August 14, 2013

Lawsuit clouds $14 billion airline merger plan

American Airlines and US Airways vow to fight back using 'all legal options.'

The Associated Press

WASHINGTON — American Airlines and US Airways expected to spend this week cruising toward completion of a merger that would create the world's biggest airline.

click image to enlarge

In this Thursday, Feb. 14, 2013 file photo, U.S. Airways and American Airlines planes are shown at gates at DFW International Airport in Grapevine, Texas. The Justice Department and a number of state attorneys general on Tuesday, Aug. 13, 2013, challenged a proposed $11 billion merger between US Airways Group Inc. and American Airlines' parent company, AMR Corp. ( (AP Photo/LM Otero, File)

Challenge sends airlines' stocks into tailspin

NEW YORK — Airlines' shares nosedived on Tuesday after the Justice Department and a number of state attorneys general threw up a challenge to the proposed merger of US Airways and American Airlines' parent company, AMR Corp., saying it would force customers to pay higher fares and fees.

Three big mergers dating back to 2008 have helped the industry limit seats, push fares higher and return to profitability. Investors expected a US Airways-American tie-up to continue that trend, and the Justice Department announcement caught both the airlines and Wall Street off guard.

US Airways Group Inc. shares posted their biggest one-day drop since October 2011. The shares plummeted 13.1 percent, or $2.46, to finish at $16.36.

AMR shares were taken off the New York Stock Exchange shortly after the company filed for bankruptcy protection but still trade over the counter; they dropped $2.64, or 45 percent, to close at $3.17.

Shares of United Continental Holdings Inc., the current No. 1 carrier, dropped 7.5 percent to $30.73. That's the biggest decline since June 4, 2012.

Shares of Delta Air Lines Inc., the second-biggest airline, dropped 7 percent to $19.55.

Southwest Airlines Co., which flies the most passengers within the U.S., lost 1.8 percent to $13.47.

 

Instead, they were stunned Tuesday when the federal government and six states sued to block the deal, saying it would hurt competition and cost consumers hundreds of millions of dollars a year in higher fares and extra fees.

Antitrust regulators had done little to interfere with other big airline mergers in the past five years, including Delta-Northwest and United-Continental. So, they were not expected to stand in the way of American and US Airways. But this latest deal would leave four airlines controlling more than 80 percent of the U.S. air-travel market.

"By further reducing the number of legacy airlines and aligning the economic incentives of those that remain, the merger of US Airways and American would make it easier for the remaining airlines to cooperate, rather than compete, on price and service," the lawsuit said.

The Justice Department turned the words of US Airways leaders against them. The 56-page complaint filed in federal district court in Washington, D.C., was peppered with quotes from internal emails, investor presentations and public comments in which top executives noted that previous mergers had helped lead to higher fares and higher fees to check a bag or change a ticket.

Shares of both companies plunged, and executives vowed to challenge the lawsuit.

"We will fight them," declared US Airways CEO Doug Parker, who would run the combined company.

Paul Denis, a Washington antitrust lawyer hired by US Airways, said Tuesday would be the Justice Department's "best day" in the matter.

"They got to hold their press conference. Now they've got to try their case in court," he said.

Tom Horton, CEO of American Airlines parent AMR Corp., said the companies had spent months trying to convince the Justice Department that the merger would help customers and boost competition by creating a tough new rival to larger airlines United and Delta.

AMR has been operating under bankruptcy protection since November 2011. It has cut labor costs, renegotiated aircraft and other leases and earned $220 million profit in the second quarter — its first profit in the April-to-June period in six years. It is forging ahead with an order for hundreds of new airplanes.

The company had expected the highlight of this week to be a Thursday hearing in which a federal bankruptcy court judge would approve its reorganization plan, including the merger. That would be one of the final steps before AMR could exit Chapter 11 protection by the end of September.

The hearing is likely to go ahead, and the judge could approve AMR's turnaround plan on the condition that the Justice Department's opposition is resolved. But AMR probably won't come out of bankruptcy for at least a few more months while it fights the lawsuit, officials at the companies said.

American and US Airways had been so confident of a quick merger that they had already named executives for the combined company, which was to be based at AMR's headquarters in Fort Worth and called American Airlines Group Inc. Executives at Tempe, Ariz.-based US Airways have been house-hunting in the Dallas-Fort Worth area.

The lawsuit may put some of those real estate deals on hold. Daniel McKenzie, an analyst for Buckingham Research Group, said the merger went from a 99-percent probability to around 50 percent.

(Continued on page 2)

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