Major U.S. Airlines (AA/DL/UA/SW) Apparently Veered Clear Of Penalties For Collusion After Justice Department Drops Probe

Four major U.S. airlines seem to have dodged a bullet after a collusion probe from the U.S. Justice Department has been downshifted due to lack of evidence.

The carriers (American, Delta, Southwest and United) received subpoenas roughly a year ago when investigators dug deeper into the development of airfares and capacity.

The U.S. aviation industry has seen a number of big mergers over the past decade resulting in four carriers pretty much dominating the market: American Airlines, Delta Air Lines, Southwest and United Airlines.

In July 2015 the U.S. Department of Justice opened a probe on whether said carriers have colluded in expansion plans. John wrote about it back then (see here).

The Dallas Business Journal (access here) now reported that these undertakings are about to be abandoned since no concrete evidence has been found to substantiate these allegations.

North Texas-based American Airlines and Southwest along with two other major U.S. carriers [Delta & United] have apparently veered clear of penalties for collusion after the Justice Department downshifted a probe into antitrust allegations. …

The Justice Department hasn’t found evidence to merit a collusion case against the airlines, according to a story first reported Wednesday by the Wall Street Journal, citing people familiar with the matter.

The DOJ investigation into the possibility that airlines colluded to keep ticket prices high came on the heels of comments by American Airlines Chairman and CEO Doug Parker and other airline chiefs about what they saw as a need for the airline industry to avoid increasing flight capacity in order to protect profits. Parker, specifically, said at the time that the airlines had learned from past price wars that increasing capacity too fast can lead to lower ticket prices and slimmer profit margins.

After American received its subpoena, Parker wrote in a letter to employees that the airline’s capacity had grown faster than demand in recent years, leading to fares actually falling.

After all the mergers were completed, you had the three legacy carriers AA/DL/UA plus Southwest as the big bullies of the market. Previously there were also Continental, Northwest and US Airways which had been absorbed by the three legacy carriers, consolidating and increasing capacity in some cases.

Has this lead to higher or lower prices? My personal impression was that flying was extraordinarily cheap in 2015/2016 but that is just a feeling, not a valid data point. I’m sure there are routes where through the elimination of direct competition, fares were going up, especially to/from non mainstream destinations in often rural areas.

… Supporters of the collusion probe noted that the four largest U.S. carriers now control 80 percent of the market. They argued that airline fares didn’t change much even when jet fuel prices dropped sharply and that every flight seemed booked to capacity to the point of passenger discomfort.

Analysts bashed the DOJ probe when it became public in mid-2015, arguing that the airlines had added more seating capacity than many investors wanted rather than cutting capacity. Airline officials, including Parker, said that they have a duty to maximize capacity to maximize profits for shareholders.

You can’t really fault airlines for filling every single seat on an airplane; that’s a ridiculous criticism. Sure it’s not entirely comfortable to sit in an Economy Class cabin that’s full to the brim but we have remind ourselves that we facilitate mass transportation here and not a private jet. Would it come to someone’s mind to complain about the public bus or metro being packed at peak hour?

On top of it, let’s also not forget that U.S. carriers still offer the standby system which allows travelers to stand by for earlier flights either because they reached the airport earlier or were inconvenienced on another flight (delays/cancellations). Airlines in Asia and Europe mostly do not allow this, forcing passengers to take their originally booked flights and planes often go out with many available seats.

Conclusion

Airlines ultimately are in business to turn a profit, something they haven’t been doing very well for the past two decades, and at least for now, they are back in the black. It’s good that the authorities keep an eye on the development of industries and collaborating competitors but at least in this instance it seemed to have been a lot of smoke and mirrors.

What did the Justice Department expect to happen when it allowed these mega mergers to go through? I’d say the low fuel prices of the past 1-2 years have somewhat salvaged the situation or we might have indeed seen a sharp increase in some fares. Who knows?

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