NYT: Airlines Under Justice Dept. Investigation Over Possible Collusion

http://www.nytimes.com/2015/07/02/business/airlines-under-justice-dept-investigation-over-possible-collusion.html

JULY 1, 2015

Airlines Under Justice Dept. Investigation Over Possible Collusion

By CHRISTOPHER DREW

Federal prosecutors on Wednesday said they had begun an investigation into possible collusion among the airlines to limit seating, two years after the Justice Department approved the latest in a wave of airline mergers, saying the combination would benefit consumers.

In letters sent to airlines, prosecutors have asked for documents from the last two years related to statements and decisions they have made about limiting capacity on flight routes. By making it harder for passengers to find seats, airlines could restrain competition and increase fares.

"We are investigating potential unlawful coordination among some airlines," said Emily Pierce, a Justice Department spokeswoman.

The inquiry, which appears to be in its early stages, is a significant shift for a department that in November 2013 cleared the way for the merger of American Airlines and US Airways, after initially filing suit to oppose it. The merger, bitterly opposed by consumer advocates, created the world's largest airline.

Now, roughly 80 percent of the nation's air traffic is concentrated among four airlines -- American, United Airlines, Delta Air Lines and Southwest Airlines.

In approving the American-US Airways merger, Justice Department officials accepted the core of the airlines' argument that a combined airline would create more options for customers on busy routes than either airline could offer on its own.

William J. Baer, assistant attorney general for the antitrust division, told reporters at the time that the merger "opens up the marketplace as never before" and that it would "disrupt today's cozy arrangements" among major carriers.

But since then, airline executives have begun speaking more openly with Wall Street analysts, and at an industry conference last month in Miami, about so-called capacity discipline -- industry jargon for limiting flights.

American Airlines said on Wednesday that it would cooperate with the investigation, but it disputed any notion that the mergers had restrained competition.

"We welcome the review as the data shows that the industry remains highly competitive with more people flying than ever before," the airline said in a statement. "Demand has been enabled by a robust and competitive marketplace, in which capacity has been added and average fares have decreased."

Luke Punzenberger, a United Airlines spokesman, confirmed that United had received the Justice Department letter. He said United was complying with the request for documents.

Delta said it had received the Justice Department's letter and was fully cooperating. Southwest did not respond to a request for comment.

Antitrust lawyers and aviation analysts said that investigators would have to resolve a central question: whether the airline executives have talked so much publicly about discipline to appease Wall Street's profit demands, or whether there is any smoking gun showing that airline executives have colluded privately.

"There have been about two years of conference calls in which Wall Street analysts have browbeat airline executives to either have discipline, or they will bust their recommendations on their stock," said Robert W. Mann Jr., an aviation analyst in Port Washington, N.Y. "I don't sense that the executives talk to each other. They actually hate each other, truth be told. But with so few of them left, there's almost a natural oligopoly."

He said that discount airlines like Spirit Airlines and Allegiant Air still offer rock-bottom fares. But among the major carriers, "there are no wounded competitors, which historically have been the ones who broke price and inflicted pain on the others," he said.

Mr. Mann added that airline fares were "a little softer" so far in 2015 than they were last year. But baggage and other fees, like for upgraded seats or Internet access, have lifted airline profits, and increases in taxes on the tickets have left consumers paying more over all on many routes, he said.

It is not clear when the Justice Department started the investigation.

Last month, Senator Richard Blumenthal, Democrat of Connecticut, called [1] on the Justice Department to take more aggressive action against airlines, which have had surging profits as the industry has consolidated.

"Consumers are paying sky-high fares and are trapped inside an uncompetitive market with a history of collusive behavior," the senator said in a letter to the department, citing a column in the business section of The New York Times. [2]

The column quoted airline executives who reassured those at the industry conference in Miami, held by the International Air Transport Association, that they all understood the need for discipline in limiting how many seats are offered to consumers.

The industry's recent good times follow years of bankruptcies, job cuts and billions of dollars in losses, which spurred a period of intense consolidation that put many well-established names out of existence. Among the mergers in the last decade are those between Delta and Northwest Airlines in 2008, United and Continental Airlines in 2010, and Southwest and AirTran Airways in 2011.

Now, in a remarkable turnaround, the major carriers have reported surging earnings.

Delta, for example, reported $746 million in profits for the first quarter, a record for the quarter. That announcement came a week after the airline said it would reduce its international flights by the end of the year to limit capacity.

In May, Gary C. Kelly, Southwest's chief executive, said the airline would increase capacity by 8 percent. But after coming under fire last month at the conference in Miami, he backpedaled a bit, saying he would hold the growth to 7 percent.

The airlines have also been helped by a plunge in fuel prices. Delta, for example, said it expected to save $2 billion on its fuel costs by the end of the year. And Southwest, which paid $3.08 a gallon for fuel in the first quarter of last year, paid only $2 a gallon in the first quarter of this year.

"It's hard to understand, with jet fuel prices dropping by 40 percent since last year, why ticket prices haven't followed," said Senator Chuck Schumer, a New York Democrat, who had also called for a Justice Department investigation. "We know that when airlines merge, there's less price competition."

News of the investigation was first reported [3] by The Associated Press.

Mr. Mann, the aviation analyst, said even if the airline executives felt they were mainly responding to pressure from Wall Street analysts at the conference in Miami, "if you're listening as a Justice Department attorney, you'd say, 'Wait a minute, these guys are all saying the same thing, and that can't just happen naturally, can it?' "

Matt Apuzzo contributed reporting.

[1] http://www.nytimes.com/2015/06/18/business/senator-urges-inquiry-into-airline-behavior.html

[2] http://www.nytimes.com/2015/06/12/business/airline-discipline-could-be-costly-for-passengers.html

[3] http://www.nytimes.com/aponline/2015/07/01/us/politics/ap-us-airlines-federal-investigation.html