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US Airways-American Airlines deal may mean higher prices: experts

A U.S. Airways jet departs Washington's Reagan National Airport next to American Airlines jets outside Washington, in this February 25, 2013
A U.S. Airways jet departs Washington's Reagan National Airport next to American Airlines jets outside Washington, in this February 25, 2013

By Karen Jacobs and Diane Bartz

ATLANTA/WASHINGTON (Reuters) - Consumer advocates worry the decision to green-light another big airline merger will mean higher prices before long, even though upstart airlines will get more access to busy airports near Washington D.C. and New York as part of the deal.

In the short term, the industry is waiting for the sale of takeoff and landing slots by the merging US Airways Group Inc and AMR Corp's American Airlines, a process that will take several months and be overseen by the Department of Justice.

The largest airlines are expected to be barred from bidding, leaving the field open to upstarts such as JetBlue, Allegiant and Spirit, if they chose to participate.

Despite this, fliers will ultimately face higher airfares after the industry shrinks to just three major carriers, said Rick Seaney, chief executive of FareCompare.com, which tracks airfares.

"In the past decade, we've seen the industry transformed from one that boasted eight large airlines to a mere four. With the latest merger, it drops to three," Seaney said. "It is likely we'll be sitting around in 2020 saying, 'I wish we still had eight carriers.'"

Industry experts were uncertain how much airfares might ultimately rise on different routes as a result of the merger.

However, Delta's merger with Northwest Airlines in 2008 led to price increases of more than 10 percent on four of the routes they dominated, as well as service cuts on another route, according to research by the American Antitrust Institute.

Based on the details on a settlement announced on Tuesday, antitrust experts said the consumers who could benefit would be those who use New York's LaGuardia, Reagan National outside Washington D.C. and other major airports.

Consumers flying outside those markets, for example from Dallas to Charlotte, could be hurt, said Jeffrey Shinder, an antitrust expert at Constantine Cannon LLP.

"Some consumers will end up being better off," said Shinder. "(But) I think in the long run, because it will take a bit for this to play out, that prices will be higher because of the transaction."

George Hoffer, a transportation economist at the University of Richmond, said consumers will face higher prices, a key concern the Department of Justice raised in August when it opposed the merger.

"In all the trenches there is one less competitor. Therefore, the remaining firms have more pricing power," Hoffer said.

He noted that Delta Air Lines Inc's stock hit an all-time high after the US Airways-American merger settlement was announced.

"The market realizes Delta now has more pricing power," Hoffer added.

However, Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law, praised the decision as farsighted.

"The leg up that the government has given some of the low cost carriers, I think, is going to have a very positive impact on the industry," he said.

Under the deal announced on Tuesday, US Airways and American Airlines agreed to sell 104 take off and landing slots at Reagan National and 34 at Laguardia, along with supporting gates and ground facilities.

They must also sell two gates at five other airports: Chicago O'Hare International, Los Angeles International, Boston Logan International, Miami International, and Dallas Love Field.

Sixteen of the 104 Reagan National slots are currently leased to JetBlue Airways Corp and will be offered to JetBlue permanently, according to the settlement agreement.

The Department of Justice will run the sale and is expected to bundle slots into groups of six to 10, to be sold along with a gate. The airlines will be allowed to sell the slot and gate bundles or make trades for them.

The government will also determine which carriers are eligible to buy or trade for slots.

The carriers are expected to include Southwest Airlines Co , JetBlue and Virgin America, all of which have previously expressed interest in gaining access to US Airways-American assets. Other low-cost carriers include Allegiant Travel Co and Spirit Airlines.

"My expectation is that the DOJ is going to not include United or Delta on the list of qualified buyers," a source close to the airlines told Reuters.

Delta said on Wednesday it was urging the Justice Department to allow all airlines to purchase slots, saying it wanted to bid for slots and facilities at National Airport as well as Dallas.

Under the proposed final judgment, the slots must be sold within 90 days of either the deal closing or when the Justice Department draws up the bundles of slots and gates.

The new carriers could be using some slots by June and certainly by the fall of 2014, according to an expert familiar with the settlement, who could not be named because he was not authorized to speak on the record.

American has asked the court considering its bankruptcy case to approve the settlement in a hearing set for November 25. The companies anticipate closing the deal in the first half of December.

(Reporting by Diane Bartz and Karen Jacobs. Editing by Ros Krasny and Andre Grenon)

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