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

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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.


It's possible that the lawsuit will never go to trial. Analysts said the Justice Department could be seeking more time and leverage to squeeze concessions from the companies, such as giving up some of their precious takeoff and landing slots at Reagan National Airport, which would create room for new competitors at the busy airport across the Potomac River from Washington.

At a news conference, Assistant Attorney General Bill Baer said the Justice Department was always prepared to discuss a settlement but that it preferred this time to seek an injunction to block the deal.

"As we look at the market today, it's not functioning as competitively as it ought to be," Baer said, and "if this deal goes through, it's going to be much worse."

The Justice Department, which was joined in the lawsuit by the attorneys general of six states and the District of Columbia, said the merger would cause "substantial harm" to consumers by leading to higher fares and fees.

Government lawyers cited examples in which US Airways operates one-stop flights that undercut nonstop flights by American and other rivals by hundreds of dollars. After the merger, they said, US Airways would drop that practice, pushing fares higher.

The lawsuit caught many observers by surprise. In the last five years, antitrust regulators in the Bush administration had allowed Delta Air Lines to buy Northwest, while the Obama administration permitted United Airlines to combine with Continental, and Southwest Airlines to buy AirTran. The nation had gone from nine major carriers in 2005 to five, and the Justice Department hadn't opposed an airline merger since United's 2001 attempt to buy US Airways, a deal that was later abandoned.

"They didn't have any problem with the Northwest-Delta merger, didn't have any problem with United-Continental. Where did they think it was going to go?" said Robert Mann, an airline consultant who once worked at American.

Consumer advocates cheered the lawsuit.

"This is the best news that consumers could have possibly gotten," said Charlie Leocha, director of the Consumer Travel Alliance and member of a panel that advises the government on travel-consumer issues.

Last year, business and leisure travelers spent more than $70 billion on airfare in the United States.

AMR and US Airways announced in February that they planned to merge into a carrier with 6,700 daily flights and annual revenue of roughly $40 billion. By passenger traffic, it would slightly eclipse United Airlines and Delta Air Lines, but all three would be similar in size.

The merger was expected to boost American's presence along the East Coast, where US Airways has strongholds in Washington, Philadelphia and Charlotte. It would also increase American's route network to help the airline win lucrative corporate-travel accounts.

When it was proposed, the deal was valued at $11 billion. Last week, AMR creditors said that the rising price of shares of US Airways, whose investors would get 28 percent of the new company, lifted the value to $14 billion.

On news of the lawsuit, US Airways shares fell $2.46, or 13.1 percent, to close 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 were down $2.64, or 45.4 percent, to $3.17.

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