Scott Mayerowitz and David Koenig broke the story that the Department of Justice is demanding copies of communications between major airlines as part of an investigation into unlawful collusion to limit capacity and increase airfares.
The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to each other how quickly they would add new flights, routes and extra seats.
A letter received Tuesday by major U.S. carriers demands copies of all communications the airlines had with each other, Wall Street analysts and major shareholders about their plans for passenger-carrying capacity.
As far as which airlines are targeted,
American Airlines, Delta Air Lines, Southwest Airlines and United Airlines all said they received a letter and are complying. Several smaller carriers, including JetBlue Airways and Frontier Airlines, said they had not been contacted by the government.
At this point we don’t know what evidence the Department of Justice has, or what basis there is to suspect an actual conspiracy amongst the major airlines to slow down airline growth.
The CEOs of United, American, and Delta All… Talking to Each Other
In the face of the double whammy of recession (which kept people out of the air) and high fuel prices, the airlines developed capacity discipline as a means of survival. It’s conceivable there were unlawful communications or signaling along the way and no doubt the Department of Justice will find that.
For pure schadenfreude one almost hopes to find a back and forth like when American’s Bob Crandall and Braniff’s Howard Putman spoke by phone about their competition over a variety of routes and then…
Mr. Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here and pound the (expletive) out of each other and neither one of us making a (expletive) dime. I mean, you know, goddamn, what the (expletive) is the point of it?
Mr. Putnam: Nobody asked American to serve Harlingen, nobody asked American to serve Kansas City, and there were low fares in there, you know, before. So. …But if you’re going to overlay every route of American’s on top of, over, on top of every route that Braniff has – I can’t just sit here and allow you to bury us without giving our best effort.
Mr. Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years.
Mr. Putnam: Do you have a suggestion for me?
Mr. Crandall: Yes, I have a suggestion for you. Raise your goddamn fares 20 percent. I’ll raise mine the next morning. You’ll make more money and I will, too.
Mr. Putnam: We can’t talk about pricing.
Mr. Crandall: Oh [expletive], Howard. We can talk about any goddamn thing we want to talk about.
Putman was taping the call and turned it over to the DOJ…
To be clear nothing has been filed by the Justice Department, this appears to be the earliest stages of investigation.
I saw one report suggesting they were looking back at a time when airfares were dropping (2008-2009), but the AP reporters who broke the story pinpoint January 2010 as the date where DOJ wants details of each airline’s capacity.
Here are inflation-adjusted average airfares between 2008 and 2014 from the Department of Transportation’s Bureau of Transportation Statistics.
Indeed, it was 2011 before airfares recovered to the same level they were at in 2008. Average fares fell 10% between 2008 and 2009 and at most from January 2010 forward merely began returning to trend.
It’s clear that the capacity discipline that dominated the industry over the past 5 years has begun to dissipate, so the timing is ironic.
- With Southwest building up to 180 flights a day at Love Field, they’re killing American’s Dallas yields. (In addition, “Southwest said at an industry event that the carrier would increase passenger-carrying capacity by 7 to 8 percent, an increase over an earlier target.”)
- There’s also increased intensive competition on the only true premium domestic routes, New York – Los Angeles and San Francisco.
- United plans to increase capacity on several transatlantic routes removing 757s in favor of larger aircraft.
- American has been adding routes to Asia. And Delta and Alaska are duking it out in a fight to the death in Seattle.
I’m not saying there aren’t violations of law. That remains to be seen. Indeed, my starting point is an assumption that there are almost always anti-trust violations. Anti-trust is something you almost can’t not violate. If prices are too high, it’s indicative of market power. If prices stay the same it’s collusion. And if they’re too low it’s predatory pricing.
It would sure be rich, though, if the US government were to take action against Emirates, Etihad, and Qatar for putting too much capacity into US markets at the same time the government is investigating the major US airlines for withholding capacity.
But considering that the government signed off on the major US airline mergers, and granted anti-trust immunity to a variety of airline joint ventures, absent a smoking gun email any claim by the federal government that it’s “shocked, shocked to find” that there’s less competition in the airline industry is severely lacking in credibility.
Ultimately while airfares have been going up they’re still below where they were (in inflation adjusted terms) after 9/11. If we’re unhappy with that, it seems far more plausible to blame less competition (solution: eliminate foreign ownership restrictions on US airlines which keep out competitors) than it is to blame a conspiracy of airline heads who would have had every incentive to come to a deal and then cheat on that deal (cartels are notoriously hard to enforce).