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Originally published August 15, 2013 at 5:16 PM | Page modified August 16, 2013 at 8:48 AM

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American Airlines' exit from bankruptcy stalls

A bankruptcy judge had been expected to rule Thursday on American’s turnaround plan, paving the way for a merger that would create the world’s biggest airline. But the U.S. Justice Department has filed suit against the merger, saying it would hurt competition and increase prices for co

The Associated Press

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NEW YORK — A judge asked American Airlines’ lawyers to explain why he should approve the company’s plan to merge with US Airways and exit bankruptcy protection while the merger is being challenged by the federal government.

Until this week, it was expected that federal Bankruptcy Judge Sean Lane would rule Thursday on American’s turnaround plan, paving the way for a merger that would make American the world’s biggest airline.

But the U.S. Justice Department upset American’s strategy Tuesday by filing a lawsuit against the merger, saying that it would hurt competition and increase prices for consumers by leaving four airlines in control of more than 80 percent of the U.S. air-travel market. That threatened to delay or scuttle the deal.

At a hearing in New York, Lane asked lawyers for American parent AMR Corp. and other parties to submit written briefs on whether he can do anything before the Justice Department lawsuit is resolved.

Judge Lane said he had “lingering doubts” about approving the plan while the merger is being challenged.

One of AMR’s lawyers, Stephen Karotkin, said that the company planned to fight the lawsuit. He said that the lawsuit shouldn’t stop the judge from approving AMR’s reorganization plan.

The judge also considered an objection to a $20 million severance award for AMR CEO Tom Horton, who would serve briefly as chairman before leaving the new company. The U.S. trustee for New York said the payment violates bankruptcy-law limits designed to prevent executives from getting big rewards not available to regular employees.

Susan Golden, a lawyer for the trustee, said the new company shouldn’t bear the cost of paying Horton for work he did on AMR’s reorganization.

“He’s being paid for work already performed,” she said.

Karotkin, however, said creditors and shareholders approved the merger knowing that it contained Horton’s payment. He said the money would ensure that Horton sticks around long enough to help smooth the process of combining airlines.

The hearing drew a huge crowd. Lawyers packed the courtroom’s five rows, and 30 more people stood along the walls. An extra courtroom and conference room were set up to handle the overflow.

Before the Justice Department jumped in, Thursday’s hearing was expected to be the final step before AMR closed the merger and ended nearly two years under bankruptcy protection.

The merger was supposed to cap an era of consolidation that has helped the airline industry limit seats, raise prices and return to profitability. Although it would leave one fewer airline, American and US Airways argued that their merger would increase competition by creating a stronger rival to industry leaders United Airlines and Delta Air Lines.

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