WASHINGTON — The Department of Transportation today rejected the proposed $676-million merger of Texas Air Corp. and Eastern Airlines, saying the acquisition would adversely affect competition in the busy Northeast air shuttle market.
The department earlier had indicated approval of the merger, which would have created the nation's largest airline holding company, as long as Texas Air Corp. took action allowing Pan American World Airways to become a viable competitor to Eastern in the Washington-New York-Boston shuttle market.
But the department said today it does not believe that the solution proposed by Texas Air to solve the competitive problems in the northeast was sufficient to allow the merger to go through.
The department, leaving open the possibility of Texas Air submitting a new merger proposal, said such a proposal would be examined and probably approved if the Northeast competition problems were resolved.
The merger of Eastern with Texas Air Corp., which already owns New York Air and Continental Airlines, would have created the country's largest airline holding company, slightly larger than United Airlines.
Last July, the department tentatively approved the merger.
At that time, the department cited potential competitive problems in the shuttle corridor as a continued area of concern, since Eastern competes head-on in that market with New York Air.
But the department indicated then that Texas Air's proposed sale of landing and takeoff slots at New York and Washington to Pan Am for $65 million appeared to assure continued competition along the corridor.
Pan Am has planned to begin hourly shuttle service in competition with the Eastern and New York Air shuttles in October but in recent weeks informed the government that it needed additional takeoff and landing authority at New York's LaGuardia Airport in order to effectively compete.
In rejecting the Texas Air-Eastern merger, the department said the deal would "eliminate effective competition" in the corridor because of Pan Am's apparent inability to obtain enough takeoff and landing slots at LaGuardia.
"Effective competition requires hourly service, especially at peak hours," the department said.
"Texas Air and Eastern may file a new application for approval of the acquisition," the department said, and it would be considered expeditiously "with the focus on the proposed competitive remedy issue."
Texas Air agreed in February to purchase financially ailing Eastern in a $600-million deal and later improved its offer to make the takeover worth $675 million.
At the time of the initial bid, Eastern ranked third among U.S. airlines in revenue-passenger miles--behind American and United--but was first in total passengers served.