Updated: August 15, 2013 11:17AM
NEW YORK — A judge asked American Airlines’ lawyers to explain why he should approve the company’s plan to merge with US Airways and exit bankruptcy protection while the merger is being challenged by the federal government.
Until this week, it was expected that federal Bankruptcy Judge Sean Lane would rule Thursday on American’s turnaround plan, paving the way for a merger that would make American the world’s biggest airline.
But the U.S. Justice Department upset American’s strategy Tuesday by filing a lawsuit against the merger, saying that it would hurt competition and increase prices for consumers by leaving four airlines in control of more than 80 percent of the U.S. air-travel market. That threatened to delay or scuttle the deal.
At a hearing in New York, Lane asked lawyers for American parent AMR Corp. and other parties to submit written briefs on whether he can do anything before the Justice Department lawsuit is resolved.
Judge Lane said he had “lingering doubts” about approving the plan while the merger is being challenged.
One of AMR’s lawyers, Stephen Karotkin, said that the company planned to fight the lawsuit. He said that the lawsuit shouldn’t stop the judge from approving AMR’s reorganization plan.
The hearing drew a huge crowd. Lawyers packed the courtroom’s five rows and 30 more people stood along the walls. An extra courtroom and conference room were setup to handle the overflow.
The judge was expected to consider objections to AMR’s reorganization plan, including a Justice Department official’s protest against a proposed $20 million severance payment for AMR CEO Tom Horton.
Before the Justice Department jumped in, Thursday’s hearing was expected to be one of the final steps before AMR closed the merger and ended nearly two years under bankruptcy protection.
The merger was supposed to cap an era of consolidation that has helped the airline industry limit seats, raise prices and return to profitability. Although it would leave one fewer airline, American and US Airways argued that their merger would increase competition by creating a stronger rival to industry leaders United Airlines and Delta Air Lines.