Federal Judge Approves American Airlines Bankruptcy Plan

A federal judge has tentatively approved the plan submitted by American Airlines to emerge from bankruptcy protection and merge with US Airways.

Judge Sean Lane ruled on Thursday that American Airlines’ plan to restructure and combine its operations with those of US Airways is an acceptable one, so long as the airline addresses antitrust concerns of the Department of Justice.

A majority of American Airlines’ creditors and labor unions had voiced their support of the restructuring plan and merger.  Their approval was a critical consideration, since the restructuring aspects of the plan reduced the airline’s payments to many of those creditors and altered agreements with the labor unions.

With the approval of the airline’s creditors and unions, many considered Judge Lane’s acceptance of the plan all but a given.  However, some believed Judge Lane might withhold his ruling on the plan until the airlines addressed the lawsuit filed by the Department of Justice to block the merger.

The Department of Justice filed a lawsuit against American Airlines and US Airways in August because they believe the merger would limit competition in a number of markets served by the airline industry.  The Department of Justice believes the lack of competition would allow the remaining airlines to raise ticket prices in a manner that would be unfair to airline passengers.

Judge Lane accepted the airlines’ argument that the matters of the bankruptcy plan and Department of Justice could be considered independent of one another.  Judge Lane was therefore willing to rule that on its own the bankruptcy plan put forth by American Airlines was a reasonable one.

The only facet of the bankruptcy plan that Judge Lane did not approve was a severance payout of over $20 million to American Airlines’ chairman, Thomas Horton.  Judge Lane noted payment of such a significant sum of money was not in line with the goals of bankruptcy law.  However, once American Airlines emerges from bankruptcy, it and US Airways will be free to pay Horton whatever sum it deems reasonable for his services.

American Airlines filed for Chapter 11 bankruptcy protection in November 2011.  Although American Airlines initially sought to continue operations as its own airline, the nature of competition in the airline industry led American to realize they needed to merge with US Airways in order to stay competitive with Delta Airlines and United Airlines.

Mergers such as the one proposed by American Airlines and US Airways allow the airlines to realize significant cost savings, as expenses of certain functions maintained by the separate airlines can be streamlined when the airlines are combined.

American Airlines’ trial concerning the Department of Justice’s lawsuit is scheduled to begin in November.  Details of any settlement with the Department of Justice have not yet been ironed out.

However, experts believe American Airlines and US Airways may have to reduce the number of routes they serve and gates they hold at various airports in order to satisfy the Department of Justice’s concerns.  Giving up routes and gates would allow other airlines to service those areas, ensuring sufficient competition remains in place and ticket prices cannot be inflated.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.