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Challenge to US Airways-American merger sets up legal fight

Ely Portillo, Rick Rothacker & Andrew Dunn

More Information

  • What the airline lawsuit means
  • Lawsuit unlikely to change airline industry
  • Editorial: US Airways merger should stand
  • Airline stocks fall sharply on DOJ challenge
  • Read the lawsuit
  • Airlines’ share of the domestic U.S. market

    1. Southwest (includes AirTran): 17.8 percent

    2. Delta Air Lines: 16.3 percent

    3. United: 15.9 percent

    4. American: 12.8 percent

    5. US Airways: 8.3 percent

    6. JetBlue: 5.1 percent

    7. Alaska Airlines: 4 percent

    Source: Bureau of Transportation Statistics

  • US Airways’ merger turbulence

    • 2000: United Airlines and US Airways announce proposed merger.

    •  2001: Justice Department says it will sue to stop the merger and the deal dies.

    •  2002: US Airways makes first trip to bankruptcy court, from August 2002 to March 2003.

    •  2004: US Airways files for bankruptcy for a second time.

    •  2005: US Airways emerges from bankruptcy and completes merger with America West. Doug Parker becomes CEO of combined company.

    •  2006: US Airways makes an $8 billion bid for Delta while that carrier is in bankruptcy court but is turned down. Delta later merges with Northwest.

    •  2008: US Airways and United discuss merger, but talks break off.

    •  2010: US Airways ends another round of merger talks with United, which later merges with Continental.

    •  2011: American Airlines files for Chapter 11, saying it needs relief from debt caused by high fuel prices and costly labor contracts. Parker, long an advocate of industry consolidation, begins pressing publicly for a merger of US Airways and American.

    •  Feb. 14, 2013: US Airways and American Airlines announce an $11 billion merger.

    •  July 12: US Airways shareholders approve merger.

    •  Aug. 5: The European Union’s regulators approve merger.

    •  Tuesday: U.S. Justice Department files suit to block the deal, calling it bad for consumers.

    •  Thursday: Hearing had been scheduled in federal bankruptcy court in New York to ask the judge overseeing American’s bankruptcy to give the deal his approval.

    Rick Rothacker

In one day, the merger of US Airways and American Airlines went from being close to approval to seriously in doubt.

The U.S. Justice Department on Tuesday moved to block the planned $11 billion merger, saying it would stifle airline competition and drive up airfares. The chief executives of both airlines immediately vowed to challenge the move.

The antitrust lawsuit surprised industry insiders who had thought the merger was just weeks away from winning Justice Department approval – one of the deal’s final two hurdles. The challenge sets up a potentially lengthy legal battle that could end with a judge deciding the merger’s fate.

It all adds another layer of uncertainty to the future at Charlotte Douglas International Airport, a US Airways hub already dealing with a lawsuit over whether it should be run by the city or a new commission.

US Airways and American planned to close their merger as soon as next month. US Airways Chief Executive Doug Parker acknowledged Tuesday that isn’t a possibility anymore but said he still thinks the merger can close by the end of this year.

“We will fight them,” said Parker, in a message to US Airways employees. “We are extremely disappointed in this action and believe the DOJ is wrong in its assessment...Other companies have found themselves in similar circumstances and gone on to successfully close their merger.”

The airline is “mounting a vigorous and strong defense in federal court,” he added.

Tom Horton, CEO of American’s parent company AMR Corp., said in a message to employees “the matter will now be settled by the courts,” a process that could take several months. In a separate message, American executives said the airlines “expect to prevail at trial.”

The merger has been in the works since American sought bankruptcy protection in 2011. In February, the companies announced their plans to create the world’s biggest airline with 6,700 daily flights and annual revenue of roughly $40 billion. The combined company would be called American Airlines and be led by Parker.

Antitrust clearance from the Justice Department and approval from American’s bankruptcy judge – which had been expected later this week – were to be the deal’s last remaining steps.

Now, the lawsuit raises the real possibility that the merger will fail. The attorneys general of six states – though not North Carolina or South Carolina – joined the federal government in filing the lawsuit in federal court in Washington.

The Justice Department lawsuit cites what it calls a history of anti-competitive behavior by US Airways executives, much of it based on senior executives’ emails.

In one 2011 exchange, an unnamed US Airways executive complains to Parker about the necessity of putting wireless Internet access on all flights, an added cost.

“Next it will be more legroom. Then industry standard labor contracts. Then better wines. Then the ability to book (tickets) on Facebook,” the executive wrote.

“Easy now,” Parker responded, according to the lawsuit. “Consolidation will help stop much of the stupid stuff but inflight Internet is not one of them.”

Assistant U.S. Attorney General Bill Baer said that although the department would be open to hearing ideas on how to settle the government’s concerns, he thinks totally blocking the merger is the best course. The lawsuit asks the court to permanently block the planned merger.

“We think the right solution here is a full-stop injunction,” Baer told reporters. He called the airline’s planned merger, which would leave more than 80 percent of the domestic air travel market controlled by the new American, Delta Air Lines, United and Southwest, “pretty messed up.”

It’s far from clear whether the airlines could address the Justice Department’s concerns and still pull off the merger.

Tom Reich, director of air service development at AvPORTS, an industry consulting firm in Dulles, Va., said the new American could promise to take steps such as putting moratoriums on fee increases and not raising fares in markets where the two airlines currently compete.

But implementing such conditions, Reich said, would erode much of the incentive to merge.

“Doing so would cause the new American to be competing with one hand tied behind its back,” he said.

Shares of US Airways and American fell sharply Tuesday. US Airways closed down 13 percent, at $16.36, and American closed down 45 percent, at $3.17.

Competition hurt or helped?

At its core, the fight comes down to whether the merger will hurt or help competition.

The Justice Department said the deal will create an unacceptable level of consolidation and cut airline capacity, all of which will lead to higher fares. The Justice Department said past experience with mergers shows the airlines “prefer tacit coordination over full-throated competition.”

To bolster their case, the Justice Department cited past statements by US Airways executives – who would run the merged airline – saying there were “too many” competitors. In 2011, US Airways President Scott Kirby said there had been three fare increases the airline had been “able to pass along to customers because of consolidation.”

In one statement, Parker called the US Airways-American merger “the last major piece needed to fully rationalize the industry.”

As the largest US Airways hub, Charlotte figures prominently in the Justice Department’s suit. The merger would illegally eliminate competition for flights between Charlotte and 38 other cities, according to the lawsuit.

The lawsuit cites city pairs like Charlotte and Dallas, in which US Airways and American currently compete. After the merger, there would be virtually no competition for airfares in those markets, the government argues.

Of the top 100 U.S. airports, Charlotte is the 25th most expensive for domestic round trips, according to government figures released last month.

The merged airline would also likely stop offering “Advantage Fares,” or lower-cost tickets to entice customers to fly and connect through its hubs, according to the lawsuit.

The complaint also outlines how airlines have been able to raise prices, impose new fees and reduce service in recent years.

The Justice Department also said US Airways executives have tried to suppress competition by communicating directly with rival airlines. In one 2010 email exchange, US Airways executives complained about an unnamed rival’s “triple miles” promotion.

The move was “hurting (the rival airline’s) profitability – and unfortunately everybody else’s,” Parker complained, according to the lawsuit. Parker told other executives to “portray these guys as idiots to Wall Street and anyone else who’ll listen.”

“Ultimately, to make sure the message was received, US Airways’ CEO forwarded the email chain – and its candid discussion about how aggressive competition would be bad for the industry – directly to the CEO of the rival airline,” the Justice Department wrote.

Seeing the merger slip away would be a serious blow to Parker, a longtime advocate of industry consolidation who engineered the US Airways-America West merger in 2005 and has since tried unsuccessfully to merge his airline with both United and Delta.

US Airways executives have argued that even though the merger would turn two competitors into one, it would actually strengthen competition by creating a fourth airline with the heft to take on Delta, United and Southwest.

“Those airlines today have less competition than they will once we put these companies together,” Parker said earlier this year in Charlotte. “It’ll be intensely competitive.”

Tuesday, consumer advocacy groups praised the government’s actions.

“There is a coordinated airline war on consumers and price transparency,” said Business Travel Coalition Chairman Kevin Mitchell, in a statement. The group praised the DOJ for shining “a spotlight on how uncompetitive and cozy U.S. airlines have become.”

Past mergers won approval

Many airline industry analysts said they were caught off guard Tuesday by the government’s opposition to the merger, especially in light of the Justice Department’s approval of the last three airline combinations: Delta-Northwest in 2008, United-Continental in 2010, Southwest-AirTran in 2011.

Airline analyst Bob Mann said the department’s move is too little, too late if the goal is to prevent airline consolidation.

“It’s like Rip Van Winkle woke up. Industry consolidation has been a 10-year process,” said Mann. “They certainly didn’t have any big objections to the last round.”

The wave of consolidation in the last five years has already left the industry with three major domestic carriers splitting up much of the traffic, with US Airways and American as smaller competitors and airlines like Alaska, Spirit and JetBlue holding on to niche markets.

The Justice Department approved both the Delta-Northwest and Southwest-AirTran mergers without objections, and only required United and Continental to give up some slots at Newark Liberty International Airport to Southwest to win approval.

Seth Kaplan of the trade publication Airline Weekly said most people in the industry thought getting approval would be easy.

“If this Justice Department approved United-Continental, how can they say no?” he said. “A lot of us were reading it wrong.”

At most, Kaplan said, industry watchers had expected the Justice Department to tell the airlines they needed to give up some slots at Washington Reagan National Airport in order to win approval.

Charlotte impact

The Justice Department’s challenge could cast a shadow on the future of Charlotte as a major hub. Charlotte Douglas currently has about 650 daily flights operated by US Airways, about 90 percent of the airport’s total. Combined with American Airlines, the merged company would operate about 94 percent of Charlotte’s daily flights.

Under the merger, Charlotte Douglas International Airport would become the combined airline’s second-busiest hub, behind only Dallas/Fort Worth International Airport.

Charlotte’s airport has already been roiled by months of debate over who should be in charge – a fight that led to the departure of longtime Aviation Director Jerry Orr and a new state law to move control of the airport from the city to an independent commission. The city has sued to block the law, and a judge has said the transfer can’t occur until approved by the Federal Aviation Administration.

Parker has repeatedly promised that Charlotte Douglas would grow in the combined company after the merger. The airport could eventually have more than 700 daily American flights, Parker said.

“All indications are this merger will be good for Charlotte,” former Charlotte Mayor Anthony Foxx, who is now the U.S. Transportation Secretary, told the Observer in February. The Department of Transportation declined to comment Tuesday. Charlotte’s current mayor, Patsy Kinsey, also declined comment.

Some airline labor unions, which have backed the merger as a way to get raises and more job security, lined up Tuesday to voice their support for the deal.

“(The Association of Professional Flight Attendants) remains confident that the deal will be approved,” the union said in a message to members.

If the merger is blocked, the Justice Department said both companies can survive on their own, as independent airlines, and consumers will reap the rewards.

‘Tied up in court’

Tuesday’s suit is US Airways’ latest run-in with the Justice Department.

In 2001, the department rejected United Airlines’ planned $12.3 billion takeover of US Airways, killing that deal.

US Airways declared bankruptcy twice in the following years, and in 2005 the carrier merged with America West.

Either airline can terminate the merger if it is not completed by Oct. 14, according to the agreement. The deadline can be extended to Dec. 13 if the airlines agree.

Other companies have found ways to proceed with mergers after being sued by the government.

In April, the department reached a settlement that allowed Anheuser-Busch InBev and Grupo Modelo to close their deal after Modelo agreed to divest its U.S. business and make other concessions.

The attorneys general who joined in the Justice Department lawsuit were from Arizona, Florida, Pennsylvania, Tennessee, Texas and Virginia. The District of Columbia also joined the suit.

N.C. Attorney General Roy Cooper is monitoring the Justice Department action and “is concerned about the potential for harm to consumers but is also considering the outcome for the City of Charlotte and surrounding communities,” his office said in a statement.

U.S. Sen. Kay Hagan, the North Carolina Democrat, said she is reviewing the lawsuit.

“My top priority throughout this process has been advocating for Charlotte Douglas to retain hub status and ensuring that North Carolina is positioned to improve air service to strengthen our economy and provide more options to travelers,” she said in a statement.

Carl Tobias, a professor at the University of Richmond School of Law, said US Airways could be in for a protracted fight.

“It could be tied up in court for a long time if there are appeals,” Tobias said.

“All of that seems to me to be not good news for the merger. But, of course, Justice has to prove their case.”

McClatchy Washington Bureau reporter Curtis Tate contributed

Portillo: 704-358-5041 On Twitter @ESPortillo
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