American travelers frequently complain that the airlines seem to have everything “rigged”, especially schedules and pricing, as it has become increasingly difficult to find inexpensive flights unless you are willing to travel at off hours or fly on smaller carriers. Based on news out of the Department of Justice late last week, it looks like Americans aren’t just imagining things.
The U.S. Justice Department has confirmed it is investigating whether several U.S. airlines have been colluding on expansion plans and other business activities, given concerns from consumer advocates and others that the industry is trying to control capacity to keep airfares as high as possible.
When contacted by the media, a DoJ spokeswoman said they are looking at “possible unlawful coordination” among some airlines. She would not provide any further details of the alleged violations or identify the airlines under investigation.
According to a knowledgeable source who spoke to the media, the investigation was launched close to two months ago.
The Big Four of the airline sector (American Airlines Group, United Continental Holdings, Delta Air Lines, and Southwest Airlines) all confirmed that they have been contacted by the DoJ and all say they are cooperating fully with the investigation.
More on airlines under investigation by DOJ
The media source notes that the Justice Department has asked the airlines for a large number of documents related to plans for expansion, as well as documents related to meetings with analysts or execs other airlines, according to a letter it sent to at least one of the airlines.
Of interest, airline execs have all recently stated that they planned to “limit growth” to protect their profit margins despite low jet fuel prices and a booming travel industry. These statements came in the weeks following a significant sell off in airline stocks related to analyst and investor fears that carriers might oversupply the market with new flights and spark price wars.
A few airlines have reduced their growth forecasts recently, but in general the air travel industry is continuing to expand the total number of seats and flights.
Shares of all of the Big Four dropped 1% to 2% after news of the Justice Department’s probe broke last week, and have continued to edge down since then.
Analysts from Morgan Stanley note:
The fact that the industry is now more consolidated may be playing a factor, but we note that the DoJ approved the transactions. There have been a series of mergers over the last ~10 years that resulted in 80%+ of the industry’s supply being owned by four airlines, a figure that was twice as high in the last decade.
However, we note that the mergers & acquisitions that formed these entities received sign-off from the DoJ and in many instances included the divestiture of slots to address market concentration issues.
Accordingly, the fact that the same department is alluding to the abuse of market power comes as a surprise.
Investors will now unfortunately likely get less meaningful discussion of future capacity plans. We believe the capacity commentary in the public domain is/ was intended for airline equity owners. These airline equity owners have increasingly become concerned about the industry’s potential loss of capacity
discipline/ lower fares this year. Unfortunately, directly addressing owners’ concerns in the public domain (e.g. 2Q conference calls) just got a bit more complicated
We think it is too soon after the American-US Airways merger for DoJ to conclude that consolidation has gone too far. We are not surprised by the decision to look into the validity and relevance of the allegations in Senator Blumenthal’s letter, but believe DoJ would want to give the new consolidated industry structure that it helped create a full economic cycle (or more) to develop before reconsidering it.