08172013Headline:

US/American Merger Blocked

The US justice department has filed an anti-trust case to block the merger of American Airlines and US Airways.

The $11bn (£7bn) deal, which would form the world’s largest airline, was backed by a federal judge in March and has been approved by the European Union.

The complaint says customers would see a price rise as the merger would “substantially lessen competition” in the domestic market.

US Airways boss Doug Parker said the company would fight the injunction.

“We are extremely disappointed in this action and believe the DOJ [Department of Justice] is wrong in its assessment,” Mr Parker said in a letter to employees.

The District of Columbia and six US states and have joined the legal action: Texas, where American Airlines is headquartered, Arizona, where US Airways is based, Florida, Pennsylvania, Tennessee and Virginia.

American Airlines and US Airways said that in light of the justice department’s action they no longer expected the merger to close by the end of 2013, but that they remained “hopeful” litigation would be over by year’s end.

The last time the US justice department blocked a major airline deal was in 2001. At the time, US Airways tried to do a deal with United Airlines. The government objected on the grounds that it would be too dominant a player. In recent years, the government appeared to change its tune.

It did not object to Delta acquiring Northwest in 2008, or to United merging with Continental Airlines in 2010. Nor did it try to stop the deal between South West Airlines and AirTran. Since deregulation in the 1970s, the airline industry has struggled to make money; many carriers have been forced into bankruptcy.

But in the last four years, as the number of carriers shrunk, the industry has managed to turn a profit. Some analysts believe the government may be trying to extract more concessions from the airlines. After all, European anti-trust regulators gave the deal the green light after American and US Airways agreed to give up some of their takeoff and landing slots at London’s Heathrow Airport.

Shares in both companies fell, along with the stock prices of other airlines, as news of the anti-trust case hit the markets on Tuesday.

“By challenging this merger, the Department of Justice is saying that the American people deserve better,” US Attorney General Eric Holder said in a statement.

“This transaction would result in consumers paying the price – in higher air fares, higher fees and fewer choices.”

The lawsuit also cites direct competition between the airlines on nonstop routes worth about $2bn in annual revenues.

The airlines had previously conceded take-off and landing slots at airports in Philadelphia and London in order to win EU approval last week.

When the deal was announced in February, US Senate Commerce Committee chairman Jay Rockefeller also expressed concern that consumers would lose.

American Airlines has been in bankruptcy protection since November 2011, but US Airways has been profitable in recent years.

The two combined airlines would have 6,700 daily flights and annual revenue of roughly $40bn.

The justice department complaint argues the two companies do not need to merge to continue to be competitive, and that American Airlines is likely to exit bankruptcy as a “vigorous competitor”.

The department also cited American Airlines’ purchase two years ago of 460 new planes, said to be the largest such order in industry history.

If the merger continues, there will be only three major US airlines, which the justice department alleges “increasingly prefer tacit coordination over full-throated competition”.

Some industry analysts suggest that American Airlines and US Airways’ ability to compete without a merger is not as strong as the department argues.

But one opponent of the two firms’ consolidation, Charlie Leocha, director of the Consumer Travel Alliance, told Reuters news agency: “This is a stake in the heart of the merger. I don’t see this moving forward.”

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