Airline Collusion - DOJ Investigates

Glenn Quagmire

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Apr 30, 2012
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http://mobile.nytimes.com/2015/07/02/business/airlines-under-justice-dept-investigation-over-possible-collusion.html?_r=0&referrer=


http://www.washingtonpost.com/business/economy/doj-investigating-potential-airline-collusion/2015/07/01/42d99102-201c-11e5-aeb9-a411a84c9d55_story.html


It seems that AA, UAL, and LUV, all acknowledge this review.

"American Airlines said it would cooperate with the investigation but disputed any notion that the mergers had restrained competition.

We welcome the review as the data shows that the industry remains highly competitive with more people flying than ever before, the airline said in a statement. Demand has been enabled by a robust and competitive marketplace in which capacity has been added and average fares have decreased.

Luke Punzenberger, a United Airlines spokesman, confirmed that United had also received the Justice Department letter. He said United was complying with the request for documents.

It is not clear when the Justice Department started the investigation.

Last month, Senator Richard Blumenthal, Democrat of Connecticut, called on the Justice Department to take more aggressive action against airlines, which have had surging profits as the industry has consolidated.

Consumers are paying sky-high fares and are trapped inside an uncompetitive market with a history of collusive behavior, the senator said in a letter to the department, citing a column in The New York Times. The column quoted airline executives who reassured those at an industry conference last month that they all understood the need for discipline in limiting flights.

After years of bankruptcies and billions in losses, the industry began a period of consolidation. Now, with bigger planes and fewer flights, the major carriers reported record earnings in the first quarter of this year."
 
from the WSJ:


“It’s somewhat ironic that the same Department of Justice who approved these mergers would now come out and cry foul,” said Joel Chefitz, an antitrust attorney at McDermott Will & Emery LLP who has worked for airline clients. In mature industries, economists expect companies to act in a disciplined fashion, Mr. Chefitz said. The government will “need evidence of a hard-core agreement” between the airlines, he said. “I’d be shocked if they got together in a smoke-filled room and agreed to cut capacity.”

despite including DL and WN, both have had rates of growth well above average for the industry and their peers and have been very aggressive in expanding their networks in competitor markets.

My guess is there is no way the DOJ can win this case before there is a change at the White House.
 
Dunno, the DOJ can look into collusion all they want, but there's more than enough evidence that the equity markets have driven the latest rounds of capacity discipline.

The markets *hate* oversupply, and when the stock gets punished long enough, management reacts. Here's but one round of it:


http://fortune.com/2015/05/21/airline-stocks-southwest/

http://www.star-telegram.com/news/business/aviation/article21752700.html

http://www.gurufocus.com/news/339189/airline-stocks-look-attractive-after-southwest-trims-capacity-growth-plans
 
I doubt very seriously that the DOJ can find that the airlines colluded between themselves about capacity. however, industry analysts have said a whole lot about capacity and some of the airlines have said a great deal about capacity to their investors and in responding to industry analysts.

At best, the DOJ might find that the airlines were messaging thru the analyst commununity but I don't think that is a charge they can make legally stick. There is no requirement that producers in any industry have to keep supply at a level to prevent fares from rising.
 
http://aviationblog.dallasnews.com/2015/07/analyst-jamie-baker-gives-four-reasons-he-doesnt-think-theres-anything-to-find-in-airline-antitrust-probe.html/
 
First, the implication that airlines currently enjoy pricing power flies in the face of current data.
 
Second, roughly 80% of fare increases we track have failed in recent years – so we can’t help but find humor in the suggestion of collusion.
 
Third, our investment thesis was never predicated on illegal behavior by management teams.
 
Fourth, the industry is already one of the most transparent imaginable, in our view, as ticket prices and schedules are publicly available, in most cases up to a year in advance.
 
 
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Second, roughly 80% of fare increases we track have failed in recent years – so we can’t help but find humor in the suggestion of collusion.
And that quote there from Hunter is the reason why this will all fail. If collusion were resulting in higher profits, you'd think that it would show up as fare increases.

Either way, there's far more competition in the airlines than there is in other industries, e.g. communications (telecom, broadcast/print media, cable & satellite TV), railroads, and shipping.
 
Most of the analysts have said it is a non-event by a DOJ.

Of course the analysts want to see higher fares and want to have the ability to talk with airlines about the drivers of their performance.

There probably was too much said about capacity esp. with WN's announcement that it would raise capacity from its previous guidance only to have analysts assail it, resulting in it coming back down.

Investors have LONG voted with their dollars against excess capacity in the industry and they will continue to do so whether anallysts and a few execs talk about it on confernce calls or not.

There was no collusion but there was discussion by analysts about capacity. Investors in the stock market got what it wanted with rational capacity which is NOT the same thing as the same level of capacity that will result in the lowest fares for consumers.

Unless the US government wants to nationalize the airlines, it has to accept that investors will get paid a decent wage even if it means higher fares for consumers.
 
Gee, did you expect him to say "Darn, you caught us!" in an employee facing communication?.... ;)

If there's anything in writing, it's probably from DL to AS, asking them to reconsider their actions for the sake of their fading partnership.

(Yes, I'm kidding. No need for 20 paragraphs from the resident DL Corporate Defense Committee representative....)
 
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I think the whole thing is a bit of grandstanding by certain members of Congress.
 
Argument:  When jet fuel prices entered the stratosphere, airlines raised ticket prices to stay out of bankruptcy.  Now, that jet fuel prices have gone down, the airlines should lower prices back to what they were (despite the fact that most of us were losing money when ticket prices were at that level).  There is also the issue that demand is up.  In a free market economy when demand is up and supply is low, prices should be higher.  The members of Congress are arguing that supply is being kept artificially low.  At the rate we are hiring flight attendants, I don't think that is AA's strategy.
 
WN announced they were going to raise capacity next year from 7 to 8%.
Wall Street analysts had a come apart.
They downgraded LUV across the board.
Within a couple days WN lost over a billion dollars in stock value (I think 2 billion).
Then WN was forced to reevaluate their growth and came back saying it would be no more than 6% next year which is lower than the orig plan of 7%.

Did Wall Street return LUV to a BUY and allow the stock to return to its original value?

Nope.

Is WN a bad investment because they have markets in which they can grow and still fill seats?

Nope.

Wall Street analysts have too much power to force companies to comply with THEIR plans regardless if it is good for a company or not.

Wall Street forced JetBlue to charge for bags or suffer the same downgrades.

Where is the investigation into the pure strong arm tactics or collusion of these so called experts?
They seem more like orgainzed crime offering protection sometimes.
 
jimntx said:
I think the whole thing is a bit of grandstanding by certain members of Congress.
 
Argument:  When jet fuel prices entered the stratosphere, airlines raised ticket prices to stay out of bankruptcy.  Now, that jet fuel prices have gone down, the airlines should lower prices back to what they were (despite the fact that most of us were losing money when ticket prices were at that level).  There is also the issue that demand is up.  In a free market economy when demand is up and supply is low, prices should be higher.  The members of Congress are arguing that supply is being kept artificially low.  At the rate we are hiring flight attendants, I don't think that is AA's strategy.
I agree.  SWA is also hiring 500+ Pilots and F/A's for 2015.  This would tell me they are planning more growth with added aircraft.  I'm still not getting where all this collusion stuff came from.  WN is right about how much SWA wanted to grow and then retracted to a lower % of growth.  Also SWA is holding back from even more growth due to the fact that Boeing cannot produce aircraft fast enough hence the aprox 40-50 used aircraft that have been bought and they are still looking for used aircraft...
 
I completely agree with Parker.

There is no basis for the government to argue collusion. Investors and industry analysts know what drives profits in any industry.

If the DOJ thinks they can tell companies they cannot talk with investment companies about their OWN FUTURE PLANS, then there is yet another Supreme Court case coming up.
 

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