NEW YORK (CNNfn) - United Airlines parent UAL Corp. and US Airways Group Inc. said Friday they have terminated their merger agreement after the U.S. Justice Department said it would move to block the deal.|
The Justice Department said the proposed $4.3 billion deal, which would have been the largest in the industry, would hurt competition and raise airfares.
UAL, which wanted to buy US Airways, said it will pay the $50 million termination fee provided for in the merger agreement.
Earlier in the day, the Justice Department said that on more than 30 routes, the combined airline would have a monopoly or duopoly on nonstop service, and that it would substantially limit competition on other routes. The department estimated that fliers now spend $5.6 billion annually flying on those routes, an amount equal to about 20 percent of the two carriers' combined revenue in 2000.
United is the No. 1 airline in the United States. US Airways ranks sixth.
"A vigorously competitive airline industry is vital to our economy and effective antitrust enforcement is important to preserving the benefits of competition in a deregulated airline industry," said a statement from Attorney General John Ashcroft. "If this acquisition were allowed to proceed, millions of consumers – business, government and families – would have little choice but to pay higher fares and accept lower quality air service."
Justice said it expects 12 states to join a suit it plans to block the deal.
"While disappointed that the merger with United will not go forward, we nevertheless must respect the Justice Department's decision," US Airways (U: down $0.89 to $17.26, Research, Estimates) said in a statement Friday "With today's announcement by the Department of Justice, US Airways and its employees will be moving forward with a plan to address the competitive environment. Details of that plan will be announced soon."
Similarly, UAL Corp. (UAL: down $0.29 to $33.63, Research, Estimates), which earlier this month said it wanted to get out of the proposed deal because of regulators' objections, said it plans to focus on improving its business internally.
"UAL ... will continue to focus on its core business plan of restoring profitability, providing its customers with the highest levels of customer service and reliability and completing outstanding labor contracts," the company said in a statement.
When UAL last month said it wanted to back out of the proposed deal, US Airways did not. As a result of the disagreement, the two companies joined to ask the department for a final ruling.
First announced in May 2000, the deal would have been worth $60 a share for US Airways shareholders. But it drew opposition from Congress and consumer groups almost from the start, and US Airways shares have traded well below that level for months, suggesting that investors doubted the deal would be approved.
The end of the deal leaves both airlines struggling with where to go next, although it could be better news for United than for US Airways.
"Regarding United, company management can now more intently focus on the airline, which has been both an operational and financial underperformer since the deal was announced," said Merrill Lynch analyst Michael Linenberg. "This should be generally positive for [United's] stock price. US Airways, on the other hand, faces a difficult future."
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Other beneficiaries of the merger cancellation, Linenberg said, will be Delta Air Lines Inc. (DAL: down $0.65 to $44.35, Research, Estimates) and AMR Corp. (AMR: down $1.01 to $34.80, Research, Estimates), which owns American Airlines. Delta now won't have to worry about a much bigger East-coast competitor, while AMR will become the world's biggest airline when it completes the integration of recently purchased Trans World Airlines into American.
United, which will lose its place as the world's biggest airline, has struggled with the worst losses in a period that has seen most airlines losing money.
US Airways executives said throughout much of the last year that it was not well positioned to compete as an independent carrier in the current airline market. But when trouble with the takeover was announced they issued a statement saying they did not want to break up the carrier.