Probably not.
Last week, the Department of Justice (DOJ) apparently sent letters to American, Delta, Southwest, and United asking for information about communications between the airlines and Wall St analysts, shareholders, and other airlines. What is DOJ looking for? Proof that the airlines are colluding to keep capacity down and fares up. This doesn’t seem to jibe with reality, but that’s never stopped DOJ before. It’s possible that DOJ has a smoking gun somewhere that it’s waiting to show the world. It just seems unlikely.
The two evil words that DOJ is investigating are “capacity discipline.” Uh oh. I just wrote it myself. Now I’ll probably get a subpoena. Capacity discipline is something that better management teams have preached for the past few years. This strategy is the complete opposite of how airlines have traditionally operated.
Historically, airlines craved market share. So they would pour a bunch of capacity into a market to try to build up a presence. The end result was a capacity glut that made everyone lose money. Airlines are really good at that. So when some management teams started actually practicing capacity discipline, it was a foreign concept.
The idea behind capacity discipline is to NOT chase market share. Instead, some airlines have decided to be more conservative, focus on their strengths, and actually aim for maximum profitability instead of flooding the market with cheap seats. Of course, this became easier with consolidation because the airlines now have fewer shiny objects they want to chase in the first place.
The result of this strategy was pretty much as you’d expect under the basic laws of supply and demand. With capacity not growing as fast, airlines could fill those fewer seats with higher fares. While in the past airlines hadn’t been considered great long term investments, that began to change as they began acting like smarter businesses. Airlines began to string together a series financial results that almost looked like companies in a normal industry. Investors began to pay closer attention.
Despite what you might expect, the airline industry is actually pretty transparent when it comes to data. Fares are published for everyone to see and schedules are in the market nearly a year in advance for most airlines. Regular updates are provided to investors around revenue and capacity expectations. Today, Wall St has whole-heartedly embraced capacity discipline because it creates a more sustainable long-term business, one worth investing in.
This, however, doesn’t mean airlines have simply fallen into line with what Wall St wants entirely. This is still a competitive industry. Delta has been pouring capacity into Seattle. American is trying to strategically grow LA. And Southwest has been bumping up its growth. That alone caused something of a panic.
Southwest CFO Tammy Romo said the airline was going to grow faster than originally expected. That combined with Delta’s bump in capacity plans as well as the fact that the big airlines were seeing falling unit revenue sent Wall St into a panic. Airline stocks lost a lot of value. It didn’t take long before Southwest scaled back its growth plans to the lower side of expectations.
While this was going on, the political machine was ramping up. Sen Richard Blumenthal (D-Conn.) wrote a letter to DOJ asking for an investigation into airline collusion. He used this Southwest example as proof. In his mind, Southwest had put out its growth plans and then the other airlines signaled to Southwest at the annual IATA general meeting that this was unacceptable. Southwest immediately pulled back.
The idea that Southwest would be scared of other airlines and reduce capacity because of them is laughable. The reality here is that the airline’s investors didn’t like the growth plan, and that’s why Southwest pulled back. It wasn’t due to signaling from other airlines.
I really hope that DOJ has more than this to stand on if it decides to pursue a case. Maybe there is some smoking gun that it hasn’t released to the world. (I kind of hope so, because it would be a lot of fun to watch.) Or maybe it’s just giving in to political pressure and going through the motions, hoping to uncover something before the investigation fizzles.
Even if it does have something, what can it really do? As one person suggested, it’s not like DOJ can make airlines grow. Sure, it can fine the airlines, but my guess is that the fine will be less costly than adding a ton of new capacity just because DOJ thinks that’s how things should work. But we won’t get to that stage anytime soon. This will be a long process.
In the meantime, you’ll see all kinds of skewed numbers thrown out there to support this accusation. I think my favorite so far is the stat looking at the big fare increases since 2009. Remember 2009? That was the depths of the recession and airlines had seen fares tank from just a year earlier.
So yes, if you compare airfares today to 2009, it’s going to look like a big increase… but only because it had fallen just before that. Fares remain historically affordable, even when you factor in fees.
The reality is that we’re in an industry that continues to put out more capacity than many think is sustainable and declining unit revenues certainly show that. If DOJ has a smoking gun, let’s just see it. Until that, I remain pretty skeptical that this will amount to anything.
42 comments on “DOJ’s Investigation of Airline Collusion Smells Like Politics, But Could It Be More?”
You just presented the perfect argument to allow international carriers to service the domestic market. Since US3 has reached such a perfect understanding of market forces, then additional competition will not challenge their supremacy. Great job Brett!
Really you’re advocating for cabbotage? That should make every buy American advocate jumpy..
Cabotage would be fantastic for air travelers
Even if foreign carriers were allowed, I don’t see SQ picking up DSM – MSP to compete with DL or AF deciding to take UA on with ABQ – DEN. Adding foreign carriers would either allow for Ryan Air to come in or for the routes with a lot of competition such as LAX – JFK to have even more competition.
Ah, so we’d need a EAS program for DSM to MSP. Excellent.
I’m being really flippant. However, I agree with Brett that people think service will become much better with foreign carriers, but I don’t see that happening.
It may become better on a few popular routes like LAX-JFK or SFO-ORD. It’s not going to improve service in podunk towns.
Ron – For the record, I’m all for cabotage with some restrictions on labor (eg you can’t just import cheap labor from India/Thailand/etc and fly them domestically). People think this would magically improve air service in the US, but I think people will be sorely disappointed. Still, I’m all for letting them give it a go.
Nice piece Brett…I sent that same chart to a friend last week and what I think is most striking is that in the mid-to-late ’90s, fares were HIGHER (in real dollars) than they are today despite the flood of stupidity in the airline industry during that period. Having competition is good, but having stupid competition didn’t really benefit anyone — it looks like Vanguard, Midway, Independence Air and Hooters (among others) didn’t drive down airfares. Running a smart industry – with smart competitors like JetBlue, Spirit and Allegiant – allows everyone to serve their market profitably…because they started chasing profits rather than market share.
The financial boom of the 90s allowed easy money to flow to people who wanted to start airlines (and knew little about how to make it work other than, ‘hey – let’s charge $29 to fly from Kansas City to Minneapolis.) That money is gone and, perhaps surprisingly, that’s allowed the industry to thrive.
The DoJ has nothing….
Wait wait wait! I know the perfect way to resolve this problem of a lack of a lack of capacity discipline, lets get Family Airlines into the air!
I’m sure they could find more than enough money in the Congrescritter’s bank accounts to get this wonderful airline funded.
It’s difficult to compare historical fares as older fares encompassed several services that are now charged seperately.
Hank Stil – There are several things that distort the fares in this chart. One one side, yes, it doesn’t include ancillary fees. How much you think people are paying on average? Even give a generous $35 (which seems highly unlikely across the board) and it doesn’t change the narrative. More importantly, you have something pushing the other way. Average length of haul has increased more than 10 percent since 2000 as shorter flights have disappeared. So you’re getting more flight for the money.
“Of course, this became easier with consolidation because the airlines now have fewer shiny objects they want to chase in the first place.”
I believe this is key to why the DOJ/politicians are chasing this. Back when we were talking about 6+ major US airlines there was just a lot more competition. Prices may have been higher overall but there was a factor of comfort that having all these players in the market was a checks and balances. Now we have a true oligopoly where the smaller players; JetBlue, et. al. aren’t big enough to really leave anyone with warm fuzzies that they are keeping the Delta’s, AA, UA’s honest.
You’re probably right that there is nothing here but who is to say airfare wouldn’t be lower today had all the mergers not happened? I tend to believe the mergers reduced competition and in turn have driven up prices. That said, airlines would probably be operating at loss in the latter. For the airline employee that sucks, but for the traveling public it’s a good thing. Quite the catch 22.
Its a good thing for airlines to be operating at a loss for a little bit for the customer, but it gets to be a bad thing in the long term. (Look at the many accidents caused by maintenance issues caused by trying to reduce costs.)
Theres also the fact that airlines can invest a bit more into the product that should help. (Wifi for instance..)
Wasn’t it for the most part GoGo that invested into Wifi?
I’m not sure on the exact details, but as I recall GoGo did pay much of the costs of installing Wifi, but I’m also sure they didn’t pay the airline for the plane their time was on the ground.
I’d also bet that DL & AS wifi streaming video service isn’t something GoGo put in at their own cost.
As for B6 and WN I’m pretty sure they paid for their Wifi installations, since they’re not Gogo.
Strange how the DOJ prohibited the purchase of U.S. Air by United back in 2001.
An excellent analysis and accurate. Putting it another way, the airlines are managing for profit which for many legislators and regulators is an outrageous concept. Just because your costs go down, it does not follow that you have to lower prices, you can choose to make money
“let’s privatize the FAA to lower costs on the government”
“how dare airlines operate at a reasonable profit instead of dumping more debt and pensions on us…after we let them do it”
I think it’s a knee-jerk sort of thing.
On the surface, we’ve gone from seven major US carriers to four in the span of six years. If you live in Cleveland, Cincinnati or Memphis you’re definitely aware of the impact of mergers on the amount of service available to you. If you live in a mid-sized market you’re also aware of the impact because you probably lost nonstop service to other markets (like CLE, CVG, MEM, possibly DCA from the slot divestiture); Fewer flights to fewer cities.
Seat pitch has become smaller. Planes have become smaller (though that trend seems to be reversing somewhat as carriers look to ditch their 50-seat RJs). More fees have been added (and I’m aware that even with the fees the fares are lower now than at pretty much any point in history, but it still feels like nickel-and-diming). Meanwhile the airlines are posting record profits by essentially copying each others’ strategies.
(Heck, even WN has hubs and spokes now, even if they don’t call them as much. The days of avoiding primary airports like BOS and LGA are long gone.)
On the other hand, the DOJ was the entity that allowed these mergers to happen – and they bought the silly arguments from Delta and the like (“Lower overhead costs from a merged operation would mean we’d be able to EXPAND service! Cincinnati to Amsterdam! Memphis to Paris! Salt Lake City to Tokyo!”) without thinking about what would be in the airlines’ best interest once the mergers actually happened.
So yeah, the DOJ is just chasing its tail on this one. You can’t really fault the airlines for squeezing every ounce of profit from their operations. Now, if we get to the point where the NK model is the order of the day (my legs hurt just thinking about 28″ of seat pitch!) then we can revisit the issue.
One thing of note: Back in the early/mid 2000s, customers were not paying separate fees for checking a bag, choosing a seat, etc. So while current base fares may be on par, many customers are paying additional funds for something that used to be included. I’d love to see some data that includes auxiliary fees as part of the total fare so that apples are truly being compared to apples.
Here’s one from a couple years ago. I’m always a little squeamish with A4A data; others may have something better.
http://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/
As a PhD economist who does research on industrial organization and antitrust and teaches it to students, I find this post to be about 50% politics and 50% speculation.
The comments by “A” and “Ron” a few paragraphs above are much closer to the reality of how things work and why the DoJ is doing this.
The sad fact of the matter is that there is very little competition in the US airline market right now and we can expect this trend to continue. Instead of plotting pictures of fares today vs fares in the 2000s, why don’t you compare fare trends in the US to those in places like Japan for example? That would make it very clear what the effects of competition are…
I happen to think this is mostly just the DOJ investigating so they can say “yup we looked” Maybe they’ll actually find something..
I think we have reduced competition, larger airlines that have fewer growth opportunities, and shareholders imposing profit discipline. The question will be at what point that is collusion / price fixing vs running the business with your head vs your heart. We already have seen a lot of great fare sales this year and there are plenty of areas of competition – Hello Seattle and Dallas and to a lesser extent Denver.
Im sure Delta and Alaska will be happy to talk about their competition.
People mistake high prices and total corporate profits for profit margins. Airlines are still not ahead of other industries.
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what is the solution? Even if the DOJ finds fault, and wants to make real change, the only way they can do that (without telling airlines how to run their businesses) is to regulate slots at key airports which I don’t think most politicians want to do and not sure airlines want it either, even the smaller guys…
Delta and Alaska are the exception that proves (or at least suggests a proof to) the rule. It’s the only place in the US where there’s currently vigorous expansion to compete, yet both carriers say they’re profiting at SEA. (It’s hard to verify the claim with DL, since SEA is a small enough fraction of their business that they could hide losses there with profits elsewhere, but AS’s continued strong profits are pretty hard to explain if SEA isn’t profitable for them despite the capacity expansion.)
But I agree that the horse is long past the barn door. The only thing the DOT can really do is prevent future mergers (except perhaps an unlikely hypothetical merger of two smaller players to create another major that is competitive in many markets, like B6+AS or VX+B6). If this investigation does find something, that would be awfully strong ammunition to prevent any future mergers including the majors, such as AS+DL or AS+AA.
The DOJ allowed all these mergers to happen which reduced competition and the heads of these airlines have learned that lower capacity means more profits and happier shareholders. All the CEOs have been in the industry for a long time and have lived through the fare wars which caused them to bleed red ink. What else do you need to know?
What’s really in each airline’s self-interest is for every other airline to maintain capacity discipline to keep industry-wide fares up while that airline increases capacity to take advantage of the higher fares. The second choice of each airline would probably be for all airlines (including itself) to maintain capacity discipline.
If there weren’t a market failure, the high fares would create an opportunity for one or a few airlines to increase capacity to take advantage. And “it’s good for the industry” is at the least a questionable competitive reason to act a certain way; the whole idea of capitalism is that true competition leads competitors to do things that are good for consumers (to win their business) when an opportunity arises.
Now, I don’t know if the DOJ investigation will find that there is illegal collusion going on in the industry (presumably they don’t know either; hence the investigation). Fares may well be close enough to in line with costs that self-interest really does mean each carrier keeps capacity where it is. And even if the investigation does turn up nothing, that doesn’t mean it isn’t worth doing. If any regulatory body only does an investigation when they know for sure that they’ll find something, they’re not doing their job.
air service is not a perfectly competitive market. There are high fixed costs, low marginal costs, and service must be relatively set in advance, even if prices are flexible
Unfortunately what now exist in the airline industry is an Oligopoly. In that type of business model it is much easier to collude.
Whether you love or hate him, Jim Cramer did a tongue in cheek analysis of what this means see:
http://www.cnbc.com/id/100564962
I also think that that the government thought they could allow mergers without the merged airlines colluding on prices, capacities, etc.
They got that one wrong!
One consequence of capacity discipline is that IDB passengers due to overbooking may have to wait longer to get a flight. Perhaps DoT should change the rules to make it easier for IDB passengers to sue the airlines and allow punitive damages as well.
Don’t IDB passengers get positive confirmed space on the next flight even if it is overbooked?
not by policy, they get variable compensation based on when the airline can get them to their final destination.
And I disagree, I think it helps since many times airlines offer more flights. If you are IDBed, Delta may not buy you a flight on AA. In the new world of less competition, DL has more service, and can try to flow you over more flights and hubs.
see here: https://www.law.cornell.edu/cfr/text/14/250.5
One solution would be to resurrect Rule 240
My guess is that DOJ already has the smoking guns. They are asking for info just to see how far the airlines go to try to do a coverup.
I suggest that the key word here is “hate.” One airline hating another. People within airlines hating each other: Customers hating the airlines. Each side determined to knock off the other, willing to do whatever they think is necessary, and not afraid to spill the beans.
My favorite market: Washington, DC (all three airports) to/from Las Vegas should provide some priceless examples of how things are going on today. Fare gyrate crazily in this market. Capacity?
Dulles to LAS: UA 2 non-stops a day, WN now gone in the market, and Frontier stepping in with one nonstop.
BWI to LAS: WN, 5 nonstops a day. Spirit, one nonstop a day, but seemingly cancelled more often than it operates.
DCA to LAS, US/AA, one nonstop a day.
Of course, everyone runs connections from all three airports, all the time. WN, of course, runs one-stops from everyplace to everyplace across the planet!
Fares in this market (all 3 airports) are a fare-geek’s dream. My guess, is that they are set not to gain market-shares, but out of pure “hate” for their fellow competiors.
May 20, I bought a one-way (NAU07AWS) from BWI to LAS on UA, connecting through LAX, and flew on June 16. (Departure out of BWI pretty much matched Spirit’s flight.)
Actual fare: $40.93, plus govt-imposed taxes/fees 28.74, total $66.60.
WN was offering a price of $127. Later, they dropped down to $59. Spirit was going for $78.09. UA also offered the fare to match certain WN flights.)
I live next door to Dulles. The the local county bus/Metro/MARC fare to BWI was less than $10.
Question: Why on earth would UA ever offer such a low fare, other than to show “hate” toward its competition. To try and kill off Spirit or was it WN? To me, a simple traveler, this just looks “nut.” Personally, I wouldn’t fly Spirit even if their fare was zero. WN? I’m thinking, I’m thinking! Afterall, my new trip-miles on MileagePlus are coming in at 25% what they were only a year ago!
For DOJ: Get the scoop on every UA NAU07AWS fare in every market. Have UA, for example explain the why. I believe it would reveal some of the hate that exists. Or, is all of this just some “signalling? Don’t forget to get good ol’ Bob Crandall or your consultant’s list!
Edit: Taxes/fees: $25.67, for a total price of $66.60.
Never forget one of the oldest adages in the law: “A good trial lawyer always knows the answer to his question before he asks the witness.” It’s highly likely that DOJ received credible information about these issues and they’re now giving the airlines an opportunity to hang themselves.
While I work for another agency, I also work with DOJ regularly. Unless they’re extremely good actors, DOJ is plenty busy. DOJ simply does not do things like this on a lark because they don’t have the time.
Also, if the news reports about the letter are correct, I suspect that issuance of such a letter by DOJ likely requires approval at the Deputy AG level, at least. Among other reasons, here are two.
First, it’s a big deal to demand the reported information because it’s somewhat burdensome on the airlines’ IT departments, counsel to advise them is costly, too, and DOJ takes this into account. Moreover, once the information is gathered and organized, none other than the airline’s CTO or, possibly, the president or CEO, are going to have to certify under penalty of criminal prosecution that they’re handing over everything that’s responsive to DOJ’s letter. In some ways, DOJ’s letter is like what’s known as a “target letter” on the criminal side, but there’s no Fifth Amendment right against self-incrimination in a civil proceeding so the CTO or CEO can’t claim some kind of privilege to try to keep their email and other communications out of the hands of DOJ.
Second, the airlines are going to scream like stuck pigs to congress that they’ve done nothing wrong and DOJ is just on a fishing expedition. Certain congressional representatives will dutifully write letters to DOJ, who will respond by thanking them for their interest but also say that it’s an ongoing investigation so they cannot comment. Nonetheless, DOJ is sensitive to such things because congress has to approve their budget.
We shall see….
It’s politics and MO. The one who has allowed it now comes to squeeze and get its whatever they are after. Once airlines comply the govt will find a way to explain dropping the claim.
Bye, the airlines that controlled about 75% of the market now control the same or more after merging.
Collusion is the natural result from airline consolidation. Now that 4 carriers control 80% of the US market, oligopoly pricing is the rule. Pricing for my regular trips (peak times, coast to coast) is up 20 to 50% versus 2 years ago. the mergers of Northwest, continental, Air Tran and Us Airways should have been prevented as anti-competitive. Am so glad to have the alternatives of Virgin America and Jet ‘blue available in lieu of the degraded service and higher prices of the dinosaur airlines!
Something is definitely going on with fares. I have been flying for many years and I find that fares this summer, especially to mid-sized and smaller markets are considerably higher than in previous years. I expect prices to go up over time but I have never seen the sort of consistent rise as I have seen this summer, especially when considering fuel prices being significantly lower than what they were last year.
As an example… Take two mid sized markets, say ORF to RSW, 21 days out, Sat night stay over is running about $425 lowest. It’s about 35% higher than last year. Same with pretty much any mid size combo I am looking at (like say JAX-RIC).
I don’t know what’s going on but I can definitely say that at least anecdotally, something ain’t right with fares this summer. Not sure whether this merits a lawsuit or not, but to me it signifies that something isn’t right from a competitive standpoint right now, when comparing prices to previous years and comparing to pricing say in Europe on similar types of routes and markets.
Now that we have an Oligopoly, the airlines have more control on their prices. Consumers do not get as much influence as they do in a totally competitive market. I guess that is why the DOJ must feel that they should intervene. They may have a smoking gun, or perhaps it is just political as you suggest. It will be interesting to see what happens.