U.S. and Handful of States Challenge American Airlines-US Airways Merger

CHICAGO — Bankrupt American Airlines and US Airways Group, Inc. will fight the surprise challenge launched by the U.S. Justice Department against their proposed merger.

Justice cited concerns the merger would undercut competition and hurt consumers.

Justice and attorneys general from six states and the District of Columbia moved Tuesday to block the union of American parent AMR Corp. with US Airways by filing a civil antitrust lawsuit.

The reduction in the number of major domestic airlines "threatens substantial harm to consumers," the complaint charges. The industry has been undergoing consolidation in recent years but the American/US Airways merger is the federal government's first move to block a deal after approving three.

"Because of the size of the airline industry, if this merger were approved, even a small increase in the price of airline tickets, checked bags, or flight change fees would cause hundreds of millions of dollars of harm to American consumers annually," it asserts.

The action came just two days ahead of a scheduled confirmation hearing on American's reorganization before Judge Sean Lane of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. Approval of the plan was to have advanced the merger and moved the airline closer to exiting Chapter 11. It's unclear now what action will occur at the hearing.

American entered bankruptcy in November 2011 with $3.3 billion of unsecured and secured municipal debt. Municipal buyers embraced the merger and reorganization proposal because American did not challenge the status of its secured bonds and plans to make even unsecured claims whole. American's bonds — both secured and unsecured — have traded at full value to a premium since early this year after the merger was announced.

High-yield buyers were stunned by the news Tuesday, market sources said. They had bought the unsecured bonds at steep discounts after the bankruptcy filing and stood to make a handsome profit under the reorganization plan. Interactive Data Corp. said it did not observe trades Tuesday on AMR unsecured municipal bonds, but the bid side had dropped by as much as 10 to 30 basis points.

In a joint statement, the two airlines outlined what they believe are the benefits of the marriage, vowed to vigorously fight the litigation, and pursue all legal options.

"We believe that the DOJ is wrong in its assessment of our merger. Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together," the statement read.

"Further, this merger provides the best outcome for AMR's restructuring," it continued, highlighting the nearly unprecedented recovery levels for creditors. "The widespread support from the employees and financial stakeholders of both airlines underscores the fact that this is the best path forward for both airlines and the customers and communities we serve."

The union would create the nation's largest airline, ahead of United Airlines and Delta Air Lines, and it was central to the reorganization plan that makes unsecured creditors whole.

American recently announced that voting results showed a majority of shareholders and creditors signed off on a proposed reorganization. The plan recently received European Union regulatory approval after some airline concessions.

The effective date for the plan and American's exit from Chapter 11 was expected to coincide with the closing of its merger with US Airways in an $11 billion, all-stock deal. Officials had hoped to close the deal this quarter and only federal regulatory approval was still needed.

The airline entered bankruptcy with about $3.3 billion of tax-exempt revenue debt issued to fund projects at its hub airports, maintenance bases and other facilities, or to refund debt. About $1.5 billion was lumped into the unsecured category, meaning it was not secured by an asset or lease, and carried only an airline guaranty. The other $1.8 billion of municipal bonds was secured by some form of collateral. In past airline bankruptcies unsecured municipal bond holders did not fare so well and received between 20 cents to 60 cents on the dollar.

Along with the Justice Department, the attorneys general of Arizona, Florida, Tennessee, Texas, Pennsylvania, Virginia, and the District of Columbia filed the complaint in U.S. District Court for the District of Columbia. American parent AMR Corp. is based in Fort Worth, Texas and US Airways is headquartered in Tempe, Arizona.

The union would create American Airlines Group Inc. with its headquarters remaining in Fort Worth. US Airways shareholders are to receive stock valued at 28% of the new airline with the remainder paid out to AMR's creditors and shareholders. Under the plan, unsecured creditors receive new common stock with a trading value estimated to pay their claims in full, including unpaid post-petition filing interest. The airline cautions that the market will ultimately determine the value once the stock begins trading.

Mike Phemister, vice president for treasury services at Dallas-Fort Worth International Airport, said Tuesday that the challenge would not delay the airport's plans to price $428 million of refunding bonds Thursday. American is the major tenant at DFW, with its headquarters at the airport's entrance.

— Richard Williamson contributed to this story.




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