DOJ Investigates Airlines’ 'Capacity Discipline'

by Michele McDonald

The Department of Justice (DOJ) is investigating whether airlines’ “capacity discipline” violates antitrust law, but proving its case will not be a slam-dunk.

The four largest U.S. carriers -- American, Delta, Southwest and United – have acknowledged receiving civil investigative demand (CID) letters from the department and have said they will cooperate.

The major airlines have been practicing capacity discipline since 2008, when the double blow of a spike in oil prices and the recession convinced them that selling seats at rock-bottom fares in order to fill planes was no longer sustainable.

Losses
The airline industry as a whole has lost more money than it has ever earned – not once, but several times – during the century of commercial aviation.

Periods of good times, often brief, have been sandwiched between economic downturns, fuel price upturns, hurricanes, oil embargos, the bursting of Internet (and other) bubbles, volcanic ash clouds and terrorist attacks.

Through it all, airlines continued to chase market share at their own expense until 2008, when the price of oil topped $100 a barrel for the first time in nearly three decades.

For the major carriers, it was the handwriting on the wall. They immediately cut capacity. They have since increased it in cautious increments.

Inventory control
Keeping inventory under control to keep prices at a higher level is not illegal.

It’s what Apple does every time it rolls out a new version of the iPhone. Long lines form in front of Apple stores days before the phones are available for sale, and they sell out quickly.

It’s what Target does when it offers designer promotions with Missoni or Lily Pulitzer. The items sell out quickly by design.

It’s what Atari did not do in 1983 when it produced so many copies of its ET video game that it could not give them away. They were buried in landfill.

Neither is it illegal for airlines to copy each other’s behavior. If something is working for one airline, others are allowed to adopt the same strategy.

Unlawful only if . . . .
“Capacity discipline” would violate the law only if airline executives actively colluded to keep capacity low. DOJ would have to find evidence of telephone calls, e-mails or other communications in which airline executives urged each other to march in lockstep on capacity for the purpose of keeping fares high.

The department launched its investigation after Sen. Richard Blumenthal (D-Conn.) was moved by a column he read in the New York Times to urge the DOJ to take action.

The “Common Sense” column, authored by James B. Stewart, suggested that airlines were signaling their intentions to each other at last month’s IATA annual general meeting in Miami. He included several quotes in which airline executives used the “discipline” term during the meeting.

But the quotes could be traced back to Reuters articles from the meeting, which showed the airline executives were responding to reporters’ questions either in individual airline press conferences or in sidebar conversations with reporters.

The executives were not speaking to other airlines, either from the stage or in another venue.

The DOJ will likely be looking for a “smoking gun” in the airline documents requested in the CID letters. But merely communicating capacity plans to the world at large (or, more usually, to Wall Street analysts who closely follow any slight shift in capacity) would not qualify.

Airlines are required to report to the Securities and Exchange Commission (SEC) any plans, such as changes in capacity, that could materially affect their businesses.

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