The federal government and six states, including Tennessee, are challenging the proposed merger of American Airlines and US Airways, saying it would cause "substantial harm" to consumers by leading to higher fares and fees.
The U.S. Justice Department and the attorneys general of six states filed a lawsuit to block the merger Tuesday in federal court in Washington, D.C.
The government's challenge threatens to quash a deal that would create the world's largest airline by passenger miles. The airlines could challenge the government in court, or possibly agree to concessions that would convince regulators to approve the merger.
The lawsuit caught many observers by surprise. In the last five years, antitrust regulators had allowed three other major airline mergers to go ahead, leaving five airlines in control of about 80 percent of domestic market. But the government argued that this merger would hurt consumers around the country by eliminating a competitor on more than 1,000 routes.
If the merger leads to even small increases in ticket prices or airline fees, it would cost American consumers hundreds of millions of dollars each year, the department said.
In Tennessee, Attorney General Bob Cooper said the merger would reduce the current number of the larger "legacy" airlines from four to three - U.S. Airways/American, United/Continental and Delta/Northwest - and the number of major airlines to five to four. In fact, the three remaining legacy airlines and Southwest would account for over 80 percent of domestic travel, making fare and fee increases easier to achieve and even more profitable for the airlines than they already are.
American and US Airways compete directly on thousands of heavily traveled nonstop and connecting routes, including many to and from Tennessee.
"Studies show that Tennessee's four major airports in Nashville, Memphis, Knoxville and Chattanooga will experience fewer flights to certain destinations and travelers will pay more for remaining flights, " Cooper said. "If this merger is completed, consumers will face decreased competition and increased prices because airlines can cut service and raise prices with less fear of competitive responses from rivals."
Shares of both airlines plunged on news of the lawsuit. US Airways Group Inc. shares fell $1.66, or 8.8 percent, to $17.16 in midday trading. AMR shares were taken off the New York Stock Exchange shortly after the company filed for bankruptcy protection in late 2011 but still trade over the counter; they were down $2.43, or 41.8 percent, to $3.38.
Neither US Airways Group Inc. nor American Airlines parent AMR Corp. commented immediately on the lawsuit.
Last year, business and leisure travelers spent more than $70 billion on airfare in the United States. Consumer advocates cheered the lawsuit.
"This is the best news that consumers could have possible gotten," said Charlie Leocha, director of the Consumer Travel Alliance and member of a panel that advises the government on travel-consumer issues. He said that recent mergers had led to higher fares and fewer flight choices and this one would have the same result.
The lawsuit will not necessarily stop the deal. The airlines could fight back in court, but it might not even get that far.
Analysts said that the Justice Department, which has been talking to the companies for months, could be seeking more time and leverage to squeeze out some concessions. Many experts had expected regulators to pressure American and US Airways into giving up some takeoff and landing slots at Reagan National Airport, allowing for new competitors at the busy airport, which is just across the Potomac River from downtown Washington.
Even outside the two companies, many in the airline industry had expected that the deal would easily win regulatory approval like Delta's purchase of Northwest, United's combination with Continental, and Southwest' acquisition of AirTran.
Justice Department officials "didn't have any problem with the Northwest-Delta merger; didn't have any problem with United-Continental. Where did they think it was going to go?" said Robert Mann, an airline consultant who once worked at American.
At the least, the lawsuit could delay AMR's exit from bankruptcy and make a merger slightly less likely, said Daniel McKenzie, an analyst for Buckingham Research Group.
AMR and US Airways announced in February that they planned to merge into a carrier with 6,700 daily flights and annual revenue of roughly $40 billion. By passenger traffic, it would slightly eclipse United Airlines and Delta Air Lines. Along with Southwest Airlines, the deal would leave four airlines dominating the U.S. market.
Mergers have helped the industry limit seats, push fares higher and return to profitability. AMR and US Airways officials had said their merger would help consumers by creating a tougher competitor for United and Delta.
AMR has cut labor costs and debt since it filed for bankruptcy protection. Pilots from both airlines have agreed on steps that should make it easier to combine their groups under a single labor contract, a big hurdle in many airline mergers.
A federal bankruptcy judge in New York was scheduled to hold a hearing Thursday to consider approving AMR's reorganization plan - one of the last steps before the merger would be completed. The hearing was expected to go ahead. The merger has been approved overwhelmingly by AMR creditors and shareholders and by US Airways shareholders.
In its lawsuit, the Justice Department was joined by the attorneys general from American's home state of Texas, US Airways' home state of Arizona, plus Florida, Virginia, Pennsylvania, Tennessee and the District of Columbia.