(Reuters) – US Airways Group Inc and American Airlines will give low-cost competitors more access to a half dozen key U.S. airports, including New York and Washington, D.C., in exchange for permission to merge and create the world’s largest airline.

The agreement announced on Tuesday settles a government lawsuit filed in August that argued that US Airways and AMR Corp, parent of bankrupt American Airlines, should be forced to scrap the merger because it would hinder competition and lead to higher fares.

Shares of AMR soared more than 25 percent on the compromise. The merger is central to American’s effort to emerge from a two-year bankruptcy process.

The two airlines will divest some of their takeoff and landing slots at Reagan National Airport, just outside Washington, D.C., and at New York’s LaGuardia Airport, both busy airports with limited capacity.

At Reagan, the airlines will shed 52 pairs of takeoff and landing slots of nearly 300 total held by the two carriers, a move that affects 44 daily departures, said AMR spokesman Casey Norton said.

The carriers agreed to divest 17 pairs of takeoff and landing slots at LaGuardia, including five that are already being sub-leased to Southwest Airlines and its AirTran unit.

Competing low-cost carriers will also be given more access to airports in Boston, Chicago, Dallas, Los Angeles and Miami, the government said.

Department of Justice officials termed the settlement a boost to the competitive landscape of the U.S. airline industry, although the impact will cover only about 112 flights out of about 6,700 daily flights for US Airways and American.

“The extensive slot and gate divestitures at these key airports are groundbreaking and they will dramatically enhance the ability of low cost carriers to compete system-wide,” said Assistant Attorney General Bill Baer of the Department of Justice’s Antitrust Division.

Shares of US Airways were volatile following news of the settlement, briefly surging to the highest point since late 2007 before falling. But in late afternoon trading they were little changed, up nine cents at $23.36 on the New York Stock Exchange. AMR shares rose $2.43 to $11.95.

Investors bid up low-cost carriers that stand to benefit from greater access. Shares in Southwest Airlines rose 1.3 percent and JetBlue shares jumped 5.4 percent.

The government said in its competitive impact statement that the divestiture of carrier slots at Reagan National and LaGuardia would deliver “substantial additional benefits,” specifically to Southwest and JetBlue.

Delta Air Lines made its own bid for expansion at Reagan National, saying in a statement that it wants to acquire slots there, and was “best positioned to continue competitive nonstop flights from Reagan National to small- and mid-sized cities.”

AVOIDING A TRIAL

Tuesday’s settlement came as the airlines and the government stared down a November 25 deadline, at which point the antitrust case would have gone to trial in District Court.

“This is the price of admission,” said airline consultant George Hamlin. “It was a necessary evil to get the deal done.”

“Both sides blinked” or there would not have been a deal, Hamlin said.

Analysts judged the settlement a win for smaller cities in the six states that joined the Justice Department’s suit in August. Those cities will walk away with a five-year guarantee of daily service.

Arizona, Florida, Michigan, Pennsylvania, Tennessee and Virginia, as well as the District of Columbia, stayed with the suit until the end. Texas dropped out on October 1 after its attorney general struck a deal with the airlines.

Losing Texas from the coalition had been seen by some experts as a crack in government’s armor, and was followed by weeks of pressure from mayors and business groups in key hub cities, urging that a settlement be reached.

One antitrust expert said the deal fell short of the game-changer claimed by the government.

“I am very surprised that the Justice Department would agree to this settlement given the fact it had filed a very strong complaint. It stood a strong likelihood of winning at trial,” said Seth Bloom, a veteran of the Justice Department now at Bloom Strategic Counsel.

SOURCE REUTERS