Deal to drop airline merger suit said to turn on meeting U.S. number

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

WASHINGTON — For American Airlines and US Airways Group Inc. to settle the U.S. lawsuit to block their merger, it took meeting the Justice Department's demand for one number — 104.

That's the number of primary take-off and landing slots at Reagan National Airport the government insisted the airlines offer before officials would discuss resolving the case, according to people familiar with the negotiations.

About two weeks ago, the carriers put those slots on the table, prompting talks that led to a deal Nov. 12, said the people, who asked not to be named because the discussions were confidential.

Initially, antitrust officials vowed to stop bankrupt American's merger with US Airways, saying it could foster price coordination in the industry, monopolize a key U.S. airport and hurt consumers by eliminating lower fares. In the end, resolving those ills turned on the surrender of assets at Reagan, according to four people with knowledge of the negotiations.

"In antitrust there is no lawsuit that can't be settled and there is significant risk on both sides that you might lose everything," said Herb Hovenkamp, an antitrust law professor at the University of Iowa who wasn't involved in the case. "Once you got movement on Reagan, the rest of it fell into place."

The proposed agreement, which must be approved by a federal judge, also included 34 slots at New York's LaGuardia Airport and smaller divestitures at five other airports. The settlement doesn't include American's commuter slots at Reagan, which must be flown with smaller, regional aircraft.

Gina Talamona, a spokeswoman for the Justice Department, Ed Stewart, a US Airways spokesman at Fleishman Hillard Inc., and Mike Trevino, a spokesman for American parent AMR Corp., declined to comment on how the settlement was reached.

American, based in Fort Worth, Texas, and US Airways announced their plan to merge in February and the Justice Department conducted an extended review. The airlines offered so little in a proposal aimed at heading off any government objections that the department didn't even respond, said two of the people. The Justice Department's Aug. 13 lawsuit to block the merger, filed as an Aug. 15 deadline loomed for a federal judge to rule on American's plan to exit bankruptcy, took the airlines by surprise, the people said.

The suit outlined broad concerns that creating the world's biggest carrier by eliminating Tempe, Ariz.-based US Airways as an independent company would hurt competition and raise prices for consumers.

The merged airline would control 69 percent of Reagan's take-off and landing rights, known as slots, almost six times more than its closest competitor, the U.S. said in its complaint. Other airlines would be effectively blocked from starting or expanding service at the airport, because they would have to buy or lease slots from another airline to operate, the government said.

The head of the Justice Department's antitrust division, Bill Baer, said when the lawsuit was filed that he hadn't mapped out potential remedies that could salvage the merger. Consumers were entitled to a "full stop injunction," he said.

During a two-month standoff, both sides focused on preparing for trial, taking shots at each other in court filings about evidence. The U.S. lawyers on the case were deemed "essential" and worked through the 16-day government shutdown in October.

Outside the courtroom, the airlines mounted a lobbying assault. At least 100,000 letters of support were sent to public officials and ads were run by the airlines and unions in major U.S. newspapers calling for the merger to be allowed. A Sept. 18 rally on Capitol Hill attracted about 300 airline pilots, flight attendants and baggage handlers.

The same day, union officials representing pilots and flight attendants for the two companies met with Baer at the Justice Department to support the merger.

On Oct. 16, Reps. Marc Veasey of Texas and Ed Pastor of Arizona wrote a pro-merger letter to President Barack Obama signed by 66 other congressional Democrats, copying U.S. Attorney General Eric Holder and the state attorneys general involved in the case.

Veasey said in a phone interview he thought the letter "made a big difference." He said days after it was sent, a White House representative took him aside at a weekly Democratic caucus meeting and assured him it had been received and was taken seriously.

Lawmakers don't usually get such assurances, said Veasey, who has 20,000 American Airlines employees in or near his Dallas-Fort Worth area district.

About a month ago, the airlines made a settlement offer involving slots at Reagan that got the government's attention, two of the people said. About two weeks later, the airlines met the Justice Department's demands for the Reagan slots, two others said.

That offer led to an agreement in principal by the time Holder, at a news conference on Nov. 4, confirmed the parties were talking, focused on divestitures at key airports across the country, the people said.

Holder was asked if there was a "magic number" of slot divestitures it would take to settle the lawsuit.

"Yes, there is, but I won't tell you what it is," he said to the reporters' laughter.

Final details of the proposed settlement were hammered out last weekend, while agreements with the six states and the District of Columbia that had joined the government's suit were wrapped up on Nov. 11, according to the people. Texas settled its own suit Oct. 1.

As the merger talks and lawsuit played out, US Airways invested a record amount in lobbying, according to disclosure reports. In the first nine months of 2013, the airline spent $4.2 million, compared with $2.8 million in 2012 and $1.7 million in 2011.

Last year, the company added to its roster of lobbyists Tony Podesta, whose brother served as one of President Bill Clinton's White House chiefs of staff. Every three months, US Airways pays the Podesta Group Inc. $140,000 — more than double what it spends on any other outside firm.

American Airlines has a history of flexing even more political muscle than its new partner, disclosure and campaign finance records show. American puts about $5 million into federal outreach every year and is on track to do so again this year, according to disclosure reports.

American's employees and their relatives made at least $889,851 in federal political contributions in 2012 to its political committee, more than twice US Airways's $434,680, according to the Center for Responsive Politics, a nonprofit group based in Washington that tracks political spending.

"Everybody bluffs and everybody blusters when they file a case but there were always negotiations going on," said Jeffrey Jacobovitz, an antitrust lawyer at Arnall Golden Gregory who wasn't involved in the lawsuit. "Both sides had risks if they went to trial and frequently cases end in settlement and it was a settlement both sides could live with."

_ With assistance from Julie Bykowicz and Laura Litvan in Washington.