Aug. 13, 2013 -- The chances of American Airlines merging with US Airways have become slimmer, according to analysts, after the Justice Department announced its objection to the move over worries about higher airfares.
The odds of the merger completing have fallen to 40 percent, now that the Justice Department has voiced its objections, according to The Buckingham Research Group, which had previously pegged the chance of the union at 99 percent.
The Justice Department filed an antitrust lawsuit on Tuesday challenging the proposed $11 billion merger between US Airways Group Inc. and American Airlines' parent, AMR Corp., which would have created the world's largest airline.
Six state attorneys general joined the lawsuit including Texas, where American Air is headquartered; Arizona, where US Airways is headquartered; plus Florida, the District of Columbia, Pennsylvania, Tennessee and Virginia.
"Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure," said Attorney General Eric Holder in a statement. "By challenging this merger, the Department of Justice is saying that the American people deserve better. This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices."
The government noted that if the merger were allowed, the top four airlines (AMR-LCC, United UAL, Delta DAL, and Southwest LUV ) would control more than 80 percent of the U.S. commercial air travel market.
US Airways' stock (NYSE: LCC) fell 13 percent at the close of New York trading to $16.36 a share. Shares of bankrupt AMR Corp.'s over-the-counter stock fell about 46 percent to $3.15.
If this merger moves forward, "even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers," said Bill Baer, assistant attorney general of the Department of Justice's Antitrust Division.
Basili Alukos, airlines analyst with Morningstar said the merger would most likely lead to higher prices.
"I think every consumer can vouch anecdotally to higher ticket prices," he said. "It's nothing they haven't realized or felt. Economics says whenever you have reduction in supply, prices go up, unless you have a perfectly elastic good and I don't think airline tickets are elastic."
Moreover, the report noted that the merger would also entrench the merged airline as the dominant carrier at Ronald Reagan Washington National Airport, with control of 69 percent of the takeoff and landing slots. Alukos said he suspects regulators and members of Congress will have their eyes on competition at Reagan airport, which is in their own backyard.
AMR Corp. and US Airways Group said they intend to "mount a vigorous and strong defense" to the Justice Department's effort to block the proposed merger. The airlines say the "procompetitive merger" will provide a "broader airline network that gives [customers] more choices."
The Justice Department has intervened in previous airline mergers.
In 2001, the Justice Department sued to block the proposed merger between United Airlines and US Airways Group, leading the two companies to call off their $4.3 billion deal.
In 2010, the Justice Department dropped its investigation of the merger between United Airlines and Continental Airlines after United Continental Holdings agreed to transfer takeoff and landing rights, known as slots, and other assets at Newark Liberty Airport to Southwest Airlines Co.
AMR and USAirways say the merger provides the "best outcome for AMR's restructuring," after the company filed for bankruptcy in Nov. 2011. AMR had previously said the company expects to exit Chapter 11 bankruptcy and merge in the third quarter, which ends Sept. 30.
Alukos said that without the merger, the equity value of AMR is "worthless."
The two companies have previously said they would be able to stand alone as companies and thrive, arguments which the Justice Department is using in its effort to block the merger.
"Absent the merger, American is likely to exit bankruptcy as a vigorous competitor, with strong incentives to grow to better compete with Delta and United," the Justice Department said. The department points to American Air's recent aircraft order, the largest in industry history, and its post-bankruptcy standalone plan called for increasing the number of flights and destinations at each of its hubs.