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 The U.S. Justice Department disclosed Wednesday that it has demanded
details from the airlines about their communications on capacity
with analysts, investors, the public and each other.
The probe revives an issue from reviews of recent industry mergers:
Can four airlines that control 80 percent of domestic air travel
coordinate pricing by following each other's public statements and
fare moves?
Concern about coordination among the big air carriers was one reason
the Justice Department sued in 2013 to stop U.S. Airways from
merging with American Airlines. That lawsuit was eventually dropped
and the companies completed the deal.
"Here it is - the very coordination that they had speculated about.
It was something of a problem before and it certainly has gotten
worse," said John Kwoka, who teaches antitrust economics at
Northeastern University.
Clandestine efforts by competitors to set prices or divide up
markets are clearly illegal. Less clear is what executives of
American Airlines Group Inc, Delta Air Lines Inc, United Continental
Holdings Inc and Southwest Airlines Co can say in public about
pricing or capacity.
At a meeting last month in Miami of the International Air Transport
Association, at least three senior airline executives stressed the
need for "discipline."
American Airlines CEO Doug Parker, for example, said airlines and
their financial backers had learned painful lessons about the costs
of adding capacity.
'SIGNALING' OR 'GUIDANCE'?
Such remarks are catnip for regulators.
"This (probe) should not be a surprise to the airlines," said one
antitrust expert who asked not to be identified to protect business
relationships. "The word 'discipline' is a no no. It's one of the
words you don't use. It's like 101 in compliance."
Still, some analysts said the investigation came as a surprise,
because airlines regularly talk about capacity at industry
conferences.
"To give us guidance, they have to give us that information," said
Helane Becker, airline analyst at Cowen and Co in New York. "It's
not nefarious. It's not hidden. It is just what it is."
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Some U.S. courts have upheld the ability of companies to give
guidance to the market even when sending those signals could affect
the actions of competitors. An antitrust lawsuit filed in 2000
against cigarette makers by tobacco wholesalers and distributors was
thrown out by a judge who said that talking to financial analysts
about pricing strategies did not amount to illegal “signaling” or
price-fixing.
Wall Street expects airlines to restrict capacity this year, because
U.S. GDP growth at 1.5 percent to 2 percent was well below forecasts
of 3 percent to 4 percent, she said. "Traffic always grows in line
with GDP," Becker said.
The Justice Department, in its probe, will be asking for emails and
other communications that would show the extent of any coordination
between airlines, if any, on critical issues of ticket prices, fees
or capacity.
In the absence of exchanges explicitly outlining capacity restraints
to prop up prices, the Justice Department would have to rely on
circumstantial evidence, said Herbert Hovenkamp, who teaches
antitrust law at the University of Iowa.
Cutting output unilaterally is legal while making an agreement to do
so is not, but proving the latter can be extremely difficult.
"In part the Justice Department wants to test the boundaries in
this," he said.
It is often difficult for regulators to prove allegations of
improper market signaling.
Scott Wagner, an antitrust expert with the law firm Bilzin Sumberg
in Miami, said the investigation's goal could be to nudge the
airline industry to reduce prices and give travelers more of the
benefit of the recent sharp fall in fuel prices.
"I think this is a shot across the bow by the Department of
Justice," he said.
(Reporting by Diane Bartz, Alwyn Scott and David Ingram. Editing by
Joseph White and Christian Plumb)
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