US probes possible airline conspiracy to keep fares high

The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to each other how quickly they would add new flights, routes and extra seats.

A letter received Tuesday by major U.S.
carriers, including United, demands copies of all communications the airlines had with each other, Wall Street analysts and major shareholders about their plans for passenger-carrying capacity. The Justice Department asked each airline for its passenger-carrying capacity by region and overall since January 2010.

On a day when the overall stock market was up, stocks of the major U.S. airlines plunged 3 to 5 percent in the minutes following news of the investigation.

Henry Harteveldt, a travel industry analyst with Atmosphere Research Group, said the allegation against airlines is serious and could have a profound effect on the way airline officials talk about their business to shareholders and Wall Street analysts.

“If the DOJ’s investigation determines these comments could be somehow collusive, the outcome may be that airlines share no information, which would hurt investors, airports and other stakeholders who have legitimate needs to know this type of information,” Harteveldt said. “What is the difference between an airline’s high-level comments about what its capacity plans may be and a retailer’s comments about the number of stores it plans to open or close? ... I’m concerned the DOJ’s investigation could have a chilling effect on legitimate business communications.”

Airline industry trade group Airlines for America said U.S. airlines compete with each other.

“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,” said Airlines for America spokeswoman Jean Medina.

She noted that airline capacity is at a post-recession high, with airlines increasing the number of available seats by 4.6 percent, or 126,000 per day during the summer travel period from June through August to accommodate growing demand for air travel.

U.S. Travel Association CEO Roger Dow said he hopes the airlines are cleared of any allegations.

“American consumers are already jaded enough about flying that we've been wondering for a while how many more gut punches they could absorb before we see a dip in air travel demand,” he said. “If not for the radical consolidation we have seen in the airline industry in the last few years, we probably would not even be having this conversation. Now that four carriers control 85 percent of domestic routes, ‘collusion’ is a thought that’s constantly going to be in the back of the minds of federal regulators.”

Thanks to a series of mergers starting in 2008, American Airlines, Delta Air Lines, Southwest Airlines and United now control more than 80 percent of the seats in the domestic travel market. During that period, they have eliminated unprofitable flights, filled a higher percentage of seats on planes and made a very public effort to slow growth in order to command higher airfares.

It worked. The average domestic airfare rose 13 percent from 2009 to 2014, when adjusted for inflation, according to the Bureau of Transportation Statistics. And that doesn't include the billions of dollars airlines collect from new fees: $25 each way to check a bag or $200 to change a domestic reservation. During the past 12 months, the airlines took in $3.6 billion in bag fees and another $3 billion in reservation change fees.

All of that has led to record profits for the industry. In the past two years, U.S. airlines earned a combined $19.7 billion.

This year could lead to even higher profits, thanks to a massive drop in the price airlines pay for jet fuel, their single highest expense. In April, U.S. airlines paid $1.94 a gallon, down 34 percent from the year before.

And that's what worries Wall Street analysts and investors.
Historically, cheap fuel has led airlines to make money-losing decisions. They would rapidly expand, launching new routes and setting unrealistically low airfares to lure passengers. Airlines that already flew those routes would match the fare, and all carriers would lose money.

Such price wars are long gone, but today's low fuel costs along with recent comments from airline executives have given the market jitters.

Airline stocks plunged in May after the chief financial officer of Southwest said at an industry event that the carrier would increase passenger-carrying capacity by 7 percent to 8 percent, an increase over an earlier target.

Last month, U.S. Sen. Richard Blumenthal (D-Conn.) called on the DOJ to open an investigation into antitrust violations by major airlines.

“The structure of the airline industry is already conducive to coordinated behavior ... the legacy airlines closely watch the pricing moves of their competitors,” Blumenthal wrote. “When one airline ‘leads’ a price increase, other airlines frequently respond by following with price increases of their own.”

The Department of Justice last launched a major antitrust probe into the airline industry in 2013, when it stalled the merger of American Airlines and U.S. Airways. The merger was eventually allowed to go through, but only after the companies agreed to give up dozens of gates at airports in New York City, Washington, D.C., and Los Angeles.

That merger, however, drew the ire of several antitrust experts who feared the Department of Justice did not obtain enough concessions from U.S. Airways and American, which became American Airlines after the merger.

“This has been a long time coming,” said Diana Moss, president of the American Antitrust Institute. “There has been a huge amount of consolidation that has created a landscape conducive to coordination.”

News of a collusion probe comes at a time when the largest three U.S. airlines, United, American and Delta, are coordinating efforts to protest against three Persian Gulf carriers. U.S. airlines allege the Gulf carriers — Emirates, Qatar and Etihad — have received unfair government subsidies and have asked the U.S. government to intervene.

Associated Press and Tribune Newspapers contributed.