A new research paper out of the University of Virginia suggests that airlines are talking about ‘capacity discipline’ in earnings calls to signal to each other a willingness to reduce capacity. When they do that, capacity falls. And that’s a form of collusion out in the open.
It’s a more public version, perhaps, of the wink and nod of communicating through fare basis codes. I always liked these letter and number codes, such as “OVALZNN3,” when they might include “FU” for a sale fare running out of a competitor’s hub.
There’s no question that airlines are signaling both their intention to restrict capacity and certainly a hope that others do too. Lower capacity overall should raise prices, all other things equal. And there’s little doubt that investors who frequently own stakes in all the airlines don’t want carriers to compete.
However this hardly seems like when American’s Bob Crandall and Braniff’s Howard Putman spoke by phone about their competition over a variety of routes and then…
Mr. Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here and pound the (expletive) out of each other and neither one of us making a (expletive) dime. I mean, you know, goddamn, what the (expletive) is the point of it?
Mr. Putnam: Nobody asked American to serve Harlingen, nobody asked American to serve Kansas City, and there were low fares in there, you know, before. So. …But if you’re going to overlay every route of American’s on top of, over, on top of every route that Braniff has – I can’t just sit here and allow you to bury us without giving our best effort.
Mr. Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years.
Mr. Putnam: Do you have a suggestion for me?
Mr. Crandall: Yes, I have a suggestion for you. Raise your goddamn fares 20 percent. I’ll raise mine the next morning. You’ll make more money and I will, too.
Mr. Putnam: We can’t talk about pricing.
Mr. Crandall: Oh [expletive], Howard. We can talk about any goddamn thing we want to talk about.
Putman was taping the call and turned it over to the DOJ. And though Crandall consented to some restrictions, there really wasn’t much even here because they never actually agreed to raise prices.
And of course it’s difficult to argue there’s any sort of collusion or monopoly in the face of falling prices today. Besides, if earnings calls are being used to limit capacity someone needs to tell United’s Scott Kirby that.
He’s been talking for some time about growing capacity in his calls.
Investors punish airlines that are growing capacity because they believe it will reduce long-term profitability.
If you want to go looking for collusion between the airlines it could be worth starting with the usual conspiracy theories about Conquistadores del Cielo, the club and regular private meeting of airline executives. And indeed the first discussion about a potential American Airlines – US Airways merger reportedly happened there…
Fascinating subject. Good article. As someone who engages in pricing competition in a market segment with 3 or 4 main players, I can attest though that verbal communication of any kind isn’t really necessary to collude. Your prices speak volumes. If I lower prices and competitor goes 10% below, he is saying FU. If he matches, he’s saying – OK…but is this really necessary?
Anti-collusion laws are clearly biased against business. Activists can collude by calling a boycott and unions can collude with each other, but the moment two CEOs play golf together the anti-business outrage begins.
@Art, are you stupid?
Maybe I’m crazy but I thought I read in some book or somewhere that most of the big airline and travel folks get together annually for some insider weekend retreat sorta deal. Likely cigars, whiskey rich guys and who knows. I would think such an event would be ripe for this sort of stuff.
@Ray Why act like a sociopath, just because you are anonymous online? How about attack the idea instead of the person.
Besides, he has a point, what else is the point of unions except massive collusion and extortion in the labor market?
Publicly sharing information relevant to profitability outlook is not collusion by any stretch of the imagination. Competitors could just as easily take that information as a signal that they can expand aggressively. Tacit collusion is a common feature of an oligopoly or duopoly, but there are enough airline competition where even tacit collusion would not be very effective in the domestic airline market. If Delta and AA get together and agree to not expand capacity, but demand increases, then other competitors including LCCs will happily move in.
This is what happened when FFP went revenue based and when basic economy was introduced. They publically talked about it and basically gave each other the heads up to make the leap knowing their competitors will follow suit.
*publicly
Nothing says professional and dignified like a man who can’t make it through a phone conference without repeatedly swearing.
The airline industry has long been open and notorious about price fixing and colluding…
…for their CARGO division where there have been so many documented instances, complete with fines by regulators, that the fines and any disciplinary actions are simply deemed/“baked into” the calculus as nothing more than the “cost of doing business” it’s practically laughable!
Of course, most passengers and consumers don’t know this because they don’t realize or understand how these deceitful, and indeed criminal, business practices, impacts them with the higher prices they pay for the products they buy, and therefore seldom, if ever, have seen the news reports more likely to be found in trade publications for lawyers, airline managements, or at best, buried deep in the business sections of a handful of business/financial publications like the Financial Times, Wall Street Journal, NY Times, etc., than making headlines on televised newscasts or front page news on typical mass market publications.
But the airline industry has a long, deep, sordid, history of many documented instances of collusion, price fixing and other anti-competitive/anti-consumer behavior.
So, does anyone really think this well documented history for anti-competitive behavior for airlines in their cargo divisions (magically) excludes their far more profitable passenger divisions where the SERIOUS MONEY is?
Seriously?
It’s the PROVING it part to meet specific legally define criteria/threshold on the passenger side that airlines know they can game to get away with – and sorry, folks, if they’re doing it on the cargo side (which is well known and documented via the many reported instances it has occurred when they got caught REPEATEDLY over many decades), only a naive waif would think it ain’t happening in OTHER divisions…
Just because virtually identical crappy seats; virtually identical row pitches; substantially similiar (degraded) products; substantially similiar fares, highly restrictive fare rules/fences/penalties/punishments; and substantially similiar frequent flyer mile programs/devaluations; baggage fees; boarding policies/fees, etc., just to name a few things that virtually every industry expert, and most passengers (regardless of their perspective on the fairness and propriety of these changes that have accellerated in their degree of scope and commonality since our industry became oligopolistic after Dougie & Co. took over legacy American five years ago) alike agrees is best described as a “Race to the Bottom” does NOT per se PROVE collusion, does NOT mean it ain’t happening…
And given what’s been going on over the past decade after industry consolidation began in earnest in 2008, and especially over the past 2-years, where even now an airline that was purposely created to be the ‘anti-airline airline’, JetBlue, is now also racing as fast as it can to catch up and NOMINALLY “differentiate” itself from Delta, United and American with its fare structures/restrictions and product offerings (something I call “Delta-lite”).
Oh, sure, now that American, Delta and United have shrunken their standard economy sections to just 30” pitch from the 31”- 32” it used to be, it’s easy for them to shrink theirs to 32” and still crow that they offer more legroom than their “competitors”.
How generous of them!
But in every other way, JetBlue sure has lost its flyer oriented heart and soul, and it ain’t anything near being the great airline it used to be…
…what with its current sleazy pricing models alone where the difference between the “Blue” fare tier (that does NOT include one checked bag [which, btw, was one of the “humanizing” aspects of that airline’s past era when it sought to “Bring Humanity Back To Flying” under the legendary David Neeleman’s vision, and his team, which also included Dave Barger, who lost his job as CEO in 2015 when he refused to cheapen/destroy the airline he, Neeleman and others worked so hard to launch, at Wall Street’s bullying to do so – or else as Barger sure did find out the hard way])…
…and the “Blue Plus” fare tier which does INCLUDE one checked bag (per the much better, flyer friendly anti-airline vision of Neeleman, Barger, et al that used to be included with EVERY fare)…
…where the difference in fare “tiers” between “Blue” and “Blue Plus” often VASTLY EXCEEDS the $25 fee were one to buy the “Blue” fare and simply pay the (NOW MUCH HIGHER than the original $15) checked bag fee separately.
Oh yeah, because nothing screams “Bringing Humanity Back To Flying” or “You Above All” better than these sleazy, dishonest and shady pricing practices!
If that alone doesn’t scream things like “SLEAZY”, “SHADY”, “DISHONEST” and “SCREW YOU”, then nothing will.
And has anyone else noticed the proliferation of fees across JetBlue of late?
Or how the many fees at JetBlue increase faster and faster with each passing year?
Or the sad (half-empty, too) snack baskets that not only are less bountiful, but also certainly lack the wide array of goodies to choose from (like my flight earlier this year)?
Oh, PUH-LEEEZZZEEE!
We can pretend this is “competition” in precise, legally defined terms.
But just because we CANNOT PROVE this lame, insipid, nominally legal compliant “faux competition” in our oligopolist, hijacked skies isn’t collusion and product quality/price fixing to meet the legally defined threshold to prosecute those who are otherwise doing it very effectively with “winks & nods” be they “magic” code words like “capacity discipline” that very much are REPEATED OVER AND OVER during quarterly analyst calls (or used to be since I would imagine an effort now will be to find and use different “magic” words 😉 ) or via the other well known method thru codes when “competitors’” fares are loaded into computer reservations systems Gary noted above, doesn’t mean they ain’t doing everything possible to go right up to, and perhaps during this current asleep at the switch Administration, even over the line of anti-competitive/anti-consumer behavior.
[Sidebar: their despicable “wishlist” to begin charging fees for elderly and disabled passengers for wheelchairs and attendants at airports also speaks volumes about how low down, sleazy, dirty, corrupt and rotten to the core current airline now managements are…]
That nearly every stinkin’ one of them except Southwest fall on top of each other to see who can better degrade, cheapen, devalue and WORSEN their products with each passing year INSTEAD of seeking to be better (“You Above All” & “Bringing Humanity Back” at JetBlue or “Climbing Higher” at Delta, just to name two retired slogans from an era when competition existed and wasn’t considered a costly, dirty nuisance by better managed airlines) speaks volumes about just how woefully deficient the competitive landscape is among our airlines.
Fact is, the only thing our airlines now can honestly claim with a straight face that they “compete over” is who can SCREW THEIR PASSENGERS BETTER – and get away with it.
That teeny tiny, “no legroom” (IFE-less) seat and that teeny tiny toilet for teeny tiny people sure is a competition – of sorts – to see who can “Race to the Bottom” FASTEST and “win” by degrading most flyers’ as much as possible as “best” as possible.
If that’s someone’s definition of “competition”, they can keep it.
Coz that sure ain’t what the outcome is in industries where REAL COMPETITION actually EXISTS, like when JetBlue or Virgin America were launched.
That much is for sure.