At a recent trade association conference in Miami of the International Air Transport Association (IATA), multiple airline executives spoke publicly about their plans to be “disciplined” in their approach to pricing and adding extra flights on popular routes. These event followed in short order thereafter:
1) The Antitrust Division of the United States Department of Justice confirmed that it had begun an investigation into whether certain major air carriers (United, American, Southwest and Delta) have colluded to limit the expansion of seat capacity—a form of price-fixing (here). The airlines will have to turn over internal documents for review and depositions may follow.
2) Within hours of the DOJ confirmation of the investigation, the first class action civil suit seeking treble damages was filed. Since that time four other class action treble damage suits have been filed and more will likely follow.
Did the airline executives needlessly bring this antitrust turbulence upon themselves? A couple of observations: These airlines are public companies. They have investors who want to know what the future plans are for profitability. It is not illegal for an airline to restrict capacity growth, or even to cut capacity–if it is a unilateral business decision. It would, however, be illegal for two or more airlines to agree to restrict capacity. And the agreement not need be express. It can be inferred from circumstances and conduct.
Red Flags/Risk Factors
It is the “inferred agreement” issue that should have given airline executives pause about multiple airlines making similar statements at a trade association event. The airline industry currently is operating in a high “antitrust risk” environment with red flags such as:
- There have been a series of recent mergers that have dramatically consolidated the airline industry and given some people concern over possible collusion.
- In fact, the DOJ sued to block the recent American Airlines/US Air merger, citing serious concerns over possible collusion in the resulting even more highly concentrated market. The DOJ dropped the suit after receiving some concessions, but for many, the tacit collusion concerns remained.
- Maybe most importantly, fuel costs have plummeted. This, of course, is well-known to the flying public who reasonably expected a drop in airfares. The fact that airfares have not followed suit, and may have in fact increased slightly, makes for a very unhappy public.
- If you travel, you also know that nearly every seat on every flight is sold out (and priced at a premium if you want “extra” leg room). The flying experience has never been less comfortable.
- There is a history of collusion in the airline industry—at a time when it was less concentrated than it is today.
Given this background, it would have been difficult for the DOJ to decline a request (made by Senator Blumenthal of Connecticut, who has extensive antitrust experience) to investigate given the public statements of the airline executives. It is entirely possible, even likely, that the DOJ investigation will not turn up enough evidence to warrant the filing of the suit. But, it could, depending upon what the internal documents show. And, even if the DOJ closes its investigation without taking any action, the civil lawsuits will continue…and continue. If no further evidence is uncovered, there may be settlements for nuisance value, but what an expensive nuisance!
It would have been wise for airline executives to consult with their antitrust counsel about the best way to give legitimate guidance to the investment public that they intended to exercise “capacity restraint” to protect profit. Not making statements about price/capacity “discipline” at a trade association event attended by competitors may have been advised. Or a statement emphasizing the unilateral nature of the decision may have helped. Of course, nothing can be done to completely immunize your company from an unfounded antitrust investigation or suit, but communication can be shaped in away to minimize such an event or help defend if sued.
The word “disciple” preceded by pricing and or capacity is a loaded word in the antitrust world. A person can unilaterally exercise discipline around a diet or spending and have success. Pricing and or capacity discipline, however, only works in an industry if competitors show similar restraint. Mutual public declarations of “discipline” can be seen as signaling tacit collusion. To be sure, it alone is not proof of an agreement. But, combined with other industry characteristics, it can be the trigger that leads to a DOJ investigation followed by civil lawsuits.
Speaking of consulting with antitrust counsel, here is a quick plug for a program that I am presenting with my friend Barbara Sicalides of Pepper Hamilton for Society of Corporate Compliance and Ethics (SCCE) titled: “CEO’s Say the Darndest Things: Training to Prevent Hot Antitrust Documents.” The program is Wednesday, July 15th at 1:00 pm. (EST).
Thanks for reading.