Four big mergers have condensed the industry. The Justice Department, which approved them all, now is investigating whether the remaining players are coordinating capacity to keep fares higher.
Photo: AP
Photo: AP

Airlines: We’re not colluding, we’re competing!

Justice Department probe raises familiar issues; we break them down.

When the Justice Department announced this month that is investigating the nation’s four biggest airlines for collusion, many frequent fliers replied with an announcement of their own: “Ya think?”

But collusion to some is competition to others: the similar fares, the baggage fees, the cheap food — all exist not because the airlines are working together but because they’re working against each other. That’s certainly what the airlines say, and the Justice Department could have a difficult time making distinctions between illegal activity and standard business practices.

At the heart of the matter is an important question in today’s economy: Amid the crowded planes and the ups and downs of air fares, how much control do consumers really have? Does demand from travelers influence the market as it should, or are airlines collectively holding consumers under their thumb?

The answers lie in the byzantine ways in which the industry works.

Have you ever heard of “capacity discipline?” It’s a big reason planes are full, fares are high and airlines are making billions in profit.

The term has gained currency in recent years, emphasizing the importance airlines and their shareholders place on keeping a lid on the amount of flying they do.

Their aim: To prevent an oversupply of seats that could drive fares down and cause a drop in profit margins. They are driven in part by a deep-seated fear: in the most extreme cases, fare wars can turn into an industry death match in which the weakest airlines fall.

The airline industry’s focus on capacity discipline, and its mantra-like repetition of the concept at industry meetings and on public conference calls with investors, has caught the attention of politicians, federal investigators and class-action plaintiffs’ attorneys. The result: the Department of Justice’s investigation of United, American, Southwest and Delta, plus a raft of proposed class-action lawsuits across the country.

The moves airlines make to limit flights to keep fares high are one point of focus in a swirl of issues that consumer advocates and antitrust attorneys say raise concerns about airline behavior:

FARE INCREASES

A fare increase usually only sticks if multiple airlines go along with it. Typically, one airline raises prices and waits to see whether others will follow. If more carriers also raise their fares, the fare hike is deemed a success. If not, it becomes a failure and the instigator rolls its fares back.

Last year saw 21 broad fare hike attempts, according to FareCompare.com, and all but five failed. This year, amid lower oil prices, FareCompare recorded far fewer attempts.

There are two types of collusion, said Diana Moss, president of the American Antitrust Institute — explicit and tacit.

With industry air fare hikes, “there’s this following behavior…. It will be up to the DOJ to determine if the airlines have engaged in explicit collusion to keep capacity tight and fares high,” Moss said.

Consumer expectations complicate the process: we often expect airlines and other retailers to match competitors’ prices, particularly when competitors are cutting rates.

Delta argues that over the past 14 years, despite the increased cost of jet fuel, the total cost of air travel adjusted for inflation including baggage fees and change fees has declined by 8 percent.

“The assertion that our success is due to anything more than the hard work of our people is not only ridiculous, it is offensive,” said Delta spokesman Trebor Banstetter in a written statement. “While we are cooperating with the inquiry, the simple fact is that Delta has not engaged in any illegal behavior.”

And Vaughn Jennings, with the airline industry group Airlines for America, said consumers do have a say.

“It is customers who decide pricing, voting every day with their wallets on what they value and are willing to pay for,” according to Jennings. He added that airlines have added seats to meet growing demand.

But airlines’ moves to increase their flying is a factor that triggered the collusion concerns, when Southwest this year proposed a large increase in flying and was criticized for the move at an industry conference in June. Southwest eventually scaled back its plans.

MERGERS

In the past seven years, four major airlines have disappeared from the skies — all of them bought up in an extraordinary wave of consolidation.

The series of mergers kicked off with Delta’s acquisition of Northwest in 2008, followed by mergers of United-Continental, Southwest-AirTran and American-US Airways. All were approved by the Justice Department.

The four major carriers remaining control about 80 percent of the U.S. market.

“These four airlines control the bulk of the market and are in a position to take steps that are anti-competitive by their nature,” said Warren Burns, attorney for the plaintiffs in a proposed class action lawsuit in Dallas alleging airline collusion.

Delta has aggressively sought the advantage in its massive Atlanta hub: Hartsfield-Jackson only has three foreign airlines operating there that are not Delta partners: Lufthansa, British Airways and Air Canada.

Delta, for its part, argues that “profitability has allowed the airline to spend billions investing in customers’ onboard experience, and upgrading aircraft and facilities around the world.”

CAPACITY DISCIPLINE

Some argue that capacity discipline has enabled airlines to passively work together on limiting flights to keep fares high.

If airlines add flights to grab market share, it could flood the market, drive prices down and cause each airline to make less money. To prevent such price wars, investors push airlines to avoid growing their flight schedules too much.

One result is that planes become more crowded. On average, planes were about 70 percent full in 2000, and now they are close to 83.5 percent full, according to federal data through March 2015.

But the Justice Department’s case is far from simple or certain. The government has not filed a complaint, only requested information from the four airlines. The government’s challenge is to find what would constitute hard evidence of express collusion among the airlines.

And from the airline industry perspective, exercising capacity discipline is just good management of a company run for profit.

What’s more, the Justice Department investigation comes at a time when some markets, including Atlanta, face a wave of new competition from low-cost carriers including Spirit and Frontier. The two combined, however, only make up 2.5 percent of flying Atlanta.

BAGGAGE FEES AND OTHER CHARGES

When American Airlines in 2008 said it would begin charging baggage fees, United quickly matched the move, followed by US Airways in a matter of weeks. Then Delta and AirTran followed — which led to a lawsuit filed by passengers alleging collusion.

The baggage fees imposed seven years ago kicked off what turned out to be a nearly industry-wide barrage of fees that has changed the way people fly. Not only do travelers pack less luggage and check fewer bags, but the airlines have also taken the launch of baggage fees and extended it into a broader trend of more fees and tiered offerings.

Those, too, often feature airlines closely monitoring each other’s moves and making similar changes. For example, Delta last year began offering a “basic economy” fare to better match offerings by Spirit Airlines.

Airlines even follow each other on frequent flier programs, with more carriers basing the program on dollars spent, rather than miles flown. But such moves may be common in other industries with companies that have comparable offerings.

ANTITRUST IMMUNITY

There are already many examples of collusion in the airline industry that are completely legal.

Delta Air Lines has antitrust immunity in its joint venture with Air France-KLM and Alitalia, which allows the partners to coordinate flights and prices. The joint venture competes against similar alliances of United-Continental-Lufthansa and American Airlines-British Airways-Iberia. So the nine airlines that control most of the U.S.-Atlantic market are reduced to three, for competitive purposes.

Delta has a similar antitrust immunity deal with Virgin Atlantic and Virgin Australia, and is seeking antitrust immunity for a deal with Aeromexico.

And Delta also got government clearance for a deal with US Airways that enabled the Atlanta carrier to consolidate its power in New York while allowing US Airways to gain a higher concentration in Washington. Now, Delta is working on a similar deal with United: Delta gains more flights from JFK in New York in exchange for more slots for United at its hub in Newark.

INDUSTRY RESPONSE

Some analysts have bristled at the Justice Department’s investigation.

“Fitch views the industry as inherently competitive and we believe that behavior by the airlines is a rational response to market conditions,” said the credit ratings firm.

Limited capacity growth is at least partially driven by investors, “as analysts and investors have been quick to react against the stocks of airlines seen as growing too rapidly.”

Delta CEO Richard Anderson, on the company’s most recent conference call with analysts on financial results, discussed Delta’s plans to scale back flight capacity growth later this year, and defended the company’s “transparency to investors.”

“We are going to continue to comply with the law, act unilaterally and do our best to give our investors visibility into our business,” Anderson said.

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