Airline Merger Canceled

United Airlines and US Airways announced Friday they called off their merger after the Justice Department said it would sue to block the acquisition.

UAL Corp., the parent of United Airlines, agreed to pay the $50 million termination fee provided for in the merger agreement.

The Justice Department said Friday the proposed acquisition, which would have been the largest-ever airline purchase, would have reduced competition, raised fares and harmed consumers.

"UAL Corporation intends to work with US Airways to determine the appropriate steps that need to be taken now that US Airways has acknowledged that the merger with United will not go forward," United said in a statement.

US Airways said it was disappointed that the deal was called off.

"We nevertheless must respect the Justice Department's decision," US Airways said in a statement.

United, the world's second-largest airline, tried to end the deal in early July. United felt it would not win regulatory approval and had more economic and labor obstacles to overcome than when it proposed the merger last year.

Vacationing families, corporations and the federal government, which spends millions on air travel, would pay the price if the merger were allowed to go forward, federal government officials said.

"While mergers can further competition, this one does not," said Attorney General John Ashcroft. "If this acquisition were allowed to proceed, millions of consumers . . . would have little choice but to pay higher fares and accept lower quality air service."

Lawmakers on Capitol Hill who had opposed the merger applauded the Justice Department's decision.

The chairman and ranking member of a Senate antitrust subcommittee, which held hearings on the deal, said it was the right move. "We have been very concerned about the likely negative effects of this deal on competition and consumers," said a statement issued by Sens. Herb Kohl, D-Wis., and Mike DeWine, R-Ohio. "We are gratified that they have now decided to move to block the deal."

Chicago-based United and Arlington, Va.-based US Airways are the second and sixth largest U.S. airlines. The Justice Department said the merger would give United a monopoly or duopoly on nonstop service on over 30 routes and substantially limit competition on numerous other routes.

Consumer choice in airlines would have been severely restricted in hub-to-hub nonstop markets like Philadelphia-Los Angeles, San Francisco-Denver and Pittsburgh-Washington, where US Airways and United are each other's only nonstop competitor, the department said.

The Washington and Baltimore markets would see reduced competition, the department said, and competition also would suffer on the East Coast because United and US Airways are the only two airlines in many markets offering connecting service between cities up and down the coast.

Consumers would have fewer options on international routes, and businesses and government agencies, which give airlins lots of business in exchange for discounts, would have one less airline to choose from, the government said.

United and US Airways had sought to allay regulators' antitrust concerns with plans for a new airline partly owned by American Airlines to take over US Airways flights out of Washington and by letting American take more than half of US Airways East Coast shuttles.

But regulators said the manufactured competition could not replace true market-driven competition.

American said it won't proceed with plans to assume US Airways flights if the merger did not go through.

The decision was also a blow for a proposed new airline called DC Air, created by Black Entertainment Television founder Robert L. Johnson.

Shares of UAL closed down 29 cents to $33.63 on the New York Stock Exchange, where shares of US Airways fell 89 cents, or 5 percent, to $17.26.

US Airways has said a merger with No. 2 United was its best chance to remain profitable in an increasingly competitive industry. United, meanwhile, has been surpassed by American Airlines, buffeted by labor and operational problems and lost nearly $1 billion since the deal was proposed.

With a formal rejection of the merger, "United can try to get back to trying to fix their airline and cut back the losses they're experiencing, which are much larger than the rest of the industry's," said Ray Neidl, a New York-based airline analyst for ABN Amro.

"Meanwhile, US Air's going to have to find another deal or sell their airline off in pieces," said Neidl.

© MMI The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed