There may be far more than meets the immediate eye behind United States Department of Justice’s inquiry into constraint of airline seat capacity growth, constraint that Connecticut Democratic U.S. Senator Richard Blumenthal contends has brought on “an onslaught of price increases in summer fares.”
In a June 17, 2015 letter to Assistant Attorney General William J. Baer, Blumenthal asked DOJ’s Antitrust Division to “conduct a full and thorough investigation of anticompetitive, anti-consumer conduct.”
Justice Department spokesman Peter Carr says, “We are investigating possible unlawful coordination by some airlines. We’ll decline further comment at this time.”
It’s the “coordination” part that’s key. In his letter, Blumenthal notes top airline executives of late have been talking a lot about “discipline” within the marketplace. The senator says this could constitute “a strategic attempt to coordinate behavior.” Blumenthal goes on to say the idea could be “specifically designed to encourage Wall Street to punish smaller rival airlines that have announced plans to expand [seat] capacity and cut fares.”
“DOJ is playing politics,” responds aviation consultant Mike Boyd, president Boyd Group International. “If political hot air contributes to global warming, the polar bears are in deep trouble now…Blumenthal is all upset because airlines are making money.”
Airline industry trade group Airlines for America was more restrained in its response, saying “domestic fares are actually down thus far in 2015…we’re confident that the Justice Department will find out what we know to be true: our members compete vigorously every day.”
The Real Motivation?
Such is the surface of the issue. What’s missing is how the investigation fits into the overall fabric of what’s happened to airline competition in the United States. Get to the root of that and DOJ’s underlying motive in launching the probe comes into sharper focus, shedding a bright light on the actual state of U.S. airline competition.
Not in dispute is this fact: “Just four major airlines (Delta, United, American and Southwest) now account for eighty percent of all domestic air travel,” says the senator. What a difference a decade can make. Ten years ago that eighty percent share was parceled out among more than double the number of carriers.
When there were eight or nine airlines that controlled that eighty percent share there was no real problem. So says a well-respected aviation industry insider who asked his name not be used. Here’s his theory: in such a flexible, dynamic marketplace the harm of that might result when airline executives talked, in public, about seat discipline would be minimal. Cut the number of carriers in half and it becomes a completely different issue. You’ve implicitly carved the United States aviation market into domains where a few airlines can dominate.
The insider contends the real reason DOJ is investigating carriers is that it now understands when it approved the rash of airline mergers resulting in airline consolidation it created a monster.
It’s not the high-profile Delta/Northwest merger, the United/Continental marriage nor the American/US Airways merger that matters most, he contends. It’s Southwest’s acquisition of AirTran that’s the straw stirring things up.
He calls that combination a seminal event, because by blessing their union DOJ took two low-fare airlines that were stimulating traffic and created an airline that not only is no longer in the business of reducing fare but has actually been selling off aircraft (AirTran’s former Boeing 717s now fly around in Delta colors).
Consider, before the Southwest merger, AirTran held Delta’s feet to the fire in terms of keeping airfares low, especially in Delta’s hometown of Atlanta. According to early 2015 U.S. Department of Transportation statistics since 2011 the average inflation-adjusted airfare has risen 16 percent at ATL, where a once standalone AirTran was the second largest carrier.
Tellingly, since 2011 DOT figures show average inflation-adjusted airfares have increased at eight of the ten busiest airports in the country. For example rates have elevated eleven percent at New York LaGuardia and nine percent at Chicago O’Hare.
The theory here is that DOJ recognizes it made mistakes in approving some mergers and is now trying to make up for it by launching an investigation into capacity growth constraint. It’s only a theory, although an intriguing one.
How Airlines Are Responding
A statement from Southwest says the nation’s largest domestic airline “will fully cooperate in answering any questions the DOJ may have of us.”
United Airlines says it’s complying with the Justice Department’s request for material.
Delta Air Lines did not respond to AirlineRatings’ requests for a statement. Other news sources report Delta is complying.
American Airlines offered the most complete response, saying it “has received a Civil Investigative Demand from the Department of Justice Antitrust Division. The CID seeks documents and information from the last two years that are related to statements and decisions about airline capacity. We welcome the review as the data shows the industry is highly competitive with more people flying than ever before. Demand has been enabled by a robust and competitive marketplace in which capacity has been added and average fares have decreased. We will cooperate fully with the investigation and demonstrate that the last two years have presented an entirely new competitive landscape that has greatly benefitted air travel consumers.”
American has reason to answer so robustly. In 1982, then Braniff International chief Howard Putnam recorded an epic telephone conversation he had with then American Airlines President Robert Crandall. The American chief didn’t know Putnam had tape rolling. On that tape Crandall discussed American’s competition with Braniff.
During the extraordinary talk, Crandall told Putnam, “I have a suggestion for you. Raise your goddamn fare twenty percent. I’ll raise mine the next morning.” The U.S. government was not amused. It brought an antitrust action against Crandall and American.
The industry insider says ever since that day the U.S. airline industry has been particularly paranoid about anti-trust issues and goes out of its way to ensure that its executives understand the consequences of any level of coordination, be it fares per se, or the number of seats they offer. Given that sort of atmosphere, the source labels as far fetched the possibility of private communication among airline execs on these critical topics.
So, what would it take for DOJ to move beyond the investigatory phase to pursuit of an actual case? A smoking gun. “They’d have to have e-mails back and forth saying don’t add capacity,” says Mike Boyd.
Business Travel Coalition Chairman Kevin Mitchell adds that such e-mails, if they at all exist, would have to be nothing short of “damning…showing an outreach between and among carriers to discipline capacity.” BTC is an East Coast-based consumer group.
There’s a fundamental flaw, asserts the insider, in forbidding airline executives from publically making known by how much they intend to increase, or cut, seat capacity. The U.S. Department of Transportation requires airlines push out information to consumers about what schedules they intend to fly, and get that information out in timely fashion.
Should it decide to pursue an actual case against any airlines, DOJ is probably going to have to discover such an evidential smoking gun, assuming one exists. The Justice Department could have a devil of a time if they depended purely on public pronouncements by airlines concerning how many seats they plan to fly as evidence of wrongdoing, or so-called “signaling.”
The Bigger Picture
Whether DOJ can make a case against the airlines remains very much to be seen. But let’s move beyond that and consider whether its investigation was prompted by what consumer watchdog groups perceive as a pattern, a pattern by which the Business Travel Coalition’s Mitchell says U.S. airlines seek to “frustrate new entries, whether [they be] domestic airlines or international airlines.”
Three major Middle East airlines – Emirates, Etihad, and Qatar – have been expanding rapidly of late in the U.S., linking travelers to their wide-ranging route networks via hubs in Dubai, Bahrain and Doha respectively. That expansion’s been made possible via an Open Skies policy meant to promote competition.
U.S. mega-carriers United, American and Delta contend the trio of Middle East airlines is violating international trade rules, that the three have gotten some $42 billion in subsidies and benefits from their governments since 2004.
The Middle East carriers insist it’s not so. Most outspoken, perhaps, is Emirates President Sir Tim Clark. He contends
United, American and Delta “have no grounds to ask the US government to unilaterally freeze Emirates’ operations to the USA or pursue other action under the Open Skies agreement. It is because we are absolutely not subsidized, and our operations do not harm these legacy carriers, but instead benefit consumers, communities and America’s national economy.”
Much of this boils down once again to seat capacity says Jack Keady, founder of southern California-based Transportation Consulting. The Big Three Middle East carriers are “opening up new cities,” new connection opportunities. And that equals “added capacity.”
Mitchell argues flatly the Big Three U.S. airlines “are seeking protection from Gulf carrier competition.” He goes further, maintaining that U.S. airline opposition to the U.S. government’s Export-Import bank helped result in Congress’ failure to renew the bank’s charter. What’s that got to do airline competition? The Ex-Im, among other things, provided loan guarantees to foreign airlines to purchase Boeing jetliners, a significant slice of them long-haul types such as the 787 and 777, the kind of craft primed for international operations.
Delta mounted major opposition to Ex-Im, claiming it helped subsidize non-U.S. competitors. After a Delta lawsuit challenging the bank was thrown out by a federal judge, Delta spokesman Trebor Banstetter told The New York Times, “We’ve known all along this is going to be won or lost in Congress.”
Boeing, wanting naturally to sell more of its airplanes abroad, backed the bank.
Finally, there’s the issue of low-fare Norwegian Air International, which sought to expand into the U.S. market. The move was blocked – at least for now – when DOT initially rejected the bid.
Although the particulars of the Norwegian rejection aren’t as clear-cut as opposition to capacity growth, the fact remains Norwegian Air International would have added new seats to the North Atlantic to and from the U.S.
The respected aviation insider that AirlineRatings interviewed for this piece does not believe that the investigation DOJ launched stemmed from conspirators gathering in some smoke-filled room to collude and cooperate in an effort to control the number seats U.S. airlines loft.
By extension, it’s more difficult still to buy the idea that the Ex-Im’s exit from the ‘Sporty Game’ of international aircraft sales, or the rejection of Norwegian Air International’s application, were somehow choreographed by some cabal, some secret political group or faction.
For all that, this fact remains: none of these moves is doing much to suffuse the U.S. skies with significantly more airline seats. In an effort to change that equation, the Business Travel Coalition recommends:
– Regular governmental review of antitrust immunity granted to global airline alliances and “metal-neutral” (i.e., airline neutral) joint ventures. Immunity, BTC believes, has “bestowed enormous benefits on the Big Three.” In some cases, such immunity can permit carriers to align their networks in certain broad markets, like the North Atlantic, by coordinating schedules, fares and operations.
– Allowing cabotage, the ability of a foreign airline to transport paying passengers between two points in another country, say from New York to Los Angeles. “The Big Three’s efforts to block new international and domestic competition only makes this option more attractive,” opines BTC.
– Restoration of the private right of legal action. This would allow U.S. consumers and their State Attorneys General representatives to sue airlines for allegedly unfair and deceptive practices. Contends BTC, “It would only require very simple legislation to enable the restoration of the private right of action for consumers [of] commercial aviation.”
Nothing, however, is simple about this. Not in the least. Capacity growth constraints are the product of ruinous decades of fare wars in the U.S., which saw too many seats chasing too few fannies. Those battles tumbled once high and mighty airlines. Now, at long last, there’s a semblance of stability. It’s that fact of life that must be weighed carefully against any efforts to throw open the competitive floodgates.