United Continental Holdings Inc. and Delta Air Lines Inc. plunged, sending an industry index down the most in four months, on concern that a U.S. lawsuit to bar the AMR Corp.-US Airways Group Inc. merger imperiled profits.
The U.S. Justice Department’s lawsuit upended analysts’ predictions that carriers would gain greater pricing power once bankrupt AMR’s American and US Airways combined to create the world’s largest airline and shrink seating capacity.
“We believe this represents a seminal, negative event for the US airline industry,” Jamie Baker, a JPMorgan Chase & Co. analyst in New York, wrote in a note to clients. “While our 2014 earnings forecasts remain unchanged, we believe a potential independent AMR will significantly diminish longer-term investor confidence in the sector.”
United tumbled 7.5 percent to $30.73 at the close in New York for the biggest decline since June 2012. Delta slid 7.1 percent to $19.55. The 10-carrier Bloomberg U.S. Airlines Index fell 5.7 percent, the most since April.
US Airways, based in Tempe, Arizona, tumbled 13 percent to $16.36, the biggest drop in the index and the largest one-day drop since October 2011.
The drop was even steeper for shares of AMR, which tumbled 45 percent to $3.17 in the biggest decline since the company’s November 2011 bankruptcy filing. Fort Worth, Texas-based AMR had planned to use the merger to complete its Chapter 11 reorganization and exit court protection.
The company’s $460 million of 6.25 percent convertible notes due in October 2014 fell 11.63 cents to 104.5 cents on the dollar at 4:14 p.m. in New York, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority. They have risen from 17.75 cents since the AMR’s bankruptcy filing.
The government’s move “significantly jeopardizes industry capacity discipline,” JPMorgan’s Baker said, referring to airlines’ new-found willingness to shrink unprofitable flying rather than grab market share with money-losing flights.
The Justice Department allowed six unprofitable airlines to merge during the past five years in an effort to cut costs and end losses. The suit to block the AMR-US Airways combination follows the Aug. 5 approval by European Union antitrust authorities after the carriers agreed to cede the right to a daily round trip between London’s Heathrow Airport, the EU’s busiest hub, and Philadelphia.
“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. “Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition.”
United and Delta now rank first and second in the global industry’s ranking by traffic following mergers that came after each reorganized in bankruptcy last decade.