By DAVID KOENIG
AP Airlines Writer
DALLAS (AP) -- The merger between American Airlines and US Airways was supposed to cap an era of consolidation that helped the airline industry return to profitability. And it would make American a viable competitor to giants United and Delta.
The government's lawsuit to block the merger has put both of those expectations in doubt.
Airline investors fear that if American can't grow by merging, it will add flights, which will lower airfares and drive down profit margins for everybody in the business. That fear prompted a two-day sell-off in airline stocks.
By combining with US Airways, American would leave bankruptcy protection as the biggest airline in the world. By itself, American would remain No. 3, with a relatively weak position on the competitive East Coast.
And American's employees worry about job security if the merger dies. Plus, they will have to work under executives with whom they have fought for years.
"They are going to be disillusioned and unexcited, and that affects everything right down to customer interface," said Dennis Tajer, an American pilot and spokesman for the Allied Pilots Association.
American's parent, AMR Corp., and US Airways Group Inc. announced their merger in February. They expected a judge to approve it this week, one of the last steps before AMR can emerge from nearly two years in bankruptcy protection. But Tuesday, the U.S. Justice Department and six states sued to block the deal, saying it would hurt competition and drive up prices for consumers.
The CEOs of both airlines have vowed to fight the Justice Department in court. If the airlines win, the lawsuit will just be a speed bump in the merger plan. Or they could negotiate a settlement with the Justice Department -- maybe by giving up coveted takeoff and landing slots at crowded Reagan National Airport outside Washington, D.C.
But if the merger gets scuttled, American and US Airways will be far behind United and Delta, which grew through regulator-approved mergers in the last five years. American will lack a strong presence on the East Coast, and US Airways, currently No. 5 among U.S. carriers, will have no service to Asia.
"US Airways by itself doesn't have the money to go out and create trans-Pacific routes," said Robert Mittelstaedt, dean emeritus of the business school at Arizona State University and a longtime observer of the airline industry. "They'll be at a disadvantage."
Airline profits have improved in recent years as mergers eliminated several major airlines and the survivors limited the supply of airplane seats, driving up fares. If American remains independent and pursues a growth strategy, "the industry's longer-term earnings prospects are jeopardized," J.P. Morgan analyst Jamie Baker wrote in a note to clients. Fitch Ratings said the government's move against the merger was a negative for the industry's credit ratings.
American declined to comment Wednesday on what it would do if the merger is blocked. At a minimum, it would have to file a new reorganization plan with the bankruptcy court, because the merger is the key element of the current plan. It would then have to get its creditors, who were instrumental in steering American toward a merger, to support the changes.
AMR can point to improving financial results since it filed for bankruptcy in November 2011. It has cut labor and other costs, and it posted a $220 million profit in the second quarter, its first profit for the period in six years. An important measure of performance, revenue per mile, hit a record in July.
The merged airline would be run by US Airways CEO Doug Parker. Several top executives at American (and some at US Airways) were not offered jobs at the new company and had planned to leave.
JPMorgan's Baker wondered whether AMR would have to ask dozens of departing managers to pull their resumes off job websites in an attempt to convince investors that a stand-alone American could compete. Those executives haven't left yet -- they were due to get severance deals if they stayed until the merger was completed.