Antitrust Regulators Say American-US Airways Deal Would Hurt Consumers

Along with the Heinz takeover, the American Airlines/US Air deal was heralded earlier this year as a sign the M&A scene was back. Now, it looks like the government isn't too happy about it.

What do you think?

WSJ:
The Justice Department unexpectedly moved to block the merger of American Airlines parent AMR Corp. AAMRQ -32.18% and US Airways Group Inc., LCC -3.55% threatening to upend what was viewed as the final step in the consolidation that has helped return U.S. airlines to profit after years of heavy losses.

The department's legal challenge to the deal also could throw a wrench into AMR's plans to quickly emerge from bankruptcy-court protection, as the merger is the basis of its bankruptcy-exit plan. The two airlines had hoped for Washington's blessing ahead of a bankruptcy-court hearing set for Thursday to confirm the exit plan, which has the support of the company's creditors and unions.

American and US Airways said they would mount "a vigorous and strong defense…and pursue all legal options" to complete their combination, which would create the world's largest airline.

The prospect of an antitrust trial means the merger can't be completed as planned in the third quarter, the companies said, but US Airways Chief Executive Doug Parker said Tuesday that he hoped the deal could still close before year-end. Mr. Parker is slated to become CEO of the new American Airlines Group Inc.

The Justice Department filed suit to block the merger of American Airlines' parent company, AMR and US Airways, saying the deal would hurt competition after a wave of airline consolidation in recent years. Six state attorneys general and the District of Columbia joined the Justice Department lawsuit, four of them from jurisdictions where American or US Airways operate hub airports.

The two carriers have said their merger would benefit consumers by building a new airline that could compete more vigorously with larger rivals. They said the new American would offer passengers a more attractive route network, more flight options and better connections to overseas destinations while improving job security and compensation for employees.

Over the past decade, antitrust regulators have put up little resistance to airline mergers, allowing four major combinations since 2005. But the lawsuit they filed Tuesday in U.S. District Court in Washington said the American-US Airways deal would go too far and hurt competition because it would leave four airlines controlling more than 80% of the U.S. market.

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

US Airways shares fell sharply on the news, finishing 4 p.m. trading down 13% at $16.36. Other airline stocks also took a hit.

Investors worried that if American were forced to remain independent, it might try to bulk up to the size of merged behemoths Delta Air Lines Inc. DAL -2.84%and United Continental Holdings Inc. UAL -3.09%That could cause industry capacity to grow and earnings prospects to diminish, according to J.P. Morgan Chase & Co.

Dennis Tajer of the Allied Pilots Association, which represents American's more than 8,000 pilots, said that if the deal falls through, the Justice Department will have "bolstered the duopoly of Delta and United." Mr. Tajer said an independent American wouldn't be able to compete, putting the company at risk of a return to bankruptcy.

Thursday's hearing on AMR's bankruptcy-exit plan was expected to go ahead, said people familiar with the matter. The judge could confirm the plan and wait to make it effective after the Justice Department's lawsuit is resolved, they said.

A scuttled merger would prolong AMR's stay in chapter 11, perhaps until late 2014, said another person close to the process. The company would have to fashion a new reorganization plan to emerge from court protection as an independent company, revise its financial projections and negotiate anew with bondholders, unions and other creditors—all of which would take considerable time.

One hedge-fund trader holding AMR debt expressed concern that financial recoveries would suffer if the merger didn't proceed. In the proposed combination, AMR creditors were to be repaid in full, with interest, and shareholders were to receive a 3.5% ownership stake in the new airline, if not more. Such sizable recoveries are rarities in Chapter 11 cases.

US Airways, a much smaller airline than American, pursued the merger almost from the moment American found itself in bankruptcy in late 2011. American executives initially scorned the alliance, instead championing the strategy of getting American out of Chapter 11 as a stand-alone airline, and then pursuing a merger sometime later.

But US Airways wore American down, starting in the spring of 2012, when it gained the support of all of American's big unions. AMR's creditors came to see the merger as offering better returns and more stability, and were slated to receive 72% of the new company.

Justice Department antitrust chief Bill Baer said Tuesday that if the parties want to propose a way to settle the lawsuit, the government was willing listen. But he added: "We think the right solution here is a full-stop injunction" to block the proposed merger.

The last big airline deal the Justice Department shot down was in July 2001, when it said it would sue to block a combination of United Airlines and US Airways. That deal eventually fell apart. Mr. Baer said his department also looked "very seriously" at US Airways' hostile bid for Delta in 2006 before it was abandoned.

The Justice Department didn't object to the 2005 combination of US Airways and America West Airlines, the 2008 acquisition of Northwest Airlines by Delta, the 2010 merger of United and Continental Airlines and the 2011 acquisition of AirTran Airways by Southwest Airlines Co. LUV -0.85%Only one—the United-Continental deal—required a concession, which involved landing spots in Newark, N.J.

The U.S. government has been scrutinizing the proposed merger of American and US Airways since late January, even before the $11 billion transaction was publicly disclosed in mid-February. European Commission antitrust regulators approved the transaction earlier this month, requiring only that the pair relinquish a pair of takeoff and landing slots at London's Heathrow Airport.

The Justice Department's suit suggested that after greenlighting the previous mergers, officials believed that consolidation was finally threatening consumers' interests. "We learned what happened to competition in prior acquisitions," Mr. Baer said. "We filed the lawsuit because we determined [this] merger would leave three legacy airlines and reduce competition."

Moreover, he said, both American and US Airways are thriving financially and neither needs the merger in order to succeed.

In its suit, the Justice Department focused on a US Airways strategy called Advantage Fares, in which it offers inexpensive, one-stop fares to undercut the prices of American, Delta and United. The strategy forced the other three airlines to drop prices more than they normally would, said the suit. If US Airways and American merged, they "would likely abandon Advantage Fares, ending significant competition and causing consumers to pay hundreds of millions of dollars more," the suit said.

The Justice Department also said that the merger would hurt passengers at Reagan National Airport near Washington, where the combined airline would control 69% of the takeoff and landing slots at the airport, up from US Airways' current 55% of the slots.

 

It is colluding but through a merger essentially. I agree it would be a terrible deal, the previous deals made sense because the company acquired was usually struggling. This is not the case with US Airways and American Airlines. It would benefit the consumer in the long haul, mentioned in the article, that capacity would in turn grow. It would only hurt the people holding their ticker.

Frank Sinatra - "Alcohol may be man's worst enemy, but the bible says love your enemy."
 

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