By DAVID KOENIG
AP Airlines Writer
DALLAS (AP) -- American Airlines and US Airways expected to spend this week cruising toward completion of a merger that would create the world's biggest airline.
Instead, they were stunned Tuesday when the federal government and six states sued to block the deal, saying it would hurt competition and cost consumers hundreds of millions of dollars a year in higher fares and extra fees.
Antitrust regulators had done little to interfere with other big airline mergers in the past five years, including Delta-Northwest and United-Continental. So, they were not expected to stand in the way of American and US Airways. But this latest deal would leave four airlines controlling more than 80 percent of the U.S. air-travel market.
"By further reducing the number of legacy airlines and aligning the economic incentives of those that remain, the merger of US Airways and American would make it easier for the remaining airlines to cooperate, rather than compete, on price and service," the lawsuit said.
The Justice Department turned the words of US Airways leaders against them. The 56-page complaint filed in federal district court in Washington, D.C., was peppered with quotes from internal emails, investor presentations and public comments in which top executives noted that previous mergers had helped lead to higher fares and higher fees to check a bag or change a ticket.
Shares of both companies plunged, and executives vowed to challenge the lawsuit.
"We will fight them," declared US Airways CEO Doug Parker, who would run the combined company.
Paul Denis, a Washington antitrust lawyer hired by US Airways, said Tuesday would be the Justice Department's "best day" in the matter.
"They got to hold their press conference. Now they've got to try their case in court," he said.
Tom Horton, CEO of American Airlines parent AMR Corp., said the companies had spent months trying to convince the Justice Department that the merger would help customers and boost competition by creating a tough new rival to larger airlines United and Delta.
AMR has been operating under bankruptcy protection since November 2011. It has cut labor costs, renegotiated aircraft and other leases and earned $220 million profit in the second quarter -- its first profit in the April-to-June period in six years. It is forging ahead with an order for hundreds of new airplanes.
The company had expected the highlight of this week to be a Thursday hearing in which a federal bankruptcy court judge would approve its reorganization plan, including the merger. That would be one of the final steps before AMR could exit Chapter 11 protection by the end of September.
The hearing is likely to go ahead, and the judge could approve AMR's turnaround plan on the condition that the Justice Department's opposition is resolved. But AMR probably won't come out of bankruptcy for at least a few more months while it fights the lawsuit, officials at the companies said.
American and US Airways had been so confident of a quick merger that they had already named executives for the combined company, which was to be based at AMR's headquarters in Fort Worth and called American Airlines Group Inc. Executives at Tempe, Ariz.-based US Airways have been house-hunting in the Dallas-Fort Worth area.
The lawsuit may put some of those real estate deals on hold. Daniel McKenzie, an analyst for Buckingham Research Group, said the merger went from a 99-percent probability to around 50 percent.
It's possible that the lawsuit will never go to trial. Analysts said the Justice Department could be seeking more time and leverage to squeeze concessions from the companies, such as giving up some of their precious takeoff and landing slots at Reagan National Airport, which would create room for new competitors at the busy airport across the Potomac River from Washington.
At a news conference, Assistant Attorney General Bill Baer said the Justice Department was always prepared to discuss a settlement but that it preferred this time to seek an injunction to block the deal.
"As we look at the market today, it's not functioning as competitively as it ought to be," Baer said, and "if this deal goes through, it's going to be much worse."
The Justice Department, which was joined in the lawsuit by the attorneys general of six states and the District of Columbia, said the merger would cause "substantial harm" to consumers by leading to higher fares and fees.
Government lawyers cited examples in which US Airways operates one-stop flights that undercut nonstop flights by American and other rivals by hundreds of dollars. After the merger, they said, US Airways would drop that practice, pushing fares higher.
The lawsuit caught many observers by surprise. In the last five years, antitrust regulators in the Bush administration had allowed Delta Air Lines to buy Northwest, while the Obama administration permitted United Airlines to combine with Continental, and Southwest Airlines to buy AirTran. The nation had gone from nine major carriers in 2005 to five, and the Justice Department hadn't opposed an airline merger since United's 2001 attempt to buy US Airways, a deal that was later abandoned.
"They 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.
Consumer advocates cheered the lawsuit.
"This is the best news that consumers could have possibly gotten," said Charlie Leocha, director of the Consumer Travel Alliance and member of a panel that advises the government on travel-consumer issues.
Last year, business and leisure travelers spent more than $70 billion on airfare in the United States.
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, but all three would be similar in size.
The merger was expected to boost American's presence along the East Coast, where US Airways has strongholds in Washington, Philadelphia and Charlotte. It would also increase American's route network to help the airline win lucrative corporate-travel accounts.
When it was proposed, the deal was valued at $11 billion. Last week, AMR creditors said that the rising price of shares of US Airways, whose investors would get 28 percent of the new company, lifted the value to $14 billion.
On news of the lawsuit, US Airways shares fell $2.46, or 13.1 percent, to close at $16.36. AMR shares were taken off the New York Stock Exchange shortly after the company filed for bankruptcy protection but still trade over the counter. They were down $2.64, or 45.4 percent, to $3.17.
Video: FOX 10's Troy Hayden speaks with aviation attorney Timothy McCulloch about the Justice Department's move.