Antitrust officials in the United States are examining whether or not the country’s four biggest airlines formed a sort of airline cartel, in which they worked together in order to keep airfares high. It is also suspected that the largest shareholders of the airlines might be involved as well.
The four carriers in question are American, United, Delta, and Southwest.
The antitrust division of the Justice Department has requested details about meetings with the major shareholders of the airlines. At the meetings, it is suspected that “industry capacity” was a significant topic of discussion.
Officials believe that consumers pay higher airfares when the same investor owns shares in more than one of the big four airlines. Academic papers have suggested that customers tend to overpay for fares when there exists such an overlap of ownership.
According to one study, airfares are as much as 11% higher than average when overlapping ownership takes place.
The information available points to unlawful coordination by the airlines in order manipulate seat capacity. By limiting the number of supplied seats on airplanes, while demand for said seats remains the same, the airline companies are able to increase ticket prices.
The investigation by the antitrust department does not mention any investors or individuals by name. Also, nobody has been accused of any specific wrongdoing at this time. However, the department is attempting to determine what exactly took place at meetings where “industry capacity” was discussed.
Some of the biggest United States money managers are allegedly involved in the situation.
Major investment firms represent some of the largest shareholders of the big four airlines. These firms include BlackRock Inc., State Street Corp., JPMorgan Chase & Co., and Primecap and Capital Group Cos. These firms all own significant stakes in at least two of the major carriers.
However, the firms are playing naïve, saying that they expect regular competition in the airline industry. The airlines are also either refusing to comment or denying the allegations.
BlackRock Inc. spokesperson Ed Sweeney said, “While we can’t comment on the DOJ’s investigation of the airline industry, we expect fair and ethical competition between the companies we invest in on behalf of our client.”
The big four airlines stated in July that they have been cooperating with all requests made by the government. The investigation was disclosed around this period of time.
According to Southwest spokesperson Brad Hawkins, the company has made its capacity decisions in regards to its own best interest and without any sort of coordination or collusion with the other airlines.
The Justice Department is looking into the situation further by examining relevant studies, such as one by the University of Michigan and the consulting firm of Charles River Associates.
According to this particular study, ticket prices are increased by 3% to 11% when there are common investors between separate major airlines. The study was conducted by Professor Martin Schmalz and economists Jose Azar and Isabel Tecu.
According to Schmalz, there are two possible explanations for this occurrence.
One is that the airlines refrain from aggressive competition. This comes in the form of the airlines refusing to either expand their seating capacity or lowering their airfares. Taking either of these actions would be against the interests of their largest shareholders. These shareholders also maintain stakes in their competitors.
If the airlines work together, there’s no need for them to compete.
Another theory is that executives in the airline industry are coordinating moves on capacity or pricing by discussing strategy through large investors, who can act as middlemen for the airlines.
However, while the study offers some interesting theories, it offered no evidence of a cartel by the airline industry.
Furthermore, the investigation has surprised some analysts due to the fact that the prices of airline tickets have been on the decline this year. This goes against the theory of the airlines conspiring to work together to avoid competitive tactics.
Meanwhile discount airlines, such as Spirit Airlines, have been working hard to increase their number of seats, causing domestic coach fares to plummet.
The topic of capacity discipline has been a common theme in the airline industry since deregulation occurred in 1978. The airlines attempt to line up their supply of seats to the demand for tickets. Whenever the two become out of balance, the airlines make adjustments by scaling back their offered supply. It’s a typical practice.
For instance, in 2009 with the recession, average fares fell by 14%. As a result, airlines made the largest cut since World War II. Since then, the airline industry has consolidated, with several mergers taking place. The airlines have been very dependent on mergers and seat capacity management in recent years after the industry experienced $58 billion in losses from 2000 to 2009. Thanks to these techniques, airlines in the United States have a combined profit of $26.6 billion since 2010.
For now, the government says that they will continue to look into the matter to make sure that the airline companies are indeed staying as competitive as possible and not working together to manipulate things into their favor.