Fitch: DOJ Antitrust Move a Credit Negative for Airline Industry

Today's move by the U.S. Department of Justice (DOJ) and six state attorney generals to block the proposed merger between US Airways and American Airlines (AMR) could effectively halt near-term airline industry consolidation and represents a modest credit negative for U.S. carriers, according to Fitch Ratings. Many of the improvements in U.S. airline credit profiles over the last five years have been driven by a more sustainable industry structure, with a smaller number of stronger carriers benefiting from disciplined capacity management practices, higher passenger yields and better revenue fundamentals. The DOJ complaint, which specifically identifies potential injury to consumers resulting from reduced competition and higher fares, may indicate that further consolidation-related improvements in airline operating profiles may not be achieved, at least in the near term. Our Positive Rating Outlook on US Airways ('B+' Issuer Default Rating) in large part reflects the potential credit benefits of the American merger if the deal closed under terms similar to those proposed. Any significant scaling back of merger-related benefits, possibly linked to today's DOJ action, would likely lead us to revisit US Airways' Outlook. The DOJ's decision may also have a negative impact on AMR's post emergence credit profile. Regardless of whether the merger is ultimately completed, AMR will emerge with a lower cost structure and a reduction in total debt. These benefits can be seen in the company's improved operating results through the first half of the year. However, without the benefits of a combined US Airways/AMR route structure, AMR will remain at a competitive disadvantage to its larger rivals. Remarks by DOJ officials following the filing of the antitrust complaint in a federal district court appear to offer limited room for compromise through revised merger terms or potential asset sales that might ease the government's market concentration concerns. The scale of the complaint, identifying potential harm to U.S. consumers broadly rather than in specific markets, as seen in the 2010 merger between United and Continental, suggests that changes in the merger plan's scale and scope may not be sufficient to win approval. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.