A new research paper out of the University of Virginia suggests that airlines are talking about ‘capacity discipline’ in earnings calls to signal to each other a willingness to reduce capacity. When they do that, capacity falls. And that’s a form of collusion out in the open.
It’s a more public version, perhaps, of the wink and nod of communicating through fare basis codes. I always liked these letter and number codes, such as “OVALZNN3,” when they might include “FU” for a sale fare running out of a competitor’s hub.
There’s no question that airlines are signaling both their intention to restrict capacity and certainly a hope that others do too. Lower capacity overall should raise prices, all other things equal. And there’s little doubt that investors who frequently own stakes in all the airlines don’t want carriers to compete.
However this hardly seems 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. And though Crandall consented to some restrictions, there really wasn’t much even here because they never actually agreed to raise prices.
And of course it’s difficult to argue there’s any sort of collusion or monopoly in the face of falling prices today. Besides, if earnings calls are being used to limit capacity someone needs to tell United’s Scott Kirby that.
He’s been talking for some time about growing capacity in his calls.
Investors punish airlines that are growing capacity because they believe it will reduce long-term profitability.
If you want to go looking for collusion between the airlines it could be worth starting with the usual conspiracy theories about Conquistadores del Cielo, the club and regular private meeting of airline executives. And indeed the first discussion about a potential American Airlines – US Airways merger reportedly happened there…