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The Deal: American, US Airways Come Out Ahead on Settlement

Tickers in this article: DAL LCC UAL

NEW YORK ( The Deal ) -- The Department of Justice extracted its pound of flesh from merger partners AMR Corp.   and US Airways , but the settlement deal with regulators announced Tuesday does little to change the competitive position of what is now on track to become the world's largest carrier.

US Airways and AMR, parent of American Airlines , when announcing their $11 billion combination back in February said the deal was necessary if the airlines were to compete against larger rivals United Continental Holdings   and Delta Air Lines . The deal, which involves US Airways acquiring the larger AMR out of bankruptcy but keeping the American name, was put in doubt in August after regulators cried foul over the combination's heft and amid fears of diminished competition.

Justice managed to win weighty carve outs in a settlement announced on Tuesday, forcing significantly more to be divested than was required for Delta to win approval to buy Northwest Airlines  in 2008 or what United's UAL Corp. gave up in 2010 to buy Continental Airlines Inc. Regulators also scored a major victory in their ongoing battle to open up crowded, slot-controlled airports in the Northeast to discount competition.

But for all the fear at the time that the lawsuit was announced that Justice's action could derail consolidation or require sacrifices too severe to make the deal palatable, an initial analysis of the settlement shows that the airlines, which post-deal will combine under the name American Airlines Group  (AAG), got off relatively easy.

"Why mince words? 'A win for the airlines' is how we view the negotiated settlement," JP Morgan analyst Jamie Baker wrote Tuesday, while Raymond James & Associates managing director James D. Parker said "the settlement in our opinion is not onerous to AAG and does not diminish its prospects."

Baker said that the agreement was not material to pro forma earnings of the combination, perhaps because the airlines said that the settlement should not impact their projections for more than $1 billion in cost and revenue synergies. The settlement, which targets asset sales at specific U.S. airports and requires the companies to keep all of their hubs in place for three years, complements the airlines' goal to use the deal to expand their domestic and international route networks and grow without having to invest heavily in new equipment.

Even where the airlines were forced to cut, they emerged largely unscathed. At Washington's Reagan National Airport the combination is required to shed slots good for 104 landings and takeoffs. But post-deal AAG will still operate 250 daily departures -about 57% of the total at the airport-compared to US Airways current 55% share or 243 flights, leading Fitch Ratings to conclude the merged airline will maintain "a competitive advantage in the D.C. market."