports across the country if they want to settle the U.S. lawsuit seeking to block their proposed merger, Attorney General Eric Holder said.

Shares of American parent AMR Corp. (AAMRQ) surged after Holder said today he hopes to resolve the case before trial through talks now taking place between Justice Department and the airlines. Should the negotiations fail, the government is prepared to go to trial to block a merger that would create the world’s largest airline, he said.

“What we have tried to focus on is to make sure that any resolution in this case necessarily includes divestitures of facilities at key constrained airports throughout the United States,” Holder said at a news conference in Washington.

He declined to disclose the number of slots for takeoff and landing rights that the government wants the airlines to sell before it will approve the tie-up.

“We will not agree to something that does not fundamentally resolve the concerns that were expressed in the complaint and do not substantially bring relief to consumers,” Holder said.

AMR rose 25 percent to $9.84 in over-the-counter trading in New York. That was the biggest jump since Feb. 14, the day the deal was announced. US Airways rose 1.2 percent to $22.71.

AMR’s $460 million of 6.25 percent convertible notes due in October 2014 rose 9 cents to 132.5 cents on the dollar in New York, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority.

The rally built on momentum generated last week when AMR Chief Executive Officer Tom Horton met with Florida Attorney General Pam Bondi to discuss ending that state’s role in the U.S. lawsuit.

Bondi said in a statement that both sides were “hopeful that we will reach a timely resolution,” and Horton echoed that with a statement saying he was “hopeful that a resolution can be reached in the near future.”

Florida is among six states plus the District of Columbia that have joined the Justice Department’s lawsuit. The U.S. and the plaintiff states argue the combination would reduce competition and raise fares. Texas dropped out of the suit last month.

Assistant U.S. Attorney General Bill Baer, head of the Justice Department’s antitrust division, said when the lawsuit was filed that “We’re in court today because we think a full-stop injunction is the right outcome for consumers.”

Bloomberg News reported the settlement talks between the airlines and the Justice Department Oct. 30.

“There has to be something where everybody can declare it a win-win and it makes sense for the airlines and it makes sense from the government’s standpoint to resolve the competitive concerns they have,” said Jonathan Lewis, an antitrust attorney at BakerHostetler in Washington, who isn’t involved in the case.

American, which has been in bankruptcy since November 2011, was set to exit court protection by merging with Tempe, Arizona-based US Airways when the Justice Department and a group of states sued to block the deal Aug. 13.

The lawsuit, unexpected by analysts and industry executives, marked a sharp break with the Justice Department’s past policy, which allowed six unprofitable airlines to merge over the past five years in an effort to cut costs and end losses.

The Justice Department claimed the planned merger would leave US Airways no incentive to offer discounted “Advantage Fares” and could cause the industry’s legacy carriers, such as United Continental Holdings Inc., Delta Air Lines Inc. and American to charge more for tickets and ancillary services.

The U.S. said in its complaint that the merged airline would control 69 percent of slots at Washington’s Reagan National Airport, almost six times more than its closest competitor, effectively blocking other airlines from entering or expanding there to increase competition. A carrier that wants to begin or expand service at Reagan must buy or lease slots from another airline.

The case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net; Laurie Asseo in Washington at lasseo1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net

Enlarge image Six states plus the District of Columbia have joined the U.S. Justice Department's lawsuit seeking to stop the proposed merger of AMR Corp.'s American Airlines with US Airways Group Inc.

Six states plus the District of Columbia have joined the U.S. Justice Department's lawsuit seeking to stop the proposed merger of AMR Corp.'s American Airlines with US Airways Group Inc. Photographer: Sam Hodgson/Bloomberg

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