Antitrust Law Daily Wrap Up, ANTITRUST NEWS: AAI urges DOJ to take a broad look at potential collusion in the airline industry, (Sep 23, 2015)

By Linda O’Brien, J.D., LL.M.

In a September 22 letter to Assistant Attorney General William Baer, the American Antitrust Institute (AAI) encouraged the U.S. Department of Justice Antitrust Division to make a strong antitrust enforcement response to impediments to competition in the U.S airline industry. Fundamental changes in the domestic airline industry over the last decade have given rise to concerns over potential collusion among the four leading carriers —United, Delta, American, and Southwest, the AAI letter stated.

Competition in the airline industry has “taken a beating” in the last decade, according to AAI President Diana Moss. Extensive consolidation, a relatively closed domestic travel market, and the airlines’ integration into their own dedicated distribution channels are contributing factors. Those changes raise questions that bear materially on the DOJ’s investigation into potential collusion by the airlines. The AAI commends the department for beginning its inquiry and urges the Antitrust Division to scrutinize both price and non-price dimensions of competition involving the four carriers.

The AAI noted that the airline industry has experienced a number of challenges during the last decade: limits on organic growth, fuel price volatility, and slowing demand for air travel. Legacy carriers responded to those developments with bankruptcies, new prices, ancillary fee strategies, and changes to distribution policies. However, consolidation was the most sought-after solution. There were five major mergers, and today’s four leading carriers control about 70 percent of the market. At the time of the mergers, direct evidence was available, such as fare increases and capacity cutbacks, that showed further consolidation would likely harm competition and consumers. Had the claimed efficiencies in previous mergers materialized, resulting in lower costs and increased consumer benefits, the competitive concerns in the industry would likely not be the subject of federal antitrust scrutiny.

Statistics for the four carriers across the hubs they have operated over the last decade reveal the fundamental reshaping of the industry that has given rise to the DOJ’s concerns over potential collusion, the AAI letter states. From 2009 to 2014, the increase in average fares across the hubs was 15 percent. This rate of growth far outstripped the rate of fuel costs, which slowed to less than 5 percent. In fact, four of the five years were marked by flat or declining fuel costs. Operating margins also increased to 8.6 percent, and the airlines were strongly profitable. The foregoing adjustments all occurred against the backdrop of highly concentrated markets.

In recent years, airline executives have allegedly signaled each other about the benefits of capacity discipline to support fares. The AAI encourages the DOJ to consider the effect of potential coordination among the four carriers on market “rules.” These rules include attempts to impose a surcharge on itineraries purchased through any distribution channel other than the airlines’ own websites or restricting access to airline data necessary to distribute airfares through rival distribution channels.

In the AAI’s view, potential anticompetitive coordination is not limited to capacity discipline to maintain supracompetitive fares. It is also important to consider parallel conduct involving fees for ancillary services and on certain “rules” of commerce. The latter include policies and strategies that could impair competition from the rival distribution channels that are critical for promoting transparency and comparison-shopping.

News: Antitrust