Justice Department Investigates Airline Collusion to Keep Fares High

By Associated Press

02 July 15

Justice Department spokeswoman confirms the department is investigating potential ‘unlawful coordination’ among some unspecified airlines

document obtained by the Associated Press shows the Justice Department is investigating whether airlines are colluding to grow at a slower pace as part of an effort to keep airfares high.

The government has requested information from airlines as part of the antitrust investigation.

Justice Department spokeswoman Emily Pierce confirmed on Wednesday that the department was investigating potential “unlawful coordination” among some airlines. She declined to comment further, including about which airlines are being investigated.

As a result of a series of mergers starting in 2008, American Airlines, Delta Air Lines, Southwest Airlines and United Airlines now control more than 80% of the seats in US skies. They have eliminated unprofitable flights, filled a higher percentage of seats on planes and worked to slow growth in order to command higher airfares.

It worked. The average domestic airfare rose 13% 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 and $200 to change a domestic reservation. During the past 12 months, the airlines took in $3.6bn in bag fees and another $3bn in reservation change fees.

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

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, US airlines paid $1.94 a gallon, down 34% 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% to 8%, an increase over an earlier target.

Wolfe Research analyst Hunter Keay, who hosted that conference on 19 May, told investors in a note afterward that the big airlines are unhappy to be restraining growth while low-cost airlines like Spirit grow at a much faster pace. He urged the major airlines in a note to investors to “step up” and cut routes for the good of the industry.

“This is a Mexican standoff. Four airlines with guns pointed at each other. Each is afraid to cut suddenly profitable routes because they fear another will backfill that route,” he wrote. “Airlines keep those routes under the rationale that it’s good for the long term. This is literally the exact opposite of capacity discipline.”

On 1 June, Southwest’s chief executive, Gary Kelly, said his airline would cap its 2015 growth at 7%. That sparked a rally in airline stocks, as investors were more assured that capacity growth would be limited.

Keay said on Wednesday that he had not been contacted by the government and doesn’t think the airlines have been acting inappropriately.

“The analyst community is bringing up the subject. You certainly can’t fault an airline executive for responding to the question,” Keay said. “The capacity continues to grow at the airports people want to fly to and air travel remains a particularly good value for the consumer, especially for the utility that it provides.”