Antitrust officials sue to block US Airways-American Airlines merger


Antitrust officials filed a lawsuit Tuesday blocking the proposed $11 billion merger between US Airways and American Airlines’ parent company, AMR Corp., saying the deal would hurt consumers by leading to higher prices. (Larry Downing/Reuters)

It was supposed to be the capstone merger — the culmination of nearly a decade of consolidation that has transformed the airline industry and winnowed a crowded field of players into just a handful.

But on Tuesday, antitrust officials filed a lawsuit blocking the proposed $11 billion merger between US Airways and American Airlines’ parent company, AMR Corp., saying the deal would hurt consumers by leading to higher fare prices and fees.

The action puts the brakes on a union that would have created the world’s largest commercial air carrier and would have put 86 percent of U.S. air travel in the hands of four big airlines.

“By challenging this merger, the Department of Justice is saying that the American people deserve better,” Attorney General Eric H. Holder Jr. said in a statement Tuesday. “This transaction would result in consumers paying the price — in higher airfares, higher fees and fewer choices.”

The civil suit, filed by the Justice Department, six state attorneys general and the District of Columbia, marked a break from the government’s usual rubber-stamping of big airline deals, including Delta’s deal with Northwest in 2008 and United’s merger with Continental in 2010.

Since 2000, 10 major airlines have completed mergers, leaving only five.

Antitrust experts said the deal between US Airways and American Airlines proved to be one too many for the Obama administration.

“If you allow this one, and now you’ve got a new largest airline, how are you going to say no?” said Albert Foer, president of the American Antitrust Institute. “At some point, you’re going to have to say no.”

The Justice Department singled out the effect the merger would have on fliers in the Washington area. The merged airline would become the dominant carrier at Reagan National Airport, officials said, controlling 69 percent of the takeoff and landing slots.

As a result, the complaint said, passengers in the Washington area would probably see higher prices and fewer choices if the merger were to go through as proposed.

Officials said the presence of JetBlue at National Airport — which they said has already caused fares to drop — would also be threatened. In 2010, JetBlue entered into an agreement with American Airlines in which it trades slots at New York’s John F. Kennedy International Airport for American’s slots at National.

AMR and US Airways said they would fight the lawsuit in court rather than seek a compromise that might lead to a settlement. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” a joint statement from the two airlines said. “Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”

The federal government concluded that American Airlines and US Airways compete directly on thousands of routes, representing business worth tens of billions of dollars in annual revenue.

The complaint said US Airways helps bring down flying costs because it offers low fares to travelers willing to take connecting flights through the company’s cheaper hubs, such as Charlotte, rather than paying more for nonstop flights run by “legacy” airlines such as United and American. Joining with American, the complaint said, is likely to prompt US Airways to stop offering those low fares.

“If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight-change fees would result in hundreds of millions of dollars of harm to American consumers,” said Bill Baer, the Justice Department’s top antitrust official.

The Justice Department’s view was corroborated in June by the Government Accountability Office, which released a report warning that the new airline would be the only carrier providing nonstop service on seven of the 12 routes where they currently compete.

The merger also would reduce competition on 1,665 other domestic routes, the report said, and create new competition in just 210 routes.

The news hit American Airlines’ stock hard Tuesday, sending it down more than 45 percent in regular trading. US Airways Group’s was down more than 13 percent.

When US Airways began to pursue bankrupt American last year, the merger was seen as a natural fit in an aviation landscape that had evolved and then dramatically consolidated since the industry was deregulated by Congress in 1978.

Long gone were the iconic U.S. carriers at the time of deregulation — Pan American, Eastern and TWA — and an industry beset by high-labor costs and fuel prices took haven in bankruptcy court as it lost more than $20 billion in a decade.

Delta, Northwest, US Airways and United all went through bankruptcy as a means of reducing their costs. Then the legacy carriers began to merge, with Delta absorbing Northwest and United joining Continental.

A newer arrival, Southwest Airlines, accelerated its rapid expansion through a merger with AirTran two years ago.

“Consolidation was a necessary evil — no industry sector could sustain year after year of multibillion-dollar losses,” Sen. John D. Rockefeller IV (D-W.Va.), chairman of the Senate Committee on Commerce, Science and Transportation, said at a June hearing.

Analysts predicted that US Airways would need to merge with American, the last of the airlines to go bankrupt, to remain competitive with Delta, United and Southwest. From a business perspective, it appeared a good match, marrying US Airways’ eastern strength with American’s stronger presence in the Midwest and West.

If the union with US Airways were consummated, the new airline would have about 94,000 employees and 950 planes and operate 6,500 daily flights from nine major hubs, with estimated sales of $39 billion.

“The airline industry spent much of the last decade going bankrupt,” said Roy Kienitz, a consultant who served as undersecretary for policy at the Transportation Department during President Obama’s first term. “As a consequence, we had a period where people got to fly for a price below what it cost to provide the service. But this cannot last. Something has to give.”

Kienitz said he is concerned the effort to block the merger is rooted in a longing to go back to a time when prices were lower. He said that situation was “unsustainable.”

“For better or worse right now there are three dominant airlines: Delta, United and Southwest,” Kienitz said. “You can argue over whether we should have allowed this to occur, but we did. So the question for today is what to do next.”

The Justice Department complaint disputes the notion that a merger is necessary for the airlines to survive.

“These two airlines are viable [and] healthy,” Baer said during a conference call Tuesday, citing statements by the airlines’ executives.

Though Baer said he was open to discussion aimed at resolving the lawsuit, a senior airline official said American would not enter into talks.

“We’re fighting this. We’re not talking about settlements,” said the official, who spoke on the condition of anonymity to discuss the issue freely. “This complaint is long on theater, and it’s short on facts that connect the merger to all the harm that they’re worried about. They never address that, and that’s the thing that they have to prove in court.”

The official said that the lawsuit could be litigated quickly and that the merger, which had been planned in the third quarter, still could be achieved by year’s end.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
Ashley Halsey reports on national and local transportation.
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Antitrust officials filed a lawsuit Tuesday blocking the proposed $11 billion merger between US Airways and American Airlines’ parent company, AMR Corp., saying the deal would hurt consumers by leading to higher prices. (Larry Downing/Reuters)

It was supposed to be the capstone merger — the culmination of nearly a decade of consolidation that has transformed the airline industry and winnowed a crowded field of players into just a handful.

But on Tuesday, antitrust officials filed a lawsuit blocking the proposed $11 billion merger between US Airways and American Airlines’ parent company, AMR Corp., saying the deal would hurt consumers by leading to higher fare prices and fees.

The action puts the brakes on a union that would have created the world’s largest commercial air carrier and would have put 86 percent of U.S. air travel in the hands of four big airlines.

“By challenging this merger, the Department of Justice is saying that the American people deserve better,” Attorney General Eric H. Holder Jr. said in a statement Tuesday. “This transaction would result in consumers paying the price — in higher airfares, higher fees and fewer choices.”

The civil suit, filed by the Justice Department, six state attorneys general and the District of Columbia, marked a break from the government’s usual rubber-stamping of big airline deals, including Delta’s deal with Northwest in 2008 and United’s merger with Continental in 2010.

Since 2000, 10 major airlines have completed mergers, leaving only five.

Antitrust experts said the deal between US Airways and American Airlines proved to be one too many for the Obama administration.

“If you allow this one, and now you’ve got a new largest airline, how are you going to say no?” said Albert Foer, president of the American Antitrust Institute. “At some point, you’re going to have to say no.”

The Justice Department singled out the effect the merger would have on fliers in the Washington area. The merged airline would become the dominant carrier at Reagan National Airport, officials said, controlling 69 percent of the takeoff and landing slots.

As a result, the complaint said, passengers in the Washington area would probably see higher prices and fewer choices if the merger were to go through as proposed.

Officials said the presence of JetBlue at National Airport — which they said has already caused fares to drop — would also be threatened. In 2010, JetBlue entered into an agreement with American Airlines in which it trades slots at New York’s John F. Kennedy International Airport for American’s slots at National.

AMR and US Airways said they would fight the lawsuit in court rather than seek a compromise that might lead to a settlement. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” a joint statement from the two airlines said. “Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”

The federal government concluded that American Airlines and US Airways compete directly on thousands of routes, representing business worth tens of billions of dollars in annual revenue.

The complaint said US Airways helps bring down flying costs because it offers low fares to travelers willing to take connecting flights through the company’s cheaper hubs, such as Charlotte, rather than paying more for nonstop flights run by “legacy” airlines such as United and American. Joining with American, the complaint said, is likely to prompt US Airways to stop offering those low fares.

“If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight-change fees would result in hundreds of millions of dollars of harm to American consumers,” said Bill Baer, the Justice Department’s top antitrust official.

The Justice Department’s view was corroborated in June by the Government Accountability Office, which released a report warning that the new airline would be the only carrier providing nonstop service on seven of the 12 routes where they currently compete.

The merger also would reduce competition on 1,665 other domestic routes, the report said, and create new competition in just 210 routes.

The news hit American Airlines’ stock hard Tuesday, sending it down more than 45 percent in regular trading. US Airways Group’s was down more than 13 percent.

When US Airways began to pursue bankrupt American last year, the merger was seen as a natural fit in an aviation landscape that had evolved and then dramatically consolidated since the industry was deregulated by Congress in 1978.

Long gone were the iconic U.S. carriers at the time of deregulation — Pan American, Eastern and TWA — and an industry beset by high-labor costs and fuel prices took haven in bankruptcy court as it lost more than $20 billion in a decade.

Delta, Northwest, US Airways and United all went through bankruptcy as a means of reducing their costs. Then the legacy carriers began to merge, with Delta absorbing Northwest and United joining Continental.

A newer arrival, Southwest Airlines, accelerated its rapid expansion through a merger with AirTran two years ago.

“Consolidation was a necessary evil — no industry sector could sustain year after year of multibillion-dollar losses,” Sen. John D. Rockefeller IV (D-W.Va.), chairman of the Senate Committee on Commerce, Science and Transportation, said at a June hearing.

Analysts predicted that US Airways would need to merge with American, the last of the airlines to go bankrupt, to remain competitive with Delta, United and Southwest. From a business perspective, it appeared a good match, marrying US Airways’ eastern strength with American’s stronger presence in the Midwest and West.

If the union with US Airways were consummated, the new airline would have about 94,000 employees and 950 planes and operate 6,500 daily flights from nine major hubs, with estimated sales of $39 billion.

“The airline industry spent much of the last decade going bankrupt,” said Roy Kienitz, a consultant who served as undersecretary for policy at the Transportation Department during President Obama’s first term. “As a consequence, we had a period where people got to fly for a price below what it cost to provide the service. But this cannot last. Something has to give.”

Kienitz said he is concerned the effort to block the merger is rooted in a longing to go back to a time when prices were lower. He said that situation was “unsustainable.”

“For better or worse right now there are three dominant airlines: Delta, United and Southwest,” Kienitz said. “You can argue over whether we should have allowed this to occur, but we did. So the question for today is what to do next.”

The Justice Department complaint disputes the notion that a merger is necessary for the airlines to survive.

“These two airlines are viable [and] healthy,” Baer said during a conference call Tuesday, citing statements by the airlines’ executives.

Though Baer said he was open to discussion aimed at resolving the lawsuit, a senior airline official said American would not enter into talks.

“We’re fighting this. We’re not talking about settlements,” said the official, who spoke on the condition of anonymity to discuss the issue freely. “This complaint is long on theater, and it’s short on facts that connect the merger to all the harm that they’re worried about. They never address that, and that’s the thing that they have to prove in court.”

The official said that the lawsuit could be litigated quickly and that the merger, which had been planned in the third quarter, still could be achieved by year’s end.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
Ashley Halsey reports on national and local transportation.
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