CHICAGO — A federal bankruptcy court judge did not rule during a Thursday hearing on American Airlines’ confirmation plan, but indicated he was leaning towards such a move even though the airline faces a federal antitrust lawsuit blocking its merger with US Airways Group.

Judge Sean H. Lane, who serves in the federal bankruptcy court in Manhattan, was quoted in numerous published reports as saying he had found “the arguments in favor of confirmation fairly persuasive.” American, its creditors’ committees, and the carrier’s unions have argued in favor of approving the confirmation plan on a conditional basis with the DOJ lawsuit pending. Lawyers involved in a private antitrust lawsuit filed against the merger argued that the confirmation plan should be put on hold until the antitrust issues are resolved.

Approval of the plan –which was assembled assuming the proposed merger would go through -- would allow American parent AMR Corp. to clear a major hurdle in its path to exit its Chapter 11 bankruptcy filed in November 2011 as it staves off further objections from parties in the case or from outside forces. The U.S. Trustee in the case does still have some objections to the plan pending.

The more daunting obstacle looms in resolving the DOJ lawsuit filed Aug. 13, which prevents the confirmation plan from taking effect even if Lane approves it. The next bankruptcy court hearing is Sept. 11.

If the airline fails to settle the government’s challenge or to prevail in federal court, it could be sent back to square one to form a new business plan as a stand-alone company. The airline initially resisted US Airways overtures last year, but pressured by creditors, it announced a proposed merger early this year.

The plan based on a merger is favored by unsecured creditors – including holders of the airline’s $3.3 billion of unsecured and secured municipal bonds – because it offers full recovery for unsecured holdings. The airline also opted against challenging the status of leases tied to its secured municipal bonds as airlines attempted in past bankruptcies with mixed results.

Some American unsecured municipal bonds posted recent trading gains after falling after the DOJ lawsuit was filed. The airline’s $1.5 billion of unsecured bonds mostly traded at near to full value, and even a premium in some cases, after the merger was announced early this year with a full recovery anticipated. After the DOJ lawsuit was filed, many securities dropped to between 75 cents to the low 90s. Some have since begun to recover with several trading recently as high as 98 cents on the dollar.

Securities from a $210 million Dallas Fort Worth International Airport bond traded at a low of 85 cents after the lawsuit’s filing, but were up to 93 cents on the 28th, and then back down to 85 cents on Thursday. A $126 million DFW bond issue dropped from 107 cents on the dollar on Aug. 7 to 77 cents after the lawsuit was filed, but was back up to 98 cents on Wednesday. An unsecured New York City airport-related bond from 1990 traded at 93 cents on the dollar on Aug. 22nd.

An Alliance Airport bond for $136 million traded at a post-lawsuit filing low of 80 cents on the dollar but had risen to 98 cents on a trade recorded Thursday. Bonds from a $109 million Chicago O’Hare International Airport deal dropped to 92 cents after the lawsuit filing but have picked up value over last week and traded at 99 cents on the dollar on Monday.

A high-yield market participant attributed to recent increases to a calming of reactionary jitters.

“The DOJ lawsuit came out of left field at a late stage just two days before the confirmation hearing” so some investors opted to dump their holdings, the source said. The airline’s secured bonds have retained their premium trading levels.

In the antitrust case, the government is pushing for a trial date next year while the airlines want a November date and warned in briefs on the subject that the government’s request could risk the merger. A hearing on the subject is scheduled before U.S. District Judge Colleen Kollar-Kotelly Friday.

A joint filing in the case Wednesday noted the willingness of both sides to entertain a settlement, with the government saying it would consider one that addresses “competitive harms posed by the merger,” but saying it has yet to be presented with a proposal. American said it continues “to believe there ought to be a realistic possibility of settlement.”

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