Skip to content
Link copied to clipboard

Airline collusion or not, competition in nose-dive

The latest twist in federal airline oversight - word that the Justice Department is looking for evidence that major carriers collude to prop up fares by keeping empty seats scarce - should be enough to make even a frequent flyer dizzy.

The latest twist in federal airline oversight - word that the Justice Department is looking for evidence that major carriers collude to prop up fares by keeping empty seats scarce - should be enough to make even a frequent flyer dizzy.

The Obama administration won praise in August 2013 when its new antitrust chief, William Baer, did what seemed almost unthinkable after many years of unchallenged industry consolidation. With six states, he sued to block the merger of US Airways and American Airlines. Baer said the deal would cut competition and harm consumers - many of whom, he said, benefited from US Airways' aggressively discounted fares for trips through connecting cities.

Barely three months later, Baer was back announcing a settlement that allowed creation of the world's largest airline - a compromise that he said "opens up the marketplaces as never before," thanks to concessions such as the release of landing slots at key, congested airports. In a call with reporters, he said the deal "will disrupt today's cozy relationships among the incumbent legacy carriers and provide consumers with more choices and more competitive airfares."

Now, he's apparently saying: Well, maybe not.

Wednesday's news was that the nation's four dominant airlines - the merged survivors of the "legacy" carriers that predated 1978's historic airline deregulation, plus Southwest, then a scrappy regional upstart - are under suspicion for illegal coordination that amounts to something similar to price-fixing.

To be clear, no one seems to suspect the kind of collusion in which titans of industry secretly agree to carve up a market rather than compete, yielding higher profits for everyone.

Instead, investigators appear to be focused on acts that antitrust experts call "facilitating practices," says Andrew Sweeting, a University of Maryland economist who studies airlines and antitrust policy.

Sweeting says that with oligopoly industries such as today's airline business - where four carriers control about 80 percent of U.S. domestic traffic - illegal coordination doesn't have to look like a classic conspiracy. Instead, the titans of industry can signal to one another in different ways.

"If you preannounce a pricing policy or preannounce other kinds of restraint," Sweeting says, you can be accused of collusion "even if you never got in a smoky room and said, 'We're going to coordinate on this.' "

Have the airlines done that?

Robert W. Mann Jr., an independent analyst and former airline executive, says key executives have repeatedly been pushed by Wall Street analysts to promise "capacity discipline." He says their aim is to reassure investors who worry that, as has happened before, one carrier or another will damage everybody's profits by overinvesting in capacity and cutting fares to fill seats.

"For the last two-plus years, on every single conference call, you've had all the usual suspects essentially browbeat industry executives on whether they will walk the walk, not just talk the talk, on capacity discipline," Mann says.

Suspicions were likely heightened by a recent industry meeting in Miami where key executives spoke, Mann says: "They all pretty much said, 'You know, we're being very careful about capacity at this point.' "

For his part, Mann believes the behavior falls short of collusion. He suggests that the airlines all act similarly because they're all financially healthy, buoyed not just by restraint on capacity but also by low fuel prices.

"I think it's airlines individually doing what is best for them," he says. "There aren't any wounded airlines that break pricing and cause collateral damage."

Antitrust officials aren't saying what they've found so far or what's driving their suspicions. But it's at least possible they have been influenced by recent research suggesting that concentrated airline ownership - particularly cross-ownership by the same mutual funds - drives up airfares because investors believe aggressive competition would harm their aggregate stake in the industry.

In a paper published in March by the University of Michigan's Ross School of Business, economists José Azar, Martin C. Schmalz, and Isabel Tecu estimated that cross-ownership has raised airline prices by 3 percent to 11 percent, compared with what they would be theoretically if each airline's owners were entirely distinct.

You could say, as Mann does, that regulators have only themselves to blame, after decades of allowing mergers and counting on new, lower-cost entrants to produce enough competition to restrain prices. That used to be called "the Southwest effect," and it still has some bite. Though Southwest has raised some fares, it still resists charging for checked baggage or booking changes.

Competition, low-cost or not, works well where it actually exists - and persists. But as Philadelphia-Pittsburgh travelers have witnessed, it doesn't do any further good when a competitor abandons a route.

It's clear enough that competition has failed many travelers, particularly those in the Midwest and smaller cities with limited service. What's less clear is whether antitrust officials have the tools - or the will - to ever fix it.