AMR-US Airways Antitrust Suit Seen as Difficult to Settle

AMR Corp. and US Airways Group Inc. will have difficulty resolving U.S. objections to their proposed merger, antitrust lawyers said.

The challenge brought by the U.S. Justice Department can be compared with its lawsuit seeking to block AT&T Inc.’s proposed takeover of T-Mobile USA Inc. in 2011, said Allen Grunes, an antitrust lawyer with GeyerGorey LLP. AT&T eventually dropped its bid for T-Mobile.

“My take is that the deal is dead,” Grunes said. “Based on the complaint, this merger doesn’t look like it can be fixed with divestitures or slot sales.”

The Justice Department, in a complaint filed yesterday in federal court in Washington, said the proposed American Airlines-US Airways tie-up would hurt competition in the industry and raise prices for consumers. The government is seeking to permanently block the merger “or any other transaction that would combine the two companies.”

Six states and the District of Columbia joined the lawsuit, making settlement prospects even more complex.

That also makes the case less like the division’s January challenge against Anheuser-Busch InBev NV’s purchase of Grupo Modelo SAB, which ended in a settlement after InBev agreed to sell a brewery in Mexico along with rights to Modelo’s brands in the U.S. to assure continued downward pressure on beer prices.

‘Strong Defense’

US Airways dropped more than 13 percent, slicing about $470 million off its market value, following news of the lawsuit. The bonds of American parent AMR fell on the news. AMR and US Airways said they plan to “mount a vigorous and strong defense” to the suit.

Assistant Attorney General Bill Baer, who heads the antitrust division, said at a press conference yesterday in Washington that he went to court “because we think a full-stop injunction is the right outcome for consumers.” While the government remains prepared to hold settlement talks, Baer said, the Justice Department hasn’t mapped out any potential remedies that could salvage the merger.

He said the government had talks with the airlines before filing the lawsuit, adding that the proposed merger was “pretty messed up.”

“Typically, the government will have already had extensive settlement discussion with the parties,” said Craig Wildfang, an antitrust lawyer with Robins, Kaplan, Miller & Ciresi LLP in Minneapolis. “The decision to sue only comes after settlement discussions have failed, although that doesn’t mean they can’t come back and take another shot at it.”

Higher Prices

American and US Airways don’t need the proposed merger to be successful, and American has indicated it could emerge from bankruptcy on its own, Baer said.

Jack Butler, an attorney for creditors of American, said in an interview on Bloomberg Television today that the U.S. lawsuit is based on “new theories that are untested and speculation” and won’t prevail in court. The government didn’t rely on the same analysis it used in approving past airline mergers, he said.

“Just because the government says something is right doesn’t make it so,” Butler said. “We think the government got it wrong.”

In addition to concerns about higher prices, Baer said the merger would create a monopoly at Washington’s Reagan National Airport that would hamper other airlines’ ability to compete and cause illegal levels of concentration in 1,000 routes.

‘Strong Complaint’

“The parties can litigate if they choose, but it’s a strong complaint and they would just be delaying the inevitable,” Grunes said. “The complaint really dismisses their story about how this merger would allow for more choices.”

The lawsuit, unexpected by analysts and industry executives, marks a sharp break with the Justice Department’s past policy, which allowed six unprofitable airlines to merge over the past five years in an effort to cut costs and end losses.

“Everybody assumed the deal would get resolved as all the other cases have,” said Robert Doyle, an antitrust lawyer with Doyle, Barlow & Mazard PLLC in Washington, referring to other airline deals. “All the past deals over the past five years have gotten settled.”

CEO Memo

Thomas Horton, chairman of Fort Worth, Texas-based AMR, said in a memo to employees yesterday the two companies have been working with the Justice Department for months, and that “the merger is complementary” and “provides significant customer benefits and that it enhances competition.”

The U.S. decision to sue follows the Aug. 5 approval of the merger by European Union antitrust authorities after the companies agreed to give up the right to a daily roundtrip between London’s Heathrow Airport, the EU’s busiest hub, and Philadelphia.

“If this merger were approved, US Airways would no longer need to offer low-fare options for certain travelers,” the government said in the complaint, noting the carrier’s practice of offering “Advantage Fares” and “aggressive discounting strategy aimed at undercutting the other legacy airlines’ nonstop fares with cheaper connecting service.”

Lower Fares

After the proposed merger, “US Airways’ economic rationale for offering Advantage Fares would likely go away,” the Justice Department said.

The complaint included screen shots of prices for flights from New York to Houston showing that Tempe, Arizona-based US Airways’ connecting fare was $870 cheaper for flights Aug. 13, returning Aug. 14, than nonstop flights by other legacy carriers and even beat fares from JetBlue Airways Corp. and AirTran Holdings Inc. by more than $300.

U.S. Bankruptcy Judge Sean Lane in Manhattan, who is overseeing the American case, is scheduled at an Aug. 15 hearing to consider its reorganization plan. Airline executives had said before the government lawsuit that they expected his approval to be the last legal step required for deal to be complete.

Over the past five years, the department allowed three other airline mergers, including Delta’s acquisition of Northwest Airlines and United Airlines parent UAL Corp.’s union with Continental.

‘Gaining Leverage’

“The filing of the lawsuit could be the first step to gaining leverage over the parties to talk about remedies,” said Gerald Pappert, a former attorney general of Pennsylvania who led a group of states in their investigation of a proposed merger between United Airlines and US Airways in 2001, which the Justice Department also sued to block.

“There are always remedies that can result in the settlement of the case and allow the merger to proceed,” said Pappert, who is now an antitrust lawyer with Cozen O’Connor LLP in Philadelphia.

The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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