this Feb. 14, 2013 file photo, Travelers pass through a
corridor at Philadelphia International Airport in
Philadelphia. As the Justice Department launches an
investigation into possible collusion in the airline
industry, experts say the government faces the burden of
proving that the carriers were deliberately signaling
business decisions to each other.
WASHINGTON — As
the Justice Department launches an investigation into possible
collusion in the airline industry, experts say the government
faces the burden of proving that carriers were deliberately
signaling business decisions to each other.
routinely increase flights based on demand. A particularly cold
winter in the Northeast, for instance, might merit more flights to
the Caribbean. And sometimes, routes are cut because there isn't
enough demand. Nothing is illegal about that.
Any company can
limit the supply of its own products, whether airline tickets,
sneakers or smartphones. But it would be illegal for airlines to
work together to limit flights in order to drive up fares.
investigation is just in its initial phases. Letters went out this
week to American Airlines, Delta Air Lines, Southwest Airlines and
United Airlines. Together, those four carriers control more than
80 percent of the domestic seats on planes.
quick to say they can't talk about pricing decisions. But in
recent years, airline executives and Wall Street analysts have
been much more open in discussing how the airlines have kept their
passenger capacity — the number of seats they put into given
markets — in check. With that capacity kept from growing too
fast, airplanes have been fuller and carriers have been able to
command higher ticket prices. That's led to record profits.
But were airlines
simply responding to Wall Street's questions about capacity, or
were they illegally agreeing not to compete too hard as part of an
effort to make more money?
supply to demand is not a novel idea and running a company for
profit is not a crime," Raymond James analyst Savanthi Syth
told investors in a note Thursday.
draws a line between the entirely lawful practice of companies'
following each other's behavior and companies illegally
conspiring. The Justice Department appears to be hunting for
communications and other signals that cross that boundary, said
Andrew Gavil, who teaches antitrust law at Howard University.
distinction involves whether or not there was really express or
intentional coordination by two firms," he said.
It's too early to
know where the investigation is going. But if the government does
find evidence of improper collusion, it could attempt to negotiate
a consent decree with the airlines to stop them from certain
behavior, such as issuing public statements about their intentions
Ever since the
government stopped regulating routes and prices in 1978, airlines
have struggled to avoid nasty and unprofitable fare wars.
Historically, when the price of jet fuel fell, one airline would
launch a new route or add extra flights on existing ones. Fares
would be slashed to attract fliers and other airlines would be
forced to match the new, lower fare.
like it, but legally they couldn't coordinate routes or fares.
In 1982, Robert
Crandall, then a senior executive who would become CEO of American
Airlines, expressed his anger about these fare wars in a phone
call with Howard Putnam, CEO of Braniff Airways.
Putnam, who was
recording the call, asked Crandall if he had a suggestion to deal
with the problem. Crandall told him to raise his fares and he'd
Crandall replied: "Yes. I have a suggestion for you. Raise
your goddamn fares 20 percent. I'll raise mine the next
morning." He said: "You'll make more money and I will
Department sued and the case was settled for little more than an
agreement by Crandall to keep a written record of all of his
contact with other airline executives for two years.
It's unclear if
there is a similar smoking-gun comment today.
executives have been talking publicly about how they've learned
not to add capacity too fast. But no statement appears to be as
blatant as Crandall's.
After a brief
industry increase in seats in the spring, American Airlines CEO
Doug Parker spoke about the need for capacity discipline to a
Reuters reporter at the International Air Transport Association's
annual conference in Miami.
question is," Parker said, "is this a one-time catch-up
for fuel prices being lower, or is this airlines behaving like
airlines used to and just increasing capacity because times are
good? I don't know if we know the answer to that yet."
A few weeks
earlier, the United Airlines chief financial officer, John D.
Rainey, spoke at a conference for Wall Street analysts and
"We are a
big believer in the right balance between supply and demand, and
we've demonstrated that with our capacity discipline," Rainey
said. "We've grown our (available seat miles) at less than
GDP for eight consecutive years, and so we'll continue to believe
investigation could take years.
an antitrust law professor at American University, said
investigations like this one generally need more than just
circumstantial evidence. A case with explicit discussion between
executives would be easy to prove. The harder challenge is one
where collusion would need to be inferred from statements by
executives to analysts, and other signaling.