United States: Airline Antitrust Investigation: Are The Skies Too Friendly?

Last Updated: November 19 2015
Article by Daniel Schaefer and Erik Lowe

This past summer the Department of Justice opened up an investigation into the domestic airline market to determine if there had been collusion in the decisions to limit the expansion of seat capacity (ergo, to raise ticket prices). In the months that followed, airline passengers around the country filed at least 23 separate class action suits accusing the airlines of conspiring to fix airline ticket prices. After a jurisdictional battle broke out among leading cases, the U.S. Judicial Panel on Multidistrict Litigation consolidated the class actions to the District of the District of Columbia. Unfortunately for the airlines, regardless of the outcome of the DOJ investigation, the multidistrict lawsuit will likely continue.

At this point, it is not exactly clear what prompted the investigation, nor has a cogent theory of collusion emerged. The New York Times initially reported that multiple airline executives may have signaled each other in public addresses and trade association meetings to remain "disciplined" about capacity—industry jargon for limiting flights. Shortly thereafter, Senator Richard Blumenthal of Connecticut called on the DOJ to take more aggressive action, pointing to surging airline profits and perceived higher fares for passengers in spite of falling fuel costs. Senator Chuck Schumer followed, alleging that the airlines were withholding flight information from discount websites in an attempt to control ticket sales. And in recent months, the DOJ has indicated that it is looking into communications between the airlines and their significant investors, presumably under the theory that investors with common ownership served as a conduit through which a collusive outcome was sought.

Whatever the alleged vector, regulators may have a hard time overlooking prior antitrust investigations in this industry. From 2005 to 2011, the DOJ obtained guilty pleas from many airlines and secured nearly $2 billion in fines for an alleged conspiracy to fix cargo fuel surcharges. The current claims fall against that backdrop, and in spite of plummeting fuel costs—savings you'd expect airlines to pass on to customers—inflation-adjusted fares have risen (slightly). In addition, the airlines are now reporting large profits; a remarkable recovery for an industry that lost billions for many years and had several participants file for bankruptcy.

Of course, the fact that the airlines are finally all making profits does not prove anything on its own. In many competitive industries, business decisions on pricing and capacity may be "interdependent." Competitors may have parallel responses when presented with similar market forces. The airlines could be engaging in substantially similar business conduct, whether in terms of setting prices or limiting passenger carrying capacity, simply because they have all decided independently that it is the best strategy. If common investors are involved, it opens up a new-ish theory of antitrust liability that asks whether investors, acting in self-interest to reap higher profits and in response to similar market forces, violate the Sherman Act by influencing their airline investments in similar ways.

Still another twist that might play out is the role of confirmation bias. The DOJ has, for the most part, approved the series of mergers over the past few years that reduced the number of major airlines from eight to four. The most recent of these mergers between American and US Air in late 2013 consolidated more than 80% of the domestic airline seats into only four carriers. The DOJ initially sued to block it, but American and US Air ultimately persuaded the DOJ that the merger would benefit consumers by allowing the joined airlines to create more options for travelers through a comprehensive network of global alliances. Can the DOJ now be tasked with impartially determining whether this market is supporting collusion without calling into question the prudence of its prior decisions?

In addition, some research suggests that the industry is not predisposed to price-fixing. This is the position of Harvard professor Michael Porter, famous for his Five-Forces Analysis assessing the "attractiveness" of a market through five external forces: (1) threat of new entrants; (2) threat of substitute products; (3) buyers with bargaining power; (4) suppliers with bargaining power; and (5) rivalry among existing firms.2 Collusion acts on the fifth force by suppressing inter-firm rivalry.3 As such, price-fixing should be more profitable in industries where forces 1-4 have a relatively benign effect on prices, and factor 5 exerts greater influence.

The Five Forces analysis implies that the airline industry is notoriously unattractive for price-fixing because airline profitability and growth are most heavily influenced by Forces 1-4: there are low barriers to entry, with new startups continually threatening incumbent airlines (force #1); other means to travel are improving (force #2); customers are becoming better informed and can easily discover competitors' prices through online sources (force #3); the two main suppliers of commercial jets are responding to increased international demand, and flying is dependent on fuel, labor, and infrastructure costs, and subject to government control and political influence (force #4). Even meteorological forces, from Icelandic volcanoes to polar vortices, can wreak havoc on airlines profits.4

Porter's work emphasizes an important reality underpinning the potential for collusion in the airline industry; namely, inter-firm rivalry, historically, has not been the main threat to airline profitability. On the other hand, we might be witnessing a new dynamic in the post-merger environment. Although mergers eliminate competition between the firms that merge, they also increase the incentives—and therefore the likelihood—for the remaining firms to collude. If the mergers create an oligopolistic market, it also becomes easier for the remaining participants to consciously monitor, and parallel, their competitors' actions without ever having forged an agreement, a phenomenon known as tacit collusion. The ultimate question for the DOJ is whether the airlines made an agreement. Although the Sherman Act is broad enough to encompass a purely tacit agreement to fix prices, the DOJ usually proves collusion through communications.

At some point, the antitrust regulators at the DOJ must have concluded that the airline mergers it approved were competitively beneficial or at the worst competitively neutral. Yet all merger analysis is predictive and imperfect. Perhaps the DOJ has had a change of heart, or perhaps it just believes an investigation is warranted as a first step. Either way, for companies operating in markets with only a few major participants, it might not be a bad idea to be just a bit less friendly.

Footnotes

1. The ideas expressed herein are my own personal and independent views, and not those of Dickstein Shapiro or its clients.

2. Michael E. Porter, "The Five Competitive Forces That Shape Strategy," Harvard Business Review (Jan. 2008).

3. Robert C. Marshall & Leslie M. Marx, The Economics of Collusion (2012).

4.The Five Competitive Forces That Shape Strategy, An Interview with Michael E. Porter, (June 30, 2008) (here for video).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.