August 14, 2013 / 7:07 PM / in 4 years

US Airways, American focus battling U.S. in court: sources

A U.S. Airways jet departs Washington's Reagan National Airport next to American Airlines jets outside Washington, in this February 25, 2013 file photo.Larry Downing/Files

NEW YORK (Reuters) - US Airways and American Airlines are focused on fighting for their $11 billion merger in court and will argue that the federal government hasn't proven that the merger would reduce competition, according to three people with knowledge of the situation.

The airlines had held staff-level discussions with the government for months, but high-level talks began a week ago, one of the sources said.

Airline executives and antitrust lawyers learned that the Department of Justice was suing to block the merger on Tuesday morning, at about the same time the 56-page lawsuit was filed, according to the sources, who spoke on condition that they not be named because they are not authorized to speak to the media.

The Justice Department and six states plus the District of Columbia sued in a Washington, D.C. court to block the merger, saying it would reduce competition and lead to higher air fares and fees.

The lawsuit is likely to delay final approval of the exit plan of American Airlines' parent company, AMR Corp, which had been set for Thursday. It also is almost certain to delay, if not derail, the merger, which the airlines had expected to conclude next month.

The companies view the government's arguments as inconsistent based on the standards by which past mergers in the airlines and other industries were approved, sources said. The companies say a merger of their two smaller carriers would increase competition by adding a viable competitor to two dominant carriers, Delta and United Continental, both products of megamergers in the past few years.

In the airlines' view, the government's case is flawed because its theory of dwindling competition applies to the industry as a whole, but the lawsuit targets only a single merger, one of the sources said.

"It's not just enough to say that we think the airline industry is susceptible to coordination," said the source. "In court, you have to connect the merger to the problem."

The Justice Department said on Tuesday that it had explained its concerns to the airlines and given them a chance to present their views.

"I don't think it was a surprise to the parties," said Bill Baer, the head of the Justice Department Antitrust Division. The department on Wednesday referred back to Baer's remarks.

The government argues in its lawsuit that the merger of US Airways Group and AMR would reduce the number of large U.S. airlines to three, and said past practices showed the major airlines "increasingly prefer tacit coordination over full-throated competition."

Legal experts unconnected to the lawsuit said the government had a strong case and that it would be tough for airlines to show that consumers would not be hurt by further industry consolidation.

"The government has a very good argument" because the cost of air travel has not come down, said David Newman, a partner at the New York law firm Day Pitney, which has represented international airlines.

The airlines will want to show that they can offer better service at lower fares only if they can capture economies of scale through a merger, he said.

Investors remained skittish about the deal. US Airways stock was down 2.2 percent at $16 in afternoon trading on the New York Stock Exchange on Wednesday. AMR shares, which had been down nearly 17 percent, had recovered somewhat to be trading at $2.93 cents down 7 percent. Airline stocks fell about 6 percent after the lawsuit was filed on Tuesday, and were down 0.8 percent on Wednesday.

Reporting by Soyoung Kim, David Ingram and Alwyn Scott; Editing by Alwyn Scott and Leslie Gevirtz

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