Justice Department probe of airlines is too little, too late

Faced with an American public fed up with cattle-car dense seating, extra fees for checked baggage, and perceived poor service from overworked airline employees, the Department of Justice is launching an antitrust probe of the industry, complete with subpoenas.  This is likely to be fruitless, because the airline industry has been allowed to merge itself into an oligopoly that doesn’t need to illicitly coordinate in order to keep a lid on capacity.

The real problem is that United was allowed to merge with Continental, Delta with Northwest, and American with U.S. Airways, reducing competition to an oligopolistic situation, under which the Big Three along with Southwest control 80% of the domestic air travel market.  Those mergers never should have been allowed to take place.

Bloomberg reports:

 U.S. airlines face an antitrust investigation by the Justice Department into whether they are discussing how to control the supply of seats, a crucial factor in determining fares.

American Airlines Group Inc. and Southwest Airlines Co. confirmed receiving Justice Department requests for details of conversations, meetings and conferences where industry capacity was discussed. The department said an inquiry was under way into possible coordination among carriers but wouldn’t give details.

Airfare decisions normally are among the most closely guarded secrets at airlines before they’re announced, and upon announcement they trigger intense scrutiny by competitors and bargain-hunting travelers. The Bloomberg U.S. Airlines Index tumbled immediately after the probe was disclosed, then pared its decline to 2 percent.

“I certainly haven’t seen any outward signs of collusion,” said Joe Denardi, an analyst with Stifel Financial Corp. in Baltimore. He questioned the Justice Department’s timing in bringing an inquiry when in fact airlines have been adding more capacity than many investors would like to see.

When the domestic airline industry had ten or more major carriers, competition was a free-for-all, with carriers taking risks in adding planes and markets in hope of grabbing traffic from rivals.  With just four big carriers, they can keep a close eye on each other and exercise capacity discipline.  The underlying economic reality is that once the door on an airplane at the gate is closed, unsold seats become worthless.  In business jargon, derived from the fish industry, this is called “sell it or smell it.”  The inability to inventory the product puts a premium on selling the last few seats at whatever the market will bear.  When there are a lot of carriers, there will be a temptation to go for those last remaining passengers (and remember that demand is elastic – when fares go down, more people decide to fly instead of drive, or take trips they wouldn’t take if fare were higher).

By resisting the impulse to add a lot of flights, airlines are able to charge higher average fares, keep empty seats to a minimum, and make a good return for shareholders.  Having only three other major competitors to keep an eye on vastly simplifies the process of avoiding excess capacity additions.  You don’t need to call airline x and say anything.  Just stop adding a lot of planes and seats, and watch what the other three competitors are doing, market by market.  This is very basic oligopoly behavior.  And we have allowed an oligopoly to be merged into existence.

That said, the other 20% of the domestic market features a bunch of upstarts, including Frontier, Allegiant, Spirit, and Alaska, who play by a different set of rules, and who are generally gaining market share.  Alaska is a special case, and I may write about it separately, but the other three are known in the industry as ULCC – ultra low cost carriers, who charge very low fares, pay their staff less than the majors, and charge for everything.  On Frontier, you pay a buck for water and must pay for carry-on baggage, for instance, as well as for reserving a seat.

It is almost certainly too late to undo the mergers.  And unless the airlines have been unbelievably stupid, I don’t think the feds will find any evidence of overt collusion.  So I doubt that this probe will go any farther.  But it will make headlines, and allow pols like Sen. Chuck Schumer to denounce ruthless capitalists, and impose a lot of legal fees on the carriers.

Meanwhile, airlines like Allegiant, Spirit, and Frontier will continue to pick up market share.

I am old enough to have enjoyed what some call the golden age of air travel.  On average, almost half the seats were empty.  Staff were paid well.  Meals were even okay.  But I also remember that fares were about the same as today, not in inflation-adjusted dollars, but in absolute dollars.  Sometimes even more.  Oh, and the airline industry was overall quite unprofitable.

I mourn the loss of all the vanished names of the airline industry: Continental, Northwest, U.S. Airways, TWA, even Braniff (which flamed out in a misbegotten expansion) and even more ancient carriers like Northeast.  If the DoJ wanted a non-oligopolistic industry, it should have stopped the last round of mergers.  Looking for collusion now is like closing the barn door after the horses have left.