Justice Department challenges American-US Airways merger

Bart Jansen | USA TODAY

Show Caption Hide Caption US Airways-American Airlines merger challenge US Airways and American Airlines, which have been barreling ahead with plans to combine the two airlines by the end of September, hit a major merger roadblock Aug. 13, 2013.

Six states and the District of Columbia joined the suit

Justice Dept. says consumers would suffer higher costs

Previous mergers have been approved

American Airlines and US Airways vowed Tuesday to fight the Justice Department lawsuit that seeks to block their planned merger because of concerns that travelers would pay hundreds of millions more for fares and fees.

Investors dumped both stocks after the lawsuit was announced Tuesday morning. US Airways shares were down $2.46, or 13%, for the day, and American was down $2.64, or 45%.

The airlines had anticipated merging within months to create the world's largest airline to better compete against United and Delta airlines. But the lawsuit that argues travelers would face hundreds of millions of dollars in higher fares and fees will at least hinder and could block those plans.

"While shareholders might benefit, creditors might benefit from consolidation, the fact of the matter is consumers will get the shaft," Bill Baer, assistant attorney general for the antitrust division, told reporters in a conference call. "The right option here is a full-stop injunction."

The department argued that the competition — and lower prices — would be lost at more than 1,000 pairs of cities where the airlines compete with connecting flights.

Baer said eliminating the non-stop competition from Charlotte to Dallas would cost travelers $3 million more per year on that route alone. With connecting flights, such as from Miami to Cincinnati, US Airways has a one-stop fare for $471 compared with $740 for American.

The department also warned that fees for baggage and other services could grow. US Airways charges an average of $40 to redeem frequent-flier miles, while American doesn't, but Baer said the combined airline would charge all passengers the fee to generate $120 million more each year.

And the department noted that the merged airline would control 69% of the slots at Ronald Reagan Washington National Airport, which would be six times more than the closest competitor.

Baer said the merger would "allow the new American to compete less."

But US Airways CEO Doug Parker, who would lead the combined airline, vowed to fight the lawsuit in a letter Tuesday to airline workers.

"We are extremely disappointed in this action and believe the DOJ is wrong in its assessment," Parker said. "We will fight them."

The federal action stunned industry observers after tepid hearings in Congress about the merger, which has already been approved by the European Union, airline creditors and airline shareholders.

"I think a lot of people are shocked about this," said Daniel Friedenzohn, associate professor at Embry-Riddle Aeronautical University in Daytona Beach, Fla., who specializes in airline acquisitions and route planning.

Jamie Baker, an airline analyst at J.P. Morgan, said the lawsuit could prompt American to emerge from bankruptcy without merging and that resolving the case could take months. Baker said the case could hurt investor confidence in the entire industry.

"We believe this represents a seminal, negative event for the U.S. airline industry," Baker said.

The Justice Department filed the case in U.S. District Court for the District of Columbia with states of Arizona, Florida, Pennsylvania, Tennessee, Texas, Virginia and the District of Columbia. The locations represent the home states of the two airlines, along with several of their major hubs.

Baer argued US Airways seeks to reduce capacity in the industry, which would lead to higher ticket prices and fees for checked bags and changing flights.

"We think it's pretty messed up," Baer said. "It's pretty bad for consumers."

William McGee, a travel and aviation consultant for Consumers Union, which advocates for consumer rights, said the lawsuit seems to share his group's concerns about airline mergers since 2001.

"A combined American/US Airways could mean fewer flights and fewer choices for consumers, coupled with higher fares and lower quality of service," McGee said. "Even more so, further consolidation in the airline industry could make it even harder for low-cost alternatives to compete effectively, and take the biggest airlines further into 'too-big-to-fail' territory."

John Briggs, a Washington lawyer who is co-chairman of antitrust and competition at Axinn, Veltrop and Harkrider LLP, said the complaint looks very strongly written in a way that could discourage the companies from pursuing the merger.

"This has the stench of all being over," Briggs said. "This deal is going to be very hard to litigate."

Baer said the airlines had asked the Justice Department to decide on its potential lawsuit by Aug. 15, when U.S. Bankruptcy Judge Sean Lane scheduled the latest hearing in American's bankruptcy case.

The airlines said in a joint statement that they would mount a vigorous defense to preserve the merger.

"We believe that the DOJ is wrong in its assessment of our merger," the airlines said. "We will mount a vigorous defense and pursue all legal options in order to achieve this merger and deliver the benefits of the new American to our customers and communities as soon as possible."

Unions continued to support the merger. The Allied Pilots Association, which represents American pilots, remains "fully committed" to a merger, according to First Officer Tom Hoban, a spokesman for the union.

The Association of Professional Flight Attendants, which represents attendants at American, also issued a statement expressing confidence the merger would be approved.

The airlines sought to merge because of recent mergers of Southwest and AirTran, United and Continental and Delta and Northwest airlines. US Airways and American officials had been optimistic about their plans because the Justice Department approved each of those previous mergers.

Baer noted opposition to potential mergers between United and US Airways and Northwest and Continental, and he said the department looked at the discussed merger of US Airways and Delta, which was abandoned. Each case is different, he said.

"If we see a problem, we go hard," Baer said.