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Concessions on routes likely to get U.S. Air-AMR off the ground

By Diane Bartz and Karen Jacobs

WASHINGTON/ATLANTA (Reuters) - US Airways and American Airlines are likely to win approval to create the world's biggest carrier, with regulators expected to focus on concessions to preserve competition in Washington, Charlotte, Dallas and other airports where they are dominant, antitrust experts say.

AMR Corp's American and US Airways are in the final stages of negotiating an $11 billion merger and a deal is expected to be announced later this week. If approved, it would mark the third major U.S. airline merger since 2008, raising the specter of higher ticket prices and fewer choices for consumers as a handful of airlines dominate the skies.

To preserve competition, antitrust experts say, the Justice Department is likely to ask for divestitures in US Airways' hub at Washington's Reagan National and Charlotte, N.C., and AMR's hub in Dallas. Outside these areas, the carriers fly different routes for the most part.

"Overlapping routes are bad, and connecting routes are good," said Herbert Hovenkamp, who teaches antitrust at the University of Iowa College of Law.

"If you put these two airlines on a map you're going to see a lot of complementary routes but you're not going to see very many where the two of them fly on the same route," he added.

The Justice Department has rarely challenged an airline merger in recent years. The last one to be challenged was a proposed United-US Airways deal in 2000-2001.

Alison Smith, an antitrust lawyer with McDermott Will & Emery law firm, said regulators are likely to approve an AMR-US Air merger if they agree to sell some routes. "That is a likely scenario," she said.

But she would not completely rule out regulatory opposition, saying a spate of mergers in recent years have left consumers with fewer flight choices. "The fact that the market has changed means that they might take a tougher line," said Smith.

Mergers have helped airlines cut costs and gain more pricing power, boosting industry profitability. The mergers of Delta Air Lines with Northwest, and UAL Corp's United Airlines with Continental Airlines, did push up airfares in some cities, according to a paper done by the non-profit groups American Antitrust Institute and Business Travel Coalition.

Following the Delta purchase of Northwest in 2008, prices went up more than 20 percent for flights between Atlanta and Detroit and more than 10 percent for flights between Minneapolis-St. Paul and Atlanta, all cities which were major hubs for the standalone Delta and Northwest and which saw a sharp drop in competition, according to the study.

The United-Continental deal in 2010 led to price increases of more than 30 percent on flights between Chicago's O'Hare and Houston and between Newark and San Francisco, while prices went up more than 20 percent on flights between Denver and Houston and Denver and Newark, among others, the non-profits found.

HIGHER PRICES?

Vaughn Cordle, partner and airline analyst with Ionosphere Capital LLC, expects airfares to go up in the long run if US Airways combined with American due to less competition.

But he said the likely phase-out of older, less efficient aircraft, plus restructuring benefits achieved by American in bankruptcy, can help the new company lower unit costs without raising fares, especially in a skittish economy.

"It would be a mistake to naturally assume fares are going to go up just because they merge," Cordle said, adding that the new airline will want to keep its fares competitive with rivals so it can fill planes on all its routes.

Still, fares alone do not tell the whole story. Many airlines now charge for baggage, food and other services, and have not dropped fuel surcharges even when jet fuel prices have fallen.

When airlines seek approval for a merger, the Justice Department usually focuses on which "city pairs" would end up with the fewest carriers serving them. It tries to ensure people would still have an adequate number of choices when they fly, and many times require the sale of some routes.

For example, when United merged with Continental in 2010, they had to sell landing slots at Newark, New Jersey to Southwest Airlines .

Routes where US Airways and American overlap include Charlotte, N.C. to Dallas-Fort Worth, Miami, Chicago, and New York's LaGuardia; and Dallas-Fort Worth to Phoenix, Philadelphia, and Chicago.

These and some flights from Reagan National Airport in Washington, D.C., could be on a list that the Justice Department would require the airlines to divest. What gets divested is usually the subject of behind-the-scenes negotiations.

Potential bidders for those slots include smaller airlines such as JetBlue Airways or Spirit Airlines , analysts say.

SOME UPSIDE

A combined American-US Airways would be better able to upgrade service and expand internationally. The merged company would have revenue of $38.69 billion based on 2012 figures, compared with $37.15 billion for United Continental and $36.67 billion for Delta.

The merger could bring more convenience for consumers on some routes, particularly when switching aircraft. US Airways currently lacks major operations in many of the biggest U.S. cities. American has hubs in Miami, New York, Dallas/Fort Worth, Chicago and Los Angeles, while US Airways has key operations in Philadelphia, Washington, Phoenix and Charlotte.

"They'll have some great hubs, that will make the airline extremely appealing to both business and leisure travelers, and it will pose a credible challenge to airlines like JetBlue, United and Delta," said Henry Harteveldt, a travel industry analyst with Hudson Crossing.

The main region where the new carrier would be weak is Asia, experts said.

(Reporting by Diane Bartz and Karen Jacobs; Additional reporting by David Ingram; Editing by Ros Krasny, Patricia Kranz, Martin Howell and Tim Dobbyn)

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