Updated from 12:13 p.m. Eastern Time with additional data and commentary throughout.
NEW YORK ( TheStreet) -- If the Department of Justice's lawsuit to block the proposed merger between American Airlines (AAMRQ.PK) and U.S. Airways (LCC) plays out similarly to the regulator's opposition to AT&T's (T) failed merger with T-Mobile (TMUS), investors in the airline industry might want to prepare for a string of consolidation among smaller carriers.
When the DoJ blocked AT&T's acquisition of T-Mobile on anti-trust grounds, it set off a 18-month whirlwind of consolidation among laggard wireless players that included the takeover of Sprint (S), the merger of T-Mobile with MetroPCS and most recently, AT&T's proposed acquisition of Leap Wireless (LEAP).
In barring the AT&T/T-Mobile combination, the DoJ voiced a clear opinion that it wanted three-to-four viable nationwide wireless carriers, prompting a consolidation among regional players and cash strapped networks such as Clearwire (CLWR). Investors, most notably, John Paulson of hedge fund Paulson & Co. took the failed AT&T and T-Mobile merger as reason to accumulate large positions in potential takeout targets at battered down share prices.The same scenario could play out in the airline industry now that the DoJ has voiced strong objections to American's proposed merger with U.S. Airways, which would have created the world's largest airline. The proposed deal comes on the heels of significant consolidation among carriers that includes the merger of United and Continental, in addition to Delta (DAL) and Northwest and would result in four airlines controlling more than 80% of the United States commercial air travel market, according to the DoJ. According to the antitrust regulator, the proposed $11 billion merger between US Airways and American would substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service. Attorneys General in six states, including Texas, where American Airlines is headquartered; Arizona, where US Airways is headquartered; Florida; the District of Columbia; Pennsylvania; Tennessee; and Virginia also oppose the merger. "Today's action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace," U.S. Attorney General Eric Holder, said in a statement. Major airlines have raised fares, imposed new and higher fees and reduced service, and the DoJ indicated it expected further increases were American and U.S. Airways to merge. Stiff state and federal opposition to the creation of what would be a new air travel behemoth to supplant UnitedContinental (UAL - Get Report), however, doesn't mean consolidation can't happen in the industry, as carriers try to regain pricing power in a nascent U.S. economic recovery. American and U.S. Airways could divest some overlapping routes and landing rights, especially in Washington's Reagan National Airport, in a possible antitrust remedy that could create opportunity for other carriers. American and U.S. Airways said they will continue to press for the merger in court. "