Justice Department, states ask court to halt American Airlines merger

By Caroline Salls

Pittsburgh, Aug. 13 - The United States of America and seven states filed a lawsuit Tuesday seeking a permanent injunction against the proposed merger of AMR Corp. subsidiary American Airlines, Inc. and US Airways Group, Inc., according to a filing with the U.S. District Court for the District of Columbia.

In addition to the United States, acting under the direction of the Attorney General, the plaintiffs in the antitrust suit include the states of Arizona, Florida, Tennessee and Texas, the commonwealths of Pennsylvania and Virginia and the District of Columbia.

The plaintiffs said the merger would reduce the number of major domestic airlines to four from five and the number of "legacy" airlines, which currently include Delta, United, American, and US Airways to three from four.

"Because of the size of the airline industry, if this merger were approved, even a small increase in the price of airline tickets, checked bags or flight change fees would cause hundreds of millions of dollars of harm to American consumers annually," the lawsuit said.

Less competition

The government entities said American and US Airways compete directly on thousands of heavily traveled routes, and millions of passengers benefit each year from head-to-head competition that this merger would eliminate.

With less competition, the plaintiffs said airlines can cut service and raise prices with less fear of competitive responses from rivals.

"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 filing said.

"That enhanced cooperation is unlikely to be significantly disrupted by Southwest and JetBlue, which, while offering important competition on the routes they fly, have less extensive domestic and international route networks than the legacy airlines."

If the merger were approved, the plaintiffs said US Airways would no longer need to offer low-fare options for some travelers, and the merged airline's cost of sticking with US Airways' one-stop, low-price strategy would increase.

"The bottom line is that the merged airline would likely abandon [US Airways'] Advantage Fares, eliminating significant competition and causing consumers to pay hundreds of millions of dollars more," according to the lawsuit.

The plaintiffs said passengers to and from the Washington, D.C., area are likely to be particularly hurt, as the combined airline would have a monopoly on 63% of the nonstop routes served out of Ronald Reagan Washington National Airport.

As a result, the lawsuit said Washington, D.C.-area passengers would likely see higher prices and fewer choices if the merger were approved.

Stand-alone success

In addition, the plaintiffs said consumers will likely be harmed by the planned merger because American had a stand-alone plan to emerge from bankruptcy poised to grow, with plans to expand domestically and internationally and add service on nearly 115 new routes.

According to the lawsuit, American's stand-alone plan would have bucked current industry trends toward capacity reductions and less competition.

However, the suit said US Airways called American's growth plan "industry destabilizing" and worried that American's plan would cause other carriers to react "with their own enhanced growth plans"

The plaintiffs said both airlines are confident they can and will compete effectively as stand-alone companies.

"A revitalized American is fully capable of emerging from bankruptcy proceedings on its own with a competitive cost structure, profitable existing business and plans for growth," the lawsuit said.

"US Airways today is competing vigorously and earning record profits.

"Executives of both airlines have repeatedly stated that they do not need this merger to succeed."

After the merger, the plaintiffs said US Airways' current executives, who would manage the merged firm, would be able to abandon American's efforts to expand and "instead continue the industry's march toward higher prices and less service."

"As its CEO candidly stated earlier this year, US Airways views this merger as 'the last major piece needed to fully rationalize the industry,'" the filing said.

Airlines' response

In a news release, AMR said it and US Airways "intend to mount a vigorous and strong defense to the U.S. Department of Justice's effort to block their proposed merger."

"Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together," the release said.

"Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices.

"Further, this merger provides the best outcome for AMR's restructuring. The widespread support from the employees and financial stakeholders of both airlines underscores the fact that this is the best path forward for both airlines and the customers and communities we serve."

The airlines said the proposed merger promotes competitiveness, as the combined airline expects to maintain current hubs of both airlines and expand service from those hubs, resulting in more choices for customers.

"The result for consumers is that the new American will be a highly competitive alternative to other domestic and global carriers," the release said.

In addition, the airlines said the merger will bring greater long-term opportunities for employees, more choices, increased service and an "enhanced travel experience" for customers and will provide the best outcome for American's restructuring, with creditors and equityholders receiving "nearly unprecedented recoveries" and having approved AMR's plan of reorganization overwhelmingly.

Merger details

As previously reported, the merger calls for American and US Airways to combine to create a global carrier with an implied combined equity value of roughly $11 billion, based on the price of US Airways stock as of Feb. 13, 2013. The company will operate under the American Airlines name.

Under the merger agreement, which was approved by the U.S. Bankruptcy Court for the Southern District of New York in March and by US Airways' shareholders last month, US Airways stockholders would receive one share of common stock of the combined airline for each share of US Airways common stock then held. The total number of shares of the combined airline issuable to holders of US Airways equity instruments would represent 28% of the diluted equity of the combined airline.

American said the remaining 72% diluted equity ownership of the combined airline would be issuable to stakeholders of AMR and its debtor subsidiaries that filed for Chapter 11 bankruptcy, American's labor unions and current AMR employees.

In connection with the merger agreement, AMR entered into a plan of reorganization support agreement with unsecured creditors holding $1.2 billion of pre-bankruptcy claims against the debtors.

The plan confirmation hearing is currently scheduled for Aug. 15.

US Airways is an airline operator based in Tempe, Ariz.

AMR, the Fort Worth-based parent of American Airlines, filed for bankruptcy on Nov. 29, 2011 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 11-15463.

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