United-US Airways Merger Dead

ByABC News

C H I C A G O, July 27, 2001 -- United Airlines and US Airways Group called off their $4.3 billion deal today after the Justice Department said it would sue to block the acquisition.

Justice officials said earlier today that the proposed combination, which would have created the world's largest airline, would have reduced competition, raised fares and harmed consumers.

Vacationing families, corporations and the federal government, which spends millions on air travel, would pay the price if the merger were allowed to go forward, federal government officials said.

"While mergers can further competition, this one does not," said Attorney General John Ashcroft. "If this acquisition were allowed to proceed, millions of consumers … would have little choice but to pay higher fares and accept lower quality air service."

As part of the termination agreement, UAL Corp., the parent of United Airlines, will pay US Airways $50 million.

Before the two airlines officially issued a statement calling off the deal, US Airways said it was disappointed that the merger won't go through.

"We nevertheless must respect the Justice Department's decision," the Arlington, Va.-based airline said.

Wanted: New Partner

US Airways said it would announce its next move soon, though analysts say the airline needs to find a new partner.

The department's decision was widely expected even before United wavered this summer in its commitment to what would have been the largest-ever airline purchase.

Facing big losses, a worsening economy and labor problems, United tried to end the deal in early July but agreed to pursue the merger after US Airways balked at the proposed separation.

Chicago-based United and Arlington, Va.-based US Airways are the second and sixth largest U.S. airlines. The Justice Department said the merger would give United a monopoly or duopoly on nonstop service on over 30 routes and substantially limit competition on numerous other routes.

Consumer choice in airlines would have been severely restricted in hub-to-hub nonstop markets like Philadelphia-Los Angeles, San Francisco-Denver and Pittsburgh-Washington, where US Airways and United are each other's only nonstop competitor, the department said.

The Washington and Baltimore markets would see reduced competition, the department said, and competition also would suffer on the East Coast because United and US Airways are the only two airlines in many markets offering connecting service between cities up and down the coast.

Consumers would have fewer options on international routes, and businesses and government agencies, which give airlines lots of business in exchange for discounts, would have one less airline to choose from, the government said.

New Airline Had Been Planned

United and US Airways had sought to allay regulators' antitrust concerns with plans for a new airline partly owned by American Airlines to take over US Airways flights out of Washington and by letting American take more than half of US Airways East Coast shuttles.

But regulators said the manufactured competition could not replace true market-driven competition.

American said it won't proceed with plans to assume US Airways flights if the merger did not go through.

The decision was also a blow for a proposed new airline called DC Air, created by Black Entertainment Television founder Robert L. Johnson.

Shares of UAL closed down 29 cents to $33.63 on the New York Stock Exchange, where shares of US Airways fell 89 cents, or 5 percent, to $17.26.

US Airways has said a merger with No. 2 United was its best chance to remain profitable in an increasingly competitive industry. United, meanwhile, has been surpassed by American Airlines, buffeted by labor and operational problems and lost nearly $1 billion since the deal was proposed.

With a formal rejection of the merger, "United can try to get back to trying to fix their airline and cut back the losses they're experiencing, which are much larger than the rest of the industry's," said Ray Neidl, a New York-based analyst for ABN Amro.

ABC News Live

ABC News Live

24/7 coverage of breaking news and live events