AMR, US Airways vow to fight for merger

Posted Tuesday, Aug. 13, 2013  comments  Print Reprints
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Legal challenge What happened: The Justice Department and attorneys general from Texas, Arizona, Florida, Pennsylvania, Tennessee, Virginia and the District of Columbia say the proposed merger of AMR Corp. and US Airways would hurt competition and harm consumers through higher fares and reduced services. Texas Attorney General Greg Abbott said he fears that several smaller airports will lose flights. What it means: The airlines cannot complete their merger as planned by the end of September and will need to argue their case in court. A settlement is possible. What’s next: A bankruptcy hearing to confirm AMR’s restructuring plan is scheduled for Thursday. But AMR will continue to operate in bankruptcy until the merger issue is settled.

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Stunned by an unexpected federal lawsuit that seeks to ground their proposed merger, top officials of American Airlines and US Airways vowed Tuesday to fight to complete a deal to create the world’s largest carrier.

Just two days before the U.S. bankruptcy judge overseeing AMR Corp.’s Chapter 11 reorganization was scheduled to confirm or deny the merger, the Justice Department and attorneys general from Texas and five other states challenged the deal on grounds that it will reduce competition.

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

The Justice Department said that if the merger goes through, the nation’s top four airlines would control more than 80 percent of the U.S. market for commercial air travel.

In a joint release, AMR and US Airways promised “a vigorous and strong defense” of the deal. “We believe that the DOJ is wrong in its assessment of our merger,” the carriers said.

“We will fight them,” US Airways CEO Doug Parker, who would run the combined company, said in a separate message to his employees.

The lawsuit surprised industry observers but thrilled consumer advocates. Since 2008, the industry’s three biggest players — United, Delta and Southwest — all expanded through mergers. Antitrust regulators had not challenged an airline merger since the planned tie-up of United Airlines and US Airways in 2001.

Justice Department officials “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. Northwest and Delta merged in 2008, Continental and United in 2010.

American and US Airways were so confident that the merger would be approved that they had already named executives for the combined company, which was to be based at AMR’s headquarters in Fort Worth and called American Airlines Group Inc. Executives at Tempe, Ariz.-based US Airways have been house-hunting in Dallas-Fort Worth.

AMR’s shares (ticker: AAMRQ) plunged 45 percent Tuesday on trading volume nearly 20 times its daily average. US Airways’ shares (ticker: LCC) were down 13 percent on the news.

On Feb. 13, the companies announced their plan to create a company with 6,700 daily flights and annual revenue of roughly $40 billion. At the very least, the lawsuit will delay the merger and AMR’s emergence from Chapter 11 bankruptcy, begun on Nov. 29, 2011.

The companies had said they hoped to conclude the deal before Sept. 30. In a recent regulatory filing, AMR said that if the merger is not completed, it could remain in bankruptcy “for an extended period of time … because AMR would be required to formulate a new plan of reorganization.”

Bankruptcy Judge Sean Lane has a hearing scheduled for Thursday in his New York courtroom to give final consideration to AMR’s restructuring plan and merger. Officials at the airlines said it’s still expected to take place. His ruling, if favorable, could have been one of the last hurdles, given that the deal already has the backing of shareholders along with AMR’s creditors and union groups.

In a letter sent to employees Tuesday morning, AMR CEO Tom Horton said he expects the latest court challenge “will likely take a few months” to resolve. “We and our counterparts at US Airways have been working with the DOJ staff for months to ensure that they had an informed view of the merger,” Horton wrote.

But, he says, “since the DOJ has formed a contrary view, the matter will now be settled by the courts.” He said that “in the meantime, American and US Airways will continue to operate as independent companies and competitors. All recent leadership announcements for the new merged American will be on hold until such time as the merger receives final clearance”

In their joint statement, American and US Airways argued that “integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together. Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”

The Allied Pilots Association, which represents American Airlines pilots, lambasted the lawsuit.

“We’re in complete disagreement” with the government’s reading of the industry, said Tom Hoban, communications chairman at APA and a 22-year American veteran. “We believe DOJ is applying a double standard” in approving the Delta-Northwest and the United-Continental mergers, which he said created much larger competitors for American and US Airways.

The merger was expected to bolster American’s domestic footprint, strengthen its presence in the Northeast, and give it a bigger network to attract business travelers and corporate accounts.

The Association of Professional Flight Attendants, which represents American’s attendants, called the suit “somewhat surprising and certainly disappointing” but said it is “confident that the deal will be approved.”

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 a member of a panel that advises the government on travel-consumer issues.

Kevin Mitchell, chairman of the Business Travel Coalition, said in a statement that the merger represents “a coordinated airline war on consumers and price transparency.” He said the lawsuit casts “a spotlight on how uncompetitive and cozy U.S. airlines have become.”

The Government Accountability Office said in June that the merger would reduce competition in a far larger number of airports than the earlier mergers. That report found that 1,665 routes between cities would lose one competitor as a result of the merger but added that the great majority of those markets still had “effective competitors.”

Seth Kaplan of the trade publication Airline Weekly said most people in the industry thought getting Justice Department approval would be easy. The European Union gave the merger its blessing Aug. 5.

“If this Justice Department approved United-Continental, how can they say no?” he said, describing his thinking. “A lot of us were reading it wrong.”

Assistant U.S. Attorney General William Baer, who heads the Justice Department’s antitrust division, told reporters in a conference call that the lawsuit aims to protect consumers from price gouging.

“Americans spent more than $70 billion flying around the country last year. Increases in the price of airline tickets, checked bags or flight change fees resulting from this merger would result in hundreds of millions of dollars of harm to American consumers,” he said.

In making its case against the merger, the government relies heavily on executives’ own words.

Throughout its 56-page lawsuit, Justice Department lawyers quote internal emails, investor presentations and public comments by the two airlines’ top executives regarding how past mergers allowed for increased fares and higher fees for checking a bag or changing flights.

For instance, US Airways President Scott Kirby noted in 2011 that past mergers had paved the way for airlines to push through three fare hikes that year.

AMR has cut its costs and debt since filing for bankruptcy protection. It recently reported a $220 million profit in the second quarter, the first time since 2007 that the carrier has made money in the quarter.

The lawsuit might not ever 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.

However, the government’s suit addresses many more industry practices than just landing slots, which could make a compromise harder to reach.

At his news conference, Baer said that the government 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.”

Texas Attorney General Greg Abbott said the state has “concerns about the potential for reduced airline service to several of Texas’ smaller airports that are currently served exclusively by American Airlines and American Eagle,” AMR’s regional carrier. In a prepared release, Abbott said American and US Airways “compete directly on thousands of heavily traveled nonstop and connecting routes, including nearly 200 routes beginning or ending in Texas cities.”

Besides Texas, attorneys general from Arizona, Florida, Pennsylvania, Tennessee and Virginia joined the lawsuit, as did the District of Columbia.

Industry consultant Tom Reich, director of air service development at AvPORTS, said American and US Airways could make several promises to regulators to win the deal, including a moratorium on increased fees, an agreement not to raise fares in markets where the carriers compete now and the surrender of some slots at Reagan National. But that might defeat the purpose of merging, he said.

“Doing so would cause the new American to be competing with one hand tied behind its back,” he said.

This report includes material from Curtis Tate of the Star-Telegram’s Washington Bureau, The Charlotte Observer, The Associated Press and The New York Times.

Jim Fuquay, 817-390-7552 Twitter: @jimfuquay

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