American Airlines-US Airways Merger Blocked By Justice Department, Which Cites Likelihood Of Higher Costs For Flying Public If Deal Gets Done

The U.S. Justice Department surprised industry watchers Tuesday by blocking the highly anticipated $11 billion merger of US Airways Group Inc (NYSE:LCC) and AMR Corp., the bankrupt parent of Americans Airlines, a move that would create the world’s largest carrier.

In a lawsuit filed in federal district court in Washington, D.C., the U.S. government argued that the merger would force travelers to pay more for air travel. The move was a surprise because the department had approved three airline mergers over the past five years, according to Bloomberg.

Wall Street reacted by dumping US Airways stock, knocking the price down by more than 10 percent to $16.82 in midday trading in New York.

“This transaction would result in consumers paying the price -- in higher airfares, higher fees and fewer choices,” Attorney General Eric Holder said in the announcement of the lawsuit. “Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace.”

The department’s complaint says the merger would further consolidate the airline industry. Justice said the combination would result in the newly formed entity controlling 69 percent of all landing slots at Reagan National Airport in Washington, D.C., and 63 percent of all out-bound nonstop routes.

The two carriers announced their intentions to merge in February. On Thursday, a bankruptcy judge is expected to consider American’s reorganization plan –- a move that’s separate from the lawsuit filed Tuesday, but which could likely affect the outcome of the hearing.

As the Wall Street Journal reported on Monday, mergers in recent years, such as the one between Delta Air Lines, Inc. (NYSE:DAL) and Northwest Airlines in 2008, have led to cost-saving consolidation of services. Air travelers have certainly noticed a corresponding increase in fares and fees, and carriers have scrambled to cut costs and raise revenue through the last economic downturn.

On Aug. 5, the European Commission approved the proposed combination of the two companies. The only condition the commission set was that the combined entity had surrender one slot at London's Heathrow airport and take measures to enhance competition on the Philadelphia-London route.