And just like that, American Airlines’ easy path out of Chapter 11 has hit a dead end.
The Justice Department â€" along with the attorneys general of six states, interestingly, mostly from “red†states that often seem to have trouble working with the federal government â€" has sued to block the merger of American and US Airways.
The merger was the centerpiece of American’s reorganization plan. A federal bankruptcy judge had planned a hearing in two days related to the plan, in a step toward allowing a vote on the deal. I suspect that hearing will be either delayed or converted into a forum for explaining “what happens now.â€
The department’s news release notes that American is operating in bankruptcy. “Absent the merger, American is likely to exit bankruptcy as a vigorous competitor, with strong incentives to grow to better compete with Delta and United,†the news release said. “American recently made the largest aircraft order in industry history, and its post-bankruptcy standalone plan called for increasing both the number of flights and the number of destinations served by those flights at each of its hubs.â€
In short, Justice Department wants American to go back to its original idea of reorganizing on a stand-alone basis.
This is going to have real implications for the creditors and shareholders of American, who will now probably get less of their money back as American decides it needs a much stronger balance sheet to survive alone. Indeed, many of the American bondholders should probably expect to become involuntary shareholders in the reorganized airline.
After all, it seems doubtful that American can wait in Chapter 11 until this antitrust case is resolved. Unless the case is quickly settled, American is pretty much going to have to put off the merger for now.
And maybe American can reinvent itself as a kind of specialty carrier, or a largely domestic operation like JetBlue. But otherwise, one has to wonder if the carrier can survive as is in a world now of international behemoths like United Airlines, International Airlines Group (owner of British Airways and Iberia), Lufthansa Group and Emirates.
I’m not an antitrust expert, but imposing the antimonopoly norm on a market that is already somewhat warped by things like prohibitions on cross-border mergers strikes me as a bit suspect.
And the Justice Department has to worry that without the merger, American will be the kind of “vigorous competitor†that Eastern Airlines and Pan Am now are.
