7/5/2015
The Justice Department announced last week that it is undergoing a probe into whether or not several major airlines are colluding to control expansion, limiting routes and seating in order to keep ticket prices high. Although refusing to name specific airlines, Department of Justice Spokesperson Emily Pierce confirmed that the department was investigating “possible unlawful coordination by some airlines.” Representatives from Delta Air Lines, Southwest Airlines, American Airlines, and United Airlines have all confirmed that they have received requests for documents from the Justice Department. American Airlines spokesperson Joshua Reed said, “We welcome the review. The industry remains highly competitive with more people flying than ever before.” The industry’s largest trade group, Airlines for America, responded, “We are confident that the Justice Department will find what we know to be true: Our members compete vigorously every day, and the traveling public has been the beneficiary.” The investigation was likely spawned after Senator Richard Blumenthal (D-CT) asked the Justice Department to examine statements by airline executives in recent months that focused on controlling growth as a major part of its short-term strategy.
Although profits for the airline industry are at a record level, airline stocks have been shaky due to investors’ fears that cheap fuel will cause overaggressive expansion. Industry analysts have noted that the average domestic airfare has risen by 5 percent, adjusted for inflation from 2007 to 2014; however that amount is still down 16 percent from the industry’s peak in 2000. Many speculate that last month’s annual International Air Transport Association (IATA) meeting in Miami was a large factor in pursuing the investigation, where airline executives frequently cited “capacity discipline,” and the need to eliminate the chance of a price war during the summer travel season. When Southwest announced their plans for growth in May, it led to a massive selloff that decreased the airlines market value by $10 billion. Although Diana Moss, president of the American Antitrust Institute, called the recent comments by executives “brazen statements that smack of coordination,” antitrust attorney Joel Chefitz believes that the government will “need evidence of a hard-core agreement” between the airline, and concludes that, “I’d be shocked if they got together in a smoke-filled room and agreed to cut capacity.”
Although the change in airfare prices is not very noteworthy in a vacuum, this comes after historically low jet fuel prices have saved the industry’s four major airlines $3.3 billion in the first quarter of 2015 alone. Senator Charles Schumer (D-NY) noted the disparity in a statement released Wednesday, saying “It’s hard to understand, with jet fuel prices dropping by 40 percent since last year, why ticket prices haven’t followed. We know that when airlines merge, there’s less price competition. What we need now is a top-to-bottom review to ensure consumers aren’t being hurt by industry changes.” Schumer is referring to four mergers involving eight of the largest domestic airlines since 2008. According to government data, the airline industry has recorded over $25 billion in profit since the start of 2013, although noting that it lost $33 billion the previous decade. The four leading airliners now control over 80 percent of the domestic market, with American, Delta, and United experiencing some of the slowest growth in the market, although Southwest is among the industry leaders with a 7 percent growth rate. Small commuter airlines such as JetBlue, Spirit, and Frontier, among the industry growth leaders, reported that had not been contacted by the Justice Department.
The investigation comes as the Justice Department and the Obama administration has recently taken an increasingly harsher stance towards possible antitrust activity revolving around big-ticket consolidations. On the same day as the probe was announced, the Justice department also launched an investigation, the Justice Department sued to block General Electric’s sale of its home appliances division to Swedish company, Electrolux, and a federal court issued an injunction against the merger of the two largest foodservice suppliers, Sysco and U.S. Foods in response to a Federal Trade Commission complaint. Sysco has since announced that it is walking away from the deal. Chefitz notes, however, that “It’s somewhat ironic that the same department of Justice who approved these mergers would now come out and cry foul.” The Justice Department did sue in 2013 to prevent the merger of American and U.S. Airways, although eventually reaching a settlement agreement to allow the merger. Airlines for America spokesperson Jean Medina said, “It is customers who decide pricing, voting every day with their wallets on what they value and are willing to pay for.” Gene Kimmelman, a former Justice Department antitrust expert, believes however; “The Justice Department doesn’t just launch investigations as fishing expeditions. There’s a keen awareness that when they request documents, there’s a significant cost to companies, it’s not easy and there are a lot of expenditures. They have to have a strong reason to believe there may be a violation of law.”
Sources:
Wall Street Journal – Jack Nicas, Brent Kendall, and Susan Carey
Washington Post – Drew Harwell, Ashley Halsey III, and Thad Moore
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