Airline industry collusion: Burden of proof

on U.S. government as investigation begins

Difficult to distinguish between illegal conspiracy and mirroring
behaviour to control seat capacity
The Associated Press Posted: Jul 05, 2015 10:50 AM ET Last Updated: Jul 05, 2015 10:50 AM ET

In recent years, airline executives and Wall Street analysts have been much more open in discussing how the airlines
have kept their passenger capacity the number of seats they put into given markets in check. (Wilfredo
Lee/Associated Press)

As the U.S. Justice Department launches an investigation into possible collusion in the airline
industry, experts say the government faces the burden of proving that carriers were deliberately
signalling business decisions to each other. Airlines routinely increase flights based on demand.
A particularly cold winter in the Northeast, for instance, might merit more flights to the
Caribbean. And sometimes, routes are cut because there isn't enough demand. Nothing is
illegal about that. Any company can limit the supply of its own products, whether airline tickets,
sneakers or smartphones. But it would be illegal for airlines to work together to limit flights in
order to drive up fares. The government's investigation is just in its initial phases. Letters went
out this week to American Airlines, Delta Air Lines, Southwest Airlines and United Airlines.
Together, those four carriers control more than 80 per cent of the domestic seats on planes.
Airlines are quick to say they can't talk about pricing decisions. But in recent years, airline
executives and Wall Street analysts have been much more open in discussing how the airlines
have kept their passenger capacity the number of seats they put into given markets in
check. With that capacity kept from growing too fast, airplanes have been fuller and carriers
have been able to command higher ticket prices. That's led to record profits. But were airlines
simply responding to Wall Street's questions about capacity, or were they illegally agreeing not
to compete too hard as part of an effort to make more money? "Matching supply to demand is
not a novel idea and running a company for profit is not a crime," Raymond James analyst
Savanthi Syth told investors in a note Thursday. Antitrust law draws a line between the entirely
lawful practice of companies' following each other's behavior and companies illegally conspiring.
The Justice Department appears to be hunting for communications and other signals that cross
that boundary, said Andrew Gavil, who teaches antitrust law at Howard University.

Looking for evidence of intentional coordination

"The distinction involves whether or not there was really express or intentional coordination by
two firms," he said. It's too early to know where the investigation is going. But if the government
does find evidence of improper collusion, it could attempt to negotiate a consent decree with the

airlines to stop them from certain behaviour, such as issuing public statements about their
intentions about capacity. Ever since the U.S. government stopped regulating routes and prices
in 1978, airlines have struggled to avoid nasty and unprofitable fare wars. Historically, when the
price of jet fuel fell, one airline would launch a new route or add extra flights on existing ones.
Fares would be slashed to attract fliers and other airlines would be forced to match the new,
lower fare. Airlines didn't like it, but legally they couldn't coordinate routes or fares.

Industry complains of fare wars

In 1982, Robert Crandall, then a senior executive who would become CEO of American Airlines,
expressed his anger about these fare wars in a phone call with Howard Putnam, CEO of Braniff
Airways. Putnam, who was recording the call, asked Crandall if he had a suggestion to deal with
the problem. Crandall told him to raise his fares and he'd follow suit. Specifically, Crandall
replied: "Yes. I have a suggestion for you. Raise your goddamn fares 20 per cent. I'll raise mine
the next morning." He said: "You'll make more money and I will too." The U.S. Justice
Department sued and the case was settled for little more than an agreement by Crandall to
keep a written record of all of his contact with other airline executives for two years. It's unclear
if there is a similar smoking-gun comment today. Airline executives have been talking publicly
about how they've learned not to add capacity too fast. But no statement appears to be as
blatant as Crandall's. After a brief industry increase in seats in the spring, American Airlines
CEO Doug Parker spoke about the need for capacity discipline to a Reuters reporter at the
International Air Transport Association's annual conference in Miami.

Airlines boast about 'capacity discipline'

"The real question is," Parker said, "is this a one-time catch-up for fuel prices being lower, or is
this airlines behaving like airlines used to and just increasing capacity because times are good?
I don't know if we know the answer to that yet." A few weeks earlier, the United Airlines chief
financial officer, John D. Rainey, spoke at a conference for Wall Street analysts and investors,
and he also used the same catchwords "capacity discipline." "We are a big believer in the right
balance between supply and demand, and we've demonstrated that with our capacity
discipline," Rainey said. "We've grown our (available seat miles) at less than GDP for eight
consecutive years, and so we'll continue to believe in that." A government investigation could
take years. Jonathan Baker, an antitrust law professor at American University, said
investigations like this one generally need more than just circumstantial evidence. A case with
explicit discussion between executives would be easy to prove. The harder challenge is one
where collusion would need to be inferred from statements by executives to analysts, and other
signalling.

The Associated Press, 2015