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By Linda Loyd

Philadelphia Inquirer

NEW YORK – A federal bankruptcy judge approved American Airlines’ reorganization plan Thursday, including a merger with US Airways Group, contingent on the combination clearing an antitrust challenge by the U.S. Justice Department.

Judge Sean H. Lane also struck down nearly $20 million in severance payments for Tom Horton, CEO of American’s parent company, AMR Corp. Horton agreed to the move.

Lane said he found the arguments for confirming American’s plan to exit bankruptcy to be persuasive.

American spokesman Mike Trevino called the development an “important milestone” in the airline’s turnaround.

Two weeks ago, when he set Thursday’s hearing date, Lane said he was leaning toward approving the merger that would create the world’s largest airline.

The one remaining issue is an antitrust lawsuit filed Aug. 13 by the Justice Department and several state attorneys general, seeking to block the proposed merger.

Lane on Thursday said the bankruptcy confirmation and the lawsuit “can proceed concurrently, rather than wait.”

“The broad support for this plan could be put at risk if the confirmation is delayed,” he said at the outset of the hearing in New York.

Lawyers for AMR Corp., its unsecured creditors committee and American’s labor unions had urged the judge to confirm the plan, ending American’s nearly two years under bankruptcy protection. The merger with US Airways is a key part of the plan.

The antitrust case will go to trial Nov. 25. If the merger is disallowed on antitrust grounds, or if a settlement changes the terms, American’s plan to exit Chapter 11 bankruptcy would go back to Lane. “No merger will occur unless and until there is regulatory approval,” the judge said.

Lawyers for American and US Airways have vowed to fight the Justice Department lawsuit. They argued it should not prevent Lane from approving AMR’s restructuring plan.

The judge struck down the severance award for Horton, who would serve as chairman of the new airline, to be called American, before he leaves the company next summer.

The U.S. Trustee’s office had contended the payment violates bankruptcy law limits designed to prevent executives from getting big payouts that are not available to regular employees.

AMR attorney Stephen Karotkin told the judge, “Mr. Horton has asked me to tell you he will promptly ask the AMR board of directors to remove his compensation agreement and allow the plan to proceed.”

The Justice Department has argued that the merger would reduce competition and increase fares and fees, and that the combined carrier would have a monopoly on too many flights at certain airports, in particular at Washington Reagan National Airport, where the new American would control 69 percent of the slots, which are takeoff and landing rights.

Joshua L. Schank, president and CEO of the Eno Center for Transportation, a Washington think tank, wrote in a newsletter Tuesday that U.S. airline passengers enjoy “historically low” airfares and that airlines operate “on thin profit margins compared to other industries.”

“It is hard to imagine that after this merger, the big four remaining airlines would suddenly be able to raise fares and dramatically increase those profit margins. It is possible that some specific markets could face a lack of competition, but why not deal with those on a case-by-case basis?” Schank wrote.

At the conclusion of Thursday’s hearing, Laura Glading, a member of the union representing American’s flight attendants who is also on the creditors committee, said: “One small victory - one more to go.”