The Justice Department is looking into the possibility that U.S. airlines have been colluding to limit their own growth in order to keep profit margins high.
The four largest airlines in the country — American, United, Delta, and Southwest — all confirmed that they are cooperating with the Department’s request for documents and meeting minutes related to their expansion plans, The Wall Street Journal reported Wednesday.
A Justice Department spokeswoman said only that the department is looking at “possible unlawful coordination,” but a source familiar with the proceedings told The WSJ that the investigation began about two months ago.
If that timeline is accurate, it indicates that the Justice Department is several steps ahead of Democratic Sen. Richard Blumenthal, who expressed his own concerns about possible collusion in a letter sent to Assistant Attorney General William Baer June 17.
Following a series of mergers that began in 2008, the four largest airlines now control roughly 80 percent of the domestic air travel market. Between 2007 and 2014, roughly coinciding with the trend toward consolidation, the average inflation-adjusted U.S. domestic fare increased 5 percent. (RELATED: PAY UP: TSA to Raise Fees Next Week)
Meanwhile, many carriers have scaled back growth forecasts in recent months, even as falling oil prices have allowed them to cut their biggest cost, for fear that expanding too quickly could lead to excess supply in the future, which would ultimately undercut short-term profits.
Yet while individual airlines are perfectly within their rights to set any growth target that makes sense to them, the Justice Department is apparently concerned that they may have crossed the line into illegality by colluding with one another to fix common limits on their expansion.
At a time when the industry is posting its strongest profits in years, the reasoning goes, any carrier that chose to artificially limit growth on its own would simply fall behind as competitors expanded to meet untapped demand. By coordinating their efforts, though, the largest carriers could largely eliminate that threat, since their smaller rivals would not be able to cut significantly into their existing business.
Diana Moss, president of the American Antitrust Institute, told The WSJ that between consolidation, service cuts, rising fares, and “brazen [public] statements that smack of coordination,” the industry’s actions may simply have caused the Justice Department to decide that, “Enough is enough.” (RELATED: United Airlines Matches Baggage Fee Increase)
The airlines, however, are expressing confidence that the probe will not lead to legal action, saying the data will prove that the industry remains highly competitive. (RELATED: Gulf Airline Blasts US for Aviation Subsidies)
Moreover, seat capacity on domestic flights is up by about 3 percent compared to a year ago, which is by far the fastest rate of expansion since at least 2008, and the industry projects a 5.4 percent year-over-year growth rate in the third quarter of 2015.
On the other hand, much of that growth is driven by smaller carriers such as Jet Blue and Alaska Air, neither of which has so far been contacted by Justice as part of its investigation. The strongest growth projections come from Spirit, at 35.2 percent, and Allegiant, at 24.3 percent.
In contrast, Southwest projects the fastest growth among the top four carriers, with a much lower but still healthy 7 percent target. Delta and American predict third-quarter growth of 4.2 percent and 3.5 percent, respectively, while United takes last place with a paltry 0.7 percent growth target.
Nonetheless, Joel Chefitz, an antitrust attorney at McDermott Will & Emery LLP, told The WSJ that the government would likely have a hard time conclusively proving that a “hard-core agreement” existed, saying, “I’d be shocked if they got together in a smoke-filled room and agreed to cut capacity.”
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