The federal government filed a lawsuit Tuesday to block the proposed merger of American Airlines and US Airways, asserting that the deal would cause “hundreds of millions of dollars of harm to American consumers annually” due to decreased competition and increased prices.
The lawsuit, filed in federal court in Washington by the Department of Justice and the attorneys general of six states and the District of Columbia, surprised many industry analysts, who had expected the merger to sail through the approval process.
Attorneys general from American’s home state of Texas, US Airways’ home state of Arizona, and Florida, Virginia, Pennsylvania, Tennessee, and Washington, D.C., are part of the lawsuit. Massachusetts Attorney General Martha Coakley declined to comment on why her office has not joined the suit.
The merger is not expected to have a major impact at Logan International Airport, where US Airways and American compete on only one route, to New York. The Massachusetts Port Authority, which runs Logan, also declined to comment on the lawsuit.
The $11 billion deal had appeared to be the final step in the evolution of the airline industry, which has shrunk in less than a decade from nine major US carriers to just four mega carriers — Delta, United, Southwest, and, if the deal goes through, a new American.
But all this consolidation has made the industry much stronger than it was just a few years ago, when carriers were bleeding money and unable to survive on their own, airline analysts said. That may have prompted the federal government to take a closer look.
“Best case, it’ll slow things down,” John Thomas, a Boston-based aviation specialist at L.E.K. Consulting, said of the lawsuit. “Worst case, they could stymie the whole thing.”
US Airways and American announced their long-anticipated merger in February, after American’s bankruptcy filing in late 2011. The combination of the two carriers would create the world’s largest airline.
It is unclear if a federal bankruptcy hearing to consider American’s reorganization plan will go ahead on Thursday as scheduled. The merger had been expected to be finalized by the end of September.
“We will fight them,” US Airways chief executive Doug Parker wrote in a letter to employees on Tuesday. “We are confident that by combining American and US Airways we are enhancing competition, providing better service to our customers, and improving the industry as a whole.”
In its lawsuit, the Justice Department said the two airlines compete directly on thousands of connecting routes, and the elimination of this head-to-head competition would lead to service cuts and price increases.
“This merger will leave three very similar legacy airlines — Delta, United, and the new American — that past experience shows increasingly prefer tacit coordination over full-throated competition,” according to the filing.
The Justice Department also singles out comments by Parker, noting that he has “cheered” previous mergers for allowing airlines to raise fares and introduce bag fees. Further, the filing notes, American reported $357 million in profits in its most recent quarter, allowing it to “compete independently as a profitable airline.”
Analysts note, however, that most of that profit came from reduced labor costs.
“The government has understood in the past that the airline industry may have been too competitive, resulting in a bankruptcy by almost every single major carrier, and so the government permitted some mergers,” said Harlan Platt, a finance professor at Northeastern University who specializes in airlines and corporate governance. “But eventually you get to the straw that breaks the camel’s back, and this merger was probably being viewed in the Justice Department as that straw.”
But some analysts said the lawsuit oversimplifies the state of the industry. It largely ignores Southwest, which carries more domestic passengers than any other US airline and has made it harder for competitors to raise prices. The mergers have also made the surviving airlines more efficient and profitable, allowing carriers to make improvements to their service.
“It’s probably better for the industry overall and potentially for the consumer in the long run to have three or four very strong, very healthy competitors,” said Peter Belobaba, an aviation researcher at MIT.
Given the disequilibrium in the industry, with American and US Airways struggling to compete independently against the mega carriers created through previous mergers, the government’s lawsuit is a “day late and a dollar short,” said airline analyst George Hoffer, an adjunct economics professor at the University of Richmond.
“Given the imbalance,” Hoffer said, “I think we’d have a much more stable industry if they allow the merger.”