In what would have been the third merger between legacy carriers in the past five years, US Airways Group Inc (NYSE:LCC) was set to merge with AMR Corporation (OTCMKTS:AAMRQ), parent company of American Airlines. But after a challenge from the Department of Justice, the merger that would have created a new American Airlines Group is under threat. With shares of US Airways Group Inc (NYSE:LCC) down more than 15% and shares of bankrupt AMR Corporation (OTCBB:AAMRQ). down around 40%, the question is: Will American Airlines Group ever take flight?
The law and the DOJ
It’s well known that the among the DOJ’s functions is to review proposed mergers between corporations, especially those where consumer choice could be limited as a result. In this case, the DOJ has mounted a court challenge to the US Airways Group Inc (NYSE:LCC)-AMR Corporation (OTCMKTS:AAMRQ) merger on allegations that such a merger would increase fares and limit choice.
Now some people may think the merger is dead because the DOJ (which would have to approve an eventual merger) has publicly noted its opposition to such a corporate tie-up. However, in the court case, the DOJ is the plaintiff, not the judge. Both US Airways Group Inc (NYSE:LCC) and AMR Corporation (OTCMKTS:AAMRQ) have vowed to offer a “vigorous” defense of their merger making the court case versus the DOJ another episode in this merger’s legal battle.
If the DOJ is going to the effort to challenge the merger in court, what chance does the merger have of ever winning approval from the same DOJ? Furthermore, the DOJ has already voiced its opinion that the forfeiture of a few routes would not solve the merger’s problems. Dead merger, right? Wrong.
While no one except those at the DOJ knows the strategy the department will pursue, there are other possible reasons the DOJ would launch a court challenge. When the DOJ negotiates for merger terms, they do so with their own bargaining position. Typically, major mergers will require concessions from the parties involved — concessions the DOJ must negotiate for.
Bargaining position comes to mind at this point. A good example in government-business merger negotiations would be the merger between Air Canada (TSE:AC.B) and its chief domestic rival Canadian Airlines that was completed in 2001. Under normal circumstances, such a merger would almost certainly be blocked on anti-competitive grounds, since it would combine the only two major Canadian carriers. However, this situation was different. Canadian Airlines’ financial state had the airline headed for bankruptcy and likely liquidation if the merger with Air Canada (TSE:AC.B) was not approved. This left the Canadian Competition Bureau with two choices: Let Canadian Airlines fail, putting thousands out of work, while allowing Air Canada (TSE:AC.B) to pick off the best assets in bankruptcy, or let the carriers merge. In this case, the Competition Bureau opted for the latter, and a Canadian megamerger was allowed.
Today, after two major industry downturns and an Air Canada (TSE:AC.B) bankruptcy, Air Canada is being increasingly challenged at home by rival WestJet. While still maintaining a major presence in the domestic market, Air Canada is also expanding internationally, where WestJet’s presence is not as great. By offering low-cost flights to Europe and adding five new densely packed Boeing 777s to other routes, Air Canada (TSE:AC.B) is not only maintaining an international presence but is also adding capacity.
Ironically, it’s the statements American Airlines has been making about its financial health that are helping to back up the DOJ claim. Unlike the Canadian merger, where both Air Canada (TSE:AC.B) and Canadian agreed that Canadian Airlines was in dire financial straits, both US Airways Group Inc (NYSE:LCC) and American Airlines have been bragging about themselves, citing their improving financial positions. US Airways Group Inc (NYSE:LCC) and American Airlines have effectively surrendered the “massive layoffs to come” card by talking up shareholder returns. Not only has this hurt their bargaining position, but it also helps to bolster the DOJ’s case in court.