US sues to block US Airways-American Airlines merger

The US Justice Department and several states sued Tuesday to block the $11 billion merger between American Airlines and US Airways, saying it would reduce competition and push up fares. Justice officials said US Airways was pushing the merger specifically to reduce competition and boost returns. And they insisted that -- contrary to arguments that the long-gestating merger is key to American's bankruptcy restructuring program -- both airlines could stand on their own profitably without merging. "The lawsuit gives consumers the best possible chance for continued competition," Assistant US Attorney General Bill Baer told reporters. If the merger goes through, consumers "will pay more for less service," he said, estimating the added bill for passengers at "hundreds of millions of dollars." "Neither airline needs this merger to succeed," he added. The move effectively halted operations already under way to begin combining the operations of the two companies, which after the merger would fly under the American Airlines brand but be run by current US Airways executives. They had expected to complete the merger during the current quarter, after garnering the approval of shareholders, creditors and European regulators. US Airways and AMR Corp., the parent of American Airlines, said they "intend to mount a vigorous and strong defense" of the merger, rejecting the assessment that it reduces competition. "Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together," they said in a statement. "Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices." The federal lawsuit, filed together with six states and Washington, DC, argues that the merger would "substantially" reduce competition and consumer choice, as well as raise fares. After the merger, four airlines -- which it said have a history of "tacit coordination" instead of competition -- would control more than 80 percent of the US commercial air travel market. US Airways and American alone compete directly on more than 1,000 routes, it said. "Eliminating this head-to-head competition would give the merged airline the incentive and ability to raise airfares." The lawsuit extensively quoted US Airways executives and documents to try to show that the airline wanted the deal expressly in order to reduce competition. "High-level executives at US Airways have talked about how consolidation allows for capacity reductions that 'enable' fare increases," said Baer. "They don't want to compete." The suit also rejects arguments that the merger is necessary to complete AMR's emergence from bankruptcy restructuring. It points out that American has had a viable standalone plan for the future, adding numerous new routes and aircraft as it rebounds. "There is no reason to accept the likely anticompetitive consequences of this merger. Both airlines are confident they can and will compete effectively as standalone companies," the suit said. Baer said the Justice Department was not seeking to have the two companies give up landing rights and routes to get approval for the tie-up. In recent cases -- such as the combination of giant beer brewer-distributors AB Inbev and Modelo -- divestments of monopoly-like positions in specific markets were required before the mergers earned Justice Department approval. Baer insisted that, while the department is "always prepared to listen" to alternative ideas, "The better idea right now is to enjoin (stop) the merger." Airline industry expert Anthony Michael Sabino of St John's University said he nevertheless expects the merger to go through with modifications to routes, like previous deals. "Over the past 15 years, as the major 'legacy' airlines have succumbed to Chapter 11 (bankruptcy restructuring) and then merged with one another in order to survive, it has been de rigueur for the government to 'squeeze out' anti-competitive overlap between the combined entities in order to preserve competition," he said. "The end game of the Justice Department is not to derail the merger, but to obtain concessions via divestitures." US Airways chief executive Doug Parker voiced confidence that the two companies could beat the lawsuit. "Other companies have found themselves in similar circumstances and gone on to successfully close their merger," he said in an open letter to staff. "We are hopeful that the litigation will be successfully concluded and we will close the merger before year end." The news sent the shares of the two carriers plummeting, pulling other major airlines lower with them. AMR Corp., whose shares are traded on OTC Markets, plummeted 45.4 percent, while US Airways lost 13.1 percent on the New York Stock Exchange. Delta Airlines meanwhile lost 7.1 percent, and United Continental Holdings fell 7.5 percent.