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US Justice Department opens probe of airlines for collusion

07/02/2015| 3:55:58 PM|

The DOJ is investigating several U.S. airlines for possible collusion in a probe that could have a deep impact on domestic carriers' seat availability and airfares.

The Department of Justice said Wednesday it is investigating several U.S. airlines for possible collusion, a probe that could have a deep impact on domestic carriers' seat availability and airfares.

"We are investigating possible unlawful coordination by some airlines," the DOJ said in a statement.

Several media outlets, including CNN, The Associated Press, and NBC News, reported that the collusion among major airlines involved limiting available seats to keep airfares high.

The U.S airlines' main trade group, Airlines for America, denied the charge. "We are confident that the Justice Department will find what we know to be true," it said in a statement. "Our members compete vigorously every day, and the traveling public has been the beneficiary."

The DOJ has already demanded copies of all communications among the airlines, analysts and shareholders.

"It's hard to understand, with jet fuel prices dropping by 40% since last year, why ticket prices haven't followed," said Sen. Charles Schumer, D-N.Y., who called for the Justice Department to launch such an investigation in December. "We know that when airlines merge, there's less price competition. What we need now is a top-to-bottom review to ensure consumers aren't being hurt by industry changes."

Sen. Richard Blumenthal, D-Conn., also welcomed the investigation. What airlines call "discipline" in matching flights with travelers "is just a fancy term" for restricting the number of flights to keep profits high, he said.

"DOJ itself played a part in this consolidation by approving several mergers and now consumers are paying sky-high fares, as airlines keep capacity artificially low in a market with a history of collusive behavior," said Blumenthal, a former five-term state attorney general.

Airlines stocks sank following the report.

Shares of American Airlines lost 2.8% to $38.80. United Continental Holdings fell 2.5% to $51.69.

Southwest Airlines ended the day down 1.4% to $32.62. JetBlue Airways fell 3.4% to $20.06. And Delta Air Lines' shares fell 2% to $40.27.

"We'll cooperate fully in answering any questions the DOJ has of us," said Brad Hawkins, a Southwest spokesman.

"Delta has received a civil investigative demand and is fully cooperating with the Department of Justice," wrote Delta spokeswoman Betsy Talton in an email.

Other airlines didn't immediately respond to requests for comments.

In recent years, U.S. airlines have been consolidating through a series of mergers and cutting back on the number of seats flown, leading to tighter capacity and higher airfares even as demand for flights continues to rise. The industry consolidation has halved the number of big U.S. airlines and 80% of U.S. passenger traffic is flown by just four carriers: American, Delta, United and Southwest.

Less than two years ago, the Justice Department opposed the merger between American Airlines and US Airways, saying it "threatens substantial harm to consumers." The merger, which was the final step in a wave of airline consolidation, "would make it easier for the remaining airlines to cooperate, rather than compete, on price and service," the department said in an August 2013 antitrust lawsuit against the airlines.

The merger would leave three "legacy" airlines — American, Delta and United — which "increasingly prefer tacit coordination over full-throated competition," the Justice Department wrote.

In a consolidated industry, airlines would have an easier time coordinating their fares, fees and "service reductions," the department said.

The merger was approved in April 2014 after the Justice Department dropped its opposition in exchange for concessions aimed at increasing competition from Southwest and JetBlue.

As of March, U.S. carriers reported 65 million passengers boarded, a seasonally adjusted all-time monthly high, according to the Department of Transportation's Bureau of Transportation Statistics. Planes that month were flying at 83.5% full, slightly below the seasonally adjusted all-time peak of 84.6% the previous January.

Adjusting for inflation, domestic round-trip fares have risen 17% since 2010 to $392 last year, according to the DOT bureau.

Airlines for America said customers decide pricing "with their wallets on what they value and are willing to pay for." It said U.S. capacity is "at a post-recession high," with airlines increasing the number of available seats by 4.6% year-over-year for the summer travel period (June 1 – Aug. 31).

The number of available seat miles, one way of measuring airline capacity, grew from 1.3 billion in 2010 to 1.47 billion last year, according to Transportation Department statistics.

Joel Chefitz, an antitrust lawyer who is a partner in the Chicago office of McDermott Will & Emery, said unless there is stark evidence of collaboration, it would be hard to see how the Justice Department could bring a case when it has given a green light to the industry's massive consolidation.

"It would be truly ironic if the government, having approved the mergers that created a consolidated, concentrated industry, an oligopoly, would now complain,'' he said. "If all they're talking about is an industry acting in a disciplined fashion, matching supply with demand as opposed to cutting prices willy-nilly in order to fill up seats ... then I don't expect the government will actually file a lawsuit.''

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TAGS: DOJ | US carriers | collusion | price fixing
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