Bloomberg News

AMR-US Airways Deal Opposed by U.S. in Antitrust Suit

August 13, 2013

AMR-US Airways Deal Said to Be Subject of U.S. Antitrust Suit

A pilot walks past US Airways Group Inc. and AMR Corp.'s American Airlines airplanes parked on the tarmac at Reagan National Airport in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

American Airlines’ merger with US Airways Group Inc. should be blocked, the U.S. said in an antitrust suit that upends American’s plans to exit bankruptcy through a deal that would create the world’s biggest airline.

The proposed tie-up would lead to less competition in the industry and higher prices for consumers, according to a complaint filed today in Washington federal court. The Justice Department said it seeks to permanently block the merger “or any other transaction that would combine the two companies.” US Airways dropped more than 13 percent and the bonds of American parent AMR Corp. fell on the news.

The Obama administration said in court papers that it wants to stop the deal because it would remove incentive for US Airways to offer lower prices, and spur higher fares. AMR and US Airways plan to fight the suit, AMR Chairman Thomas Horton said in a memo to employees.

“This transaction would result in consumers paying the price -- in higher airfares, higher fees and fewer choices,” said U.S. Attorney General Eric Holder in a statement. “Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition.”

The lawsuit, unexpected by analysts and industry executives, marks a sharp break with the Justice Department’s past policy, which allowed six unprofitable airlines to merge over the past five years in an effort to cut costs and end losses.

Bankruptcy Filing

For AMR, which filed for bankruptcy protection in November 2011, the merger would have completed its reorganization and allowed it to exit court protection. AMR last year flew more than 80 million passengers to about 250 destinations, earning more than $24 billion in revenue, the U.S. said.

US Airways in 2012 flew more than 50 million passengers to 200 destinations, with more than $13 billion in revenue, the government said in its complaint. The airline closed down 13 percent to $16.36 in New York.

The decline was the biggest intraday drop since October 2011 and helped drag the Bloomberg U.S. Airlines Index down by 5.7 percent.

“We’re in court today because we think a full-stop injunction is the right outcome for consumers,” said Assistant U.S. Attorney General Bill Baer, head of the Justice Department’s antitrust division, at a press conference today in Washington. He said the government had talks with the airlines before filing the lawsuit, adding that the proposed merger was “pretty messed up.”

Government Willingness

The government’s willingness to approve past industry consolidation didn’t have a direct impact on the decision to seek to halt this merger, he said.

“As we look at the market today, it’s not functioning as competitively as it ought to be,” Baer said.

While the government is “always prepared” to hold settlement talks, he said, the Justice Department hasn’t mapped out any potential remedies that could salvage the merger.

In his memo today, AMR’s Horton said the two companies have been working with the Justice Department for months, and that “the merger is complementary” and “provides significant customer benefits and that it enhances competition.”

Fort Worth, Texas-based AMR’s $460 million of 6.25 percent notes due in 2014 fell 11.625 cents to 104.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Ed Stewart, a spokesman for Tempe, Arizona-based US Airways Group Inc. (LCC:US) and Mike Trevino, a spokesman for American, declined to comment.

Stocks Slump

Delta Air Lines Inc. and United Continental Holdings Inc. slumped as well following news of the lawsuit filing.

“If this merger were approved, US Airways would no longer need to offer low-fare options for certain travelers,” the government said in the complaint, noting the carrier’s practice of offering “Advantage Fares” and “aggressive discounting strategy aimed at undercutting the other legacy airlines’ nonstop fares with cheaper connecting service.”

After the proposed merger, “US Airways’ economic rationale for offering Advantage Fares would likely go away,” the Justice Department said.

US Airways shareholders approved the merger July 12, and AMR’s creditors endorsed it in a vote announced on Aug. 1.

AMR and US Airways compete “head-to-head” with nonstop service on 17 domestic routes, the government said in its complaint, representing $22 billion in annual industrywide revenue. AMR and US Airways compete directly on more than 1,000 routes where one or both offer connecting service, the U.S. said, representing “billions of dollars” in annual revenue.

Highly Concentrated

More than 1,000 routes in which AMR and US Airways compete would become so highly concentrated that the proposed merger is “presumed, as a matter of law, to be anticompetitive,” according to the lawsuit. The U.S. cites the Charlotte, North Carolina to Dallas route as one of those routes.

Crafting a remedy that could resolve the Justice Department’s concerns may be difficult, according to David Balto, a Washington-based antitrust lawyer who represents consumer groups.

“US Airways is the maverick in the market, how do you recreate that?” Balto said, referring to the carrier’s reputation for aggressive pricing.

U.S. Decision

Baer said today that American and US Airways don’t need the proposed merger to be successful, and that American could emerge from bankruptcy on its own.

The U.S. decision to sue follows the Aug. 5 approval of the merger by European Union antitrust authorities after the companies agreed to give up the right to a daily round trip between London’s Heathrow Airport, the EU’s busiest hub, and Philadelphia.

U.S. Bankruptcy Judge Sean Lane in Manhattan, who is overseeing the American case, is scheduled at an Aug. 15 hearing to consider its reorganization plan. Airline executives had said before the government lawsuit that they expected his approval to be the last legal step required for deal to be complete.

The two airlines announced their plans in February and have been moving toward a merger while awaiting regulatory approval.

The Justice Department conducted an extended review to determine whether combining the two carriers would reduce competition or create a monopoly in any markets. The combination would create the largest carrier by passenger traffic, surpassing United Continental. (UAL:US)

Five Years

Over the past five years, the department allowed three other airline mergers, including Delta’s (DAL:US) acquisition of Northwest Airlines and United Airlines parent UAL Corp.’s union with Continental.

After more than $58 billion in losses from 2001 to 2009, major U.S. carriers are headed for a fourth straight annual profit this year.

Competitors including JetBlue Airways Corp. and Southwest Airlines Co. had questioned the extent of control the new, merged American would have at Reagan National Airport in Washington.

Reagan takeoff and landing rights, known as slots, are highly prized by airlines because they are limited by U.S. regulators and rarely become available. Only three other heavily congested U.S. airports have such restrictions: Newark Liberty International Airport in New Jersey, and John F. Kennedy International and LaGuardia airports in New York.

Posed No Threat

US Airways and American had argued the $14.3 billion merger posed no threat to competition at Reagan and that forcing them to surrender slots would result in fewer flights to mid-sized and small cities.

While the post-merger American would account for 67 percent of daily departures from Reagan, it would control just 25 percent of aircraft seats in the broader Washington market that also includes Washington Dulles International and Baltimore/Washington International Thurgood Marshall airports, US Airways said.

US Airways holds 55 percent of slots at Reagan, the U.S. said in its complaint. The proposed consolidation would increase that percentage to 69 percent, and the combined airline would have a “monopoly” on 63 percent of the nonstop routes out of the airport, according to the government.

The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Sara Forden in New York at sforden@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Ed Dufner at +1-214-954-9453 or edufner@bloomberg.net


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