Wall Street and the airline industry are reeling in the wake of the surprise, last-minute move by the Justice Department and a group of state attorneys general to block the $11 billion mega-merger between US Airways (LCC) and American Airlines (AAMRQ).
What investors need to know after watching both stocks get pummeled is whether the suit is a knockout blow, or if the airlines can get up off the mat.
The early rounds look ugly. The suit filed on Tuesday puts the brakes on a deal that would have created the world’s largest airline — just 48 hours before a federal bankruptcy court in Manhattan was set to approve American’s plan to emerge from bankruptcy protection by merging with LCC.
Attorneys general of six states and the District of Columbia joined the DoJ in the suit, which says the merger “would substantially lessen competition for commercial air travel throughout the United States,” Assistant Attorney General Bill Baer said in a statement.
Taken alone, that remark suggests DOJ would be willing to haggle with US Air and American over steps they could take to mitigate those competition concerns — including, but not limited to, transferring takeoff and landing slots to competing carriers at airports like Washington D.C.’s Reagan National, where the post-merger American would control nearly 69% of the total slots.
But Baer’s statement doesn’t end there: “Importantly, neither airline needs this merger to succeed,” he said. “We simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service.”
Translation: if you’re looking for DOJ to bless a US Air-American marriage, look elsewhere.
That’s bad news for airline investors who have wildly bid up both stocks over the past year in anticipation of the massive economies of scale and a combined airline that generates $47.8 billion in annual revenue by 2017.
The market reacted as expected — US Airways stock closed down 13% on Tuesday; AAMRQ stock plummeted nearly 45% on trading volume of nearly 111 million shares — 17 times the stock’s average trading volume.
Traditional legacy airlines Delta (DAL) and United Continental (UAL) were dragged down about 7% on fears that the antitrust suit could signal an aggressive departure from the nation’s 35-year-old posture of airline deregulation.
Predictably, US Airways and American defiantly vowed to mount a vigorous defense of the deal. “We believe that the DOJ is wrong in its assessment of our merger,” the companies said in a joint statement Tuesday. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together. Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices.”
So what happens next — and what does it all mean for shareholders?