When Airlines Talk About Restricting Capacity at Conferences, You Know They’re Probably Not Breaking the Law

In the New York Times, James Stewart thinks that the airlines’ public statements demonstrate collusion to restrict capacity and thus raise prices as the Department of Justice is investigating.

He offers up some quotes from last month’s International Air Transport Association meeting in Miami:

Here is Delta Air Lines’ president, Ed Bastian: Delta is “continuing with the discipline that the marketplace is expecting.”

Air Canada’s chief executive, Calin Rovinescu: “People were undisciplined in the past, but they will be more disciplined this time.”

And American Airlines’ chief, Doug Parker, said the airlines had learned their lessons from past price wars. “I think everybody in the industry understands that,” he told Reuters.

He claims this qualifies as an impermissible invitation to collude.

While it’s not illegal on its face to discuss capacity issues at industry conferences, it wouldn’t be much of a stretch to interpret this week’s comments as thinly veiled invitations to restrict capacity increases to keep ticket prices high.

…Christopher L. Sagers, an antitrust professor at Cleveland-Marshall College of Law and an airline industry specialist who opposed the American-US Airways merger in testimony before Congress, said that sort of talk at a conference of direct competitors in a concentrated oligopoly is a huge legal risk.

“I don’t see a smoking gun,” Mr. Sagers said. “But they’re all but saying you need to limit output to keep up prices.”

(Emphasis mine)

Except that if there was actual collusion, the last way they’d be able to successfully pull it off would be for the CEOs of major airlines to signal their plans in a public forum. If all that existed were public statements, that would be highly suggestive there wasn’t any collusion.

It’s basic game theory.

In a simple model where carrying air passengers is profitable, an individual airline wants to increase its capacity to carry more air passengers profitably. But it doesn’t want to do that if everyone else is going to increase capacity too because none of them would make more money.

What a given airline would want is every other airline to limit capacity, while they expanded their own capacity.

  • By signaling their own capacity restraint, they encourage other carriers to think they can expand capacity profitably.
  • If they were trying to signal capacity restraint collusively, their incentive would be to head fake — to convince other airlines not to expand capacity, while they themselves grew.

That’s what makes cartels so hard to enforce, without some kind of government mandate (the old Civil Aeronautics Board largely existed to enforce a cartel and prevent competition, they set airfares at a level that would generate profits and forbade new routes that they felt would lead to ‘ruinous competition’).

And it’s one reason that what the government will need to prove a case is precisely the ‘smoking gun’ that Professor Sagers doesn’t see here.

There could well be a smoking gun. Doug Parker sent an inadvisable email to Delta’s CEO in 2010.

In 2010, when Delta rolled out a new discount promotion, Parker complained in an e-mail chain with his executives that the move was “hurting [Delta’s] profitability – and unfortunately everyone else’s” and also urged them to bad-mouth Delta to Wall Street. Parker forwarded the whole e-mail chain to Delta CEO Richard Anderson in an effort to get him to re-consider the discounts. Anderson said that was inappropriate and sent the conversation on to his lawyer.

There could well be violations of law, it’s almost impossible not to find one when the government goes looking. As I wrote yesterday,

[M]y starting point is an assumption that there are almost always anti-trust violations. Anti-trust is something you almost can’t not violate. If prices are too high, it’s indicative of market power. If prices stay the same it’s collusion. And if they’re too low it’s predatory pricing.

But there’s almost no universe in which — even if true — this is the cause of higher prices and fewer seats in the air.

  • It’s nearly impossible to hold a secret and voluntary cartel together amongst four major competitors (United, Southwest, Delta, and American.

  • The government isn’t serious about increasing competition in the airline industry. If it were we wouldn’t be hearing about a plot to raise prices. We wouldn’t be hearing about the government taking under consideration complaints that the Middle East airlines sell too many seats too cheaply. We would be hearing about lifting of foreign ownership restrictions to bring in new competitors in the wake of approved mergers and immunized joint ventures.

Between 1992 and 1994 the Department of Justice investigated airline signaling through computer reservation systems, and ultimately wound up with a consent decree (‘we weren’t signaling but we promise not to use these systems in the way we say we weren’t’). That’s a way an investigation can end in ‘only’ a couple of years.

So even if you buy that there was collusion, even if there turns out to be embarassing e-mails eventually, and even if you think that could materially shift capacity and price [hint: it wouldn’t], then you still shouldn’t expect to see anything come of this investigation in anywhere approximating the near-term.

Ultiamtely airfares are a function of supply and demand. Airlines are loosening up on their capacity discipline even as they’re giving lip service to it — whether it’s Southwest’s growth at Love Field, Delta’s growth in Seattle and elsewhere, American’s plans to fly larger aircraft across the Atlantic or American expanding with new Pacific routes. That, combined with any economic downturn, will have much greater effects on price than entreaties from one airline to another to please not compete so hard.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Hi Gary,

    Really thoughtful take. Thank you! The only issue I have with it is that I think the game theory behind these decisions doesn’t work quite the way you describe for airlines. The goal of an airline is not simply to make money, but to operate in such a way that it makes its owners money. This seems like a redundant distinction, but in the case of the domestic carriers, it turns out that they are substantially owned by the same small group of large institutional investors. (Lengthy scholarly paper here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2427345 ).

    Whether it is provable or not, this substantially changes the calculus regarding the extent to which collusion is a good idea. An individual company reducing its maximal profit could still result in a greater aggregate profit for the shareholders with the most sway.

  2. Gary I think you might be too trusting by half. And also think price fixing is much much harder than it is. Look at LCDs and memory – both are hyper competitive markets and both were successfully prosecuted (and certainly guilty) for price fixing.

    The most competitive markets are the ones most at risk for (because they benefit most from) price fixing. Non-competitive markets don’t require price fixing – because someone already has a monopoly.

    Yes, they all fall apart given a long enough horizon, but that could be 5-15 years. Plenty of damage done and profit extracted.

  3. Gary,

    Your thought process is correct if there is no limitations in a market. You miss one important fact. There are a limited number of slots at airports and the government which controls them has also allowed the merger to limit the number of competitors in the market. Basically the barrier of entry is too high. If you put constraints and put a barrier of entry, those already in the market can operate more freely. Now if you effectively signal to the oligopoly not to increase capacity, the public doesn’t have many options.

  4. I practiced antitrust law for over 35 years, both with the government (FTC) and with corporations. Proving conspiracies needs much more than parallel conduct (if one looks outside and finds many people using umbrellas, it is far more likely that it is raining than it is a conspiracy concerning umbrellas). But, in many industries, the economic incentives to conspire are high (think auto parts) and executives, especially in the air transport industry, have sufficient egos to believe they won’t get caught.

    In order to open an investigation, DOJ staff needed some evidence other than mere suspicion to get authorization to proceed from the Assistant Attorney General, and to obtain reciprocal clearance from the FTC (automatic in the case of airlines, a traditional DOJ industry).

    In the end, it will be the e-mails and other internal documents that determine the outcome of this interesting matter.i

  5. Airlines don’t need to send signals or emails to enforce capacity discipline.The terms of annual and long-term bonuses, which amount to10s of millions of dollars for airline CEOs, are a most effective way to keep the cartel in line.

  6. I’ve posted my views on this silly move by the DOJ elsewhere so won’t repeat them here. However, since SouthWest has long had a variant of a revenue-based FF program and Delta changed its program to revenue-based two years ago, followed by UA doing the same last year…and speculation is that AA can’t resist doing the same next year…isn’t this a clear case of collusion by the Big Four and thus something the DOJ should really look into, and order a reversal?!

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