The New York Times recently noted that “discipline” is the go-to buzzword for airline executives. It’s most often used in conjunction with “capacity,” and the gist is that airlines have been focused on limiting the number of flights and seats. So long as supply of flights is relatively low, airfare prices—and profits—can remain high.
The question now being asked—not merely by travelers annoyed by high prices, but by a Justice Department investigation—is this: Is the airline industry’s much-heralded “discipline” illegal?
This week, the Justice Department sent letters to American Airlines, Delta Air Lines, Southwest Airlines and United Airlines—the nation’s four largest domestic carriers, accounting for 80% of flights within the U.S.—concerning “the undesirability of your company or any other airline increasing capacity.” The airlines were asked to turn over flight and capacity data accrued since 2010, with the idea that the Justice Department is investigating whether any “unlawful coordination” on capacity, and by extension on pricing, has been taking place.
The investigation comes a couple of weeks after U.S. Sen. Richard Blumenthal (D-CT) publicly accused the airlines of “potential anti-competitive, anti-consumer behavior and misuse of market power.” In his complaint, which urged the Department of Justice to pursue the matter, Blumenthal quoted a previous DOJ report that summed up how airfares have gone up steadily and largely unchecked by competition in recent years:
This scenario has become all the more common in the post-merger era of oligopoly in the airline industry. With fewer competitors, there are fewer players to worry about having to get on board with each successive fare increase. Considering that unprofitable routes have been cut and flights are fuller than ever, there is little reason for an airline to break ranks and refuse to raise fares, let alone to dare engage in pricing wars.
In lieu of the desperation to fill seats via bargain flight prices like they did regularly in the past, the airlines have focused lately on maximizing the profitability of each route, with higher fares, more add-on fees, and no worries about having to drop fares to match some upstart competitor.
This behavior is undeniably anti-consumer. We’ll have to see if it’s deemed illegally anti-competitive, and what if anything rulings or fines can possibly do to change the (un)competitive atmosphere in the consumer’s favor.
The airlines might point out that the investigation is occurring just as flight prices are, in fact, getting cheaper. Flight search data indicates that, overall, flights this summer are a few percentage points less expensive than they were a year ago. Still, considering that fuel prices have decreased dramatically, it would be reasonable to expect airfare prices to drop significantly further, and for airlines to add capacity to take advantage of lower costs.
But doing so would be exhibiting a lack of “discipline,” and would be seriously frowned upon by many airline executives and airline investors alike. In late May, airline stocks tanked after a move was announced by Southwest Airlines. The airline’s crime? It was bumping up expansion plans slightly. The decision might seem sensible—fuel prices are low, flight capacity is high, so why not add flights and fight for more market share?—but investors punished Southwest, and the entire airline industry, due to concerns that “Domestic capacity discipline has effectively vanished,” as Wolfe Research airline analyst Hunter Keay put it.
On Wednesday of this week, airline stocks took another significant dip. This time, the blame went to the Justice Department’s investigation into “unlawful coordination” among the airlines. It goes to show that there could be something to the concept that when airline stocks take a beating, it’s probably good news for travelers.
The larger, unfortunate truth is that, no matter what the Justice Department finds in its investigation, there’s no getting around that there’s very little legitimate competition left in the domestic airline market. With fewer competitors dominating domestic flights, the age of discipline—and, perhaps, collusion—is here. That’s why the era of flight pricing wars is dead.