Uncertainty awaits airline industry without merger
American Airlines is third behind United and Delta and is weak on the East Coast. US Airways is No. 5 among U.S. carriers, lacks strength in the middle of the country and doesn’t even fly to Asia. But combine them, and you’ve got the biggest airline in the world.
The Associated Press
DALLAS — The merger between American Airlines and US Airways was supposed to cap an era of consolidation that helped the airline industry return to profitability. And it would make American a viable competitor to giants United and Delta.
The government’s lawsuit to block the merger has put both of those expectations in doubt.
If American cannot grow by merging, it could decide to add flights to better compete with larger rivals. Doing so would likely reduce airfares — and profit margins — across the industry, an outcome that many airline investors fear. Airline stocks sank for a second straight day Wednesday.
American has faded to a distant third and is particularly weak along the East Coast. US Airways is No. 5 among U.S. carriers, lacks strength in the middle of the country and doesn’t even fly to Asia. But put them together under the American Airlines name, and you’ve got the biggest airline in the world.
Size helps airlines land important corporate-travel accounts — business passengers will pay higher fares for a carrier that gets them where they want to go.
That’s why American and US Airways are vowing to fight the U.S. Justice Department’s lawsuit to block their merger.
“If this merger does not take place, US Air will continue to have the gaps and weaknesses in its network that it has now, and American will continue to have the gaps and weaknesses in its network,” said Joe Sims, an antitrust lawyer hired by American. “Neither individually will be as effective a competitor to United and Delta and Southwest and all the smaller low-cost carriers.”
American’s parent, AMR Corp., and US Airways Group Inc. announced their merger in February. They expected a judge to approve it this week, one of the last steps before AMR can emerge from nearly two years in bankruptcy protection.
U.S. Bankruptcy Judge Sean Lane in Manhattan is scheduled to consider its reorganization plan Thursday.
But Tuesday, the U.S. Justice Department and six states sued to block the deal, saying it would hurt competition and drive up prices for consumers.
The CEOs of both airlines could negotiate a settlement with the Justice Department — maybe by giving up coveted takeoff and landing slots at crowded Reagan National Airport outside Washington, D.C.
But on Wednesday antitrust lawyers said the airlines will have difficulty resolving the objections to the proposed merger.
The challenge brought by the Justice Department can be compared with its lawsuit seeking to block AT&T’s proposed takeover of T-Mobile USA in 2011, said Allen Grunes, an antitrust lawyer with GeyerGorey. AT&T eventually dropped its bid for T-Mobile.
“My take is that the deal is dead,” Grunes said.
Assistant Attorney General Bill Baer, who heads the antitrust division, said Wednesday that while the government remains prepared to hold settlement talks, the Justice Department hasn’t mapped out any potential remedies that could salvage the merger.
Bair said the government had talks with the airlines before filing the lawsuit, adding that the proposed merger was “pretty messed up.”
But if the merger does get scuttled, American and US Airways will be far behind United and Delta, which grew through regulator-approved mergers in the last five years. American will lack a strong presence on the East Coast, and US Airways, currently No. 5 among U.S. carriers, will have no service to Asia.
American declined to comment Wednesday on what it would do if the merger is blocked. At a minimum, it would have to file a new reorganization plan with the bankruptcy court, because the merger is the key element of the current plan. It would then have to get its creditors, who were instrumental in steering American toward a merger, to support the changes.
AMR can point to improving financial results since it filed for bankruptcy in November 2011. It has cut labor and other costs, and it posted a $220 million profit in the second quarter, its first profit for the period in six years. An important measure of performance, revenue per mile, hit a record in July.
J.P. Morgan analyst Jamie Baker wondered whether AMR would have to ask dozens of departing managers to pull their résumés off job websites in an attempt to convince investors that a stand-alone American could compete. Those executives haven’t left yet — they were due to get severance deals if they stayed until the merger was completed.
Information from Bloomberg News is included in this report.