DELAYED

08.13.13

U.S. Justice Department Files Lawsuit to Block Merger Between American Airlines and US Airways

Amid a wave of consolidation sweeping the industry, prices are rising and competition on certain routes is decreasing.

In a move that surprised the markets and the airline industry, the Department of Justice filed a lawsuit Tuesday to block a pending merger between American Airlines and US Airways. In the months since the the two large airlines agreed to join forces, consumers have fretted that the deal would reduce competition and result in higher fares.

On Tuesday, the federal government signaled that it agrees. Attorney General Eric Holder said in a statement that his actions were prompted by worries for the consumer: “Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure. By challenging this merger, the Department of Justice is saying that the American people deserve better. 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.”

In February, a deal worth $11 billion was struck to bring American Airlines’ parent company, AMR Corp., out of bankruptcy and into the arms of US Airways, which has had its own brushes with bankruptcy over the past decade. The merger has since been awaiting regulatory approval. The DOJ’s suit will go on to a federal district court where it will be decided whether an injunction will be issued, keeping the merger from occurring before a real trial. Bert Foer, president of the Washington, D.C.–based American Antitrust Institute, said that if an injunction is issued, it is unlikely that American and US Airways will continue to pursue the merger.

“What usually happens is the parties walk away from the case and the trial that would follow,” Foer said. “The prevailing law is still very favorable to the Justice Department, and the dynamics of a case like this, typically, are that the parties to the merger don’t want to leave the merger hanging in the air during the time of the trial and appeals.”

Prior to the DOJ stepping in, there were many consumer challenges to the proposed merger. The proposed US Airways and American Airlines merger would be the fourth major airline combination in the past five years. Previous mergers include those between United Airlines and Continental Airlines, and Southwest Airlines’ acquisition of AirTran Airlines. The DOJ did not intervene in any of the previous instances. Although airlines greatly suffered during the height of the recession, companies are heading toward their fourth straight year of profit.

In addition to the lack of competition that would come from having one less airline operating in the sky, critics worried that routes would be consolidated and thus fewer options would be offered. The two airlines expressly stated that the merger would reduce “excess capacity” to the fleet. For consumers, however, the reduction of excess capacity tends to lead to fuller flights and higher prices. “I think there’s too much concentration,” Foer said. “We know from past mergers that prices do go up and concentration of flights is easier and consumers do get injured, so I think [The DOJ] is protecting consumers by ensuring the level of concentration doesn’t get worse.”

Monopolies in certain airports are also a big concern. Take Regan National Airport in Washington, D.C. The airport is highly regulated and the number of airlines that can claim a hub there is small. The merger would give the new US Airways company 67 percent of daily departures from the airport.

Since the winter announcement, individuals in many states have filed lawsuits against the merger on the premise of antitrust issues, arguing that combining American Airlines with US Airways would leave four major airlines controlling almost 75 percent of domestic air travel. Yet despite the individual uproar and some comments from members of Congress, it seemed that the merger would continue unhinged.

Stocks for the two airlines and others plummeted this morning after news of the legal move surfaced. AMR Corp., which had opened the day at $5.81 a share, hit a low of $3.65 in late-morning trading, off about 30 percent.