Justice Department tries to block airline merger

The U.S. Justice Department sued AMR (the parent company of American Airlines) and US Airways to try and block the pending merger.

What’s different is that it defies recent department policy allowing airlines to combine forces with little resistance, the Wall Street Journal reported:

The Justice Department filed suit Tuesday to block the merger of American Airlines’ parent corporation, AMR Corp., and US Airways Group Inc., saying the deal would hurt competition after a wave of airline consolidation in recent years.

“This transaction would result in consumers paying the price—in higher airfares, higher fees and fewer choices,” said Attorney General Eric Holder in a statement.

Over the past decade, Washington has put up little resistance to airline mergers, but the lawsuit said the combination of American and US Airways would go too far and result in four airlines controlling more than 80% of the U.S. commercial air-travel market.

American and US Airways compete directly on more than 1,000 routes where one or both offer connecting service, the government said. The government’s suit says the vast majority of domestic airline routes are already highly concentrated.

The New York Times reported the Justice Department claims that if the merger were to go through, it would give four carriers control of 80 percent of the U.S. market:

After approving a series of mergers between the nation’s airlines in recent years, the Justice Department’s decision came as a surprise to both carriers, who had expressed confidence the deal would go through with only a few changes. Antitrust regulators had not challenged an airline merger since the planned tie-up between United Airlines and US Airways in 2001.

Since then, Delta Air Lines merged with Northwest Airlines, United merged with Continental, and Southwest merged with AirTran.

In recent years, however, consumer groups and some economists have warned that the wave of consolidation in the airline sector had contributed to higher airfares and less choice for consumers.

“Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace,” said Eric H. Holder Jr., the United States attorney general.

The civil antitrust lawsuit was filed in the United States District Court for the District of Columbia to challenge the planned deal.

The Justice Department said the vast majority of domestic airline routes were already highly concentrated. A merger of American and US Airways, it said, would result in four airlines controlling more than 80 percent of the United States market for commercial air travel.

The Bloomberg story added these details about why the Justice Department thought the merger illegal, including lack of completion for Washington, D.C. passengers:

Direct competition by American and US Airways would be eliminated on nonstop service on 17 domestic routes generating about $2 billion in annual industrywide revenue, creating “strong incentives for the merged airline to reduce capacity and raise fares,” the U.S. complaint stated.

The lawsuit comes just 48 hours before AMR was set to go to U.S. Bankruptcy Court in Manhattan to ask Judge Sean Lane to confirm its reorganization plan. Lane probably will delay the confirmation hearing until late September or early October, said Anthony Sabino, a specialist in airline bankruptcy who teaches law at St. John’s University in New York.

The late maneuver stunned analysts and investors, triggering a selloff that dragged the 10-carrier Bloomberg U.S. Airlines Index down 5.7 percent for the biggest decline since April. US Airways fell the most, tumbling 13 percent to $16.36.

A merged American would become the world’s largest airline by traffic, topping United Continental Holdings Inc.’s United, and would be able to raise ticket prices without risk of being undercut by competitors, the Justice Department said.

“Passengers to and from the Washington, D.C., area are likely to be particularly hurt,” the agency said in the complaint. US Airways now has 55 percent of the takeoff and landing slots at Washington’s Reagan Airport, a proportion that would rise to 69 percent under the merger, the Justice Department said.

 “That’s the kind of thing that’s going to be Item A on the action list” for antitrust regulators, Sabino said.

Routes from Dallas-Fort Worth International Airport, American’s home hub, and Charlotte, a US Airways hub, were among those cited in the Justice Department complaint as among those where “the merger is presumptively illegal.”

It seems that all the consolidation in the past few years is hurting this deal. As fewer carriers cover routes, price inflation does seem to be a legitimate concern. The Wall Street Journal story had sections with employee memos where executives of both firms expressed confidence the merger would go through. Here’s hoping the courts move quickly to make a decision, especially since a bankruptcy plan hinges on the outcome.