Every time you book a flight, you wince a little at the price. Could it all be unreasonable? Airlines always claim that their flights are overbooked, that weather is playing a part, or that seats on your flight are in high demand. But what if they’re causing that high demand themselves in an effort to keep your plane ticket airfare high?
Civil Antitrust Investigation Eyes Major Airlines’ Possible Collusion
On July 1st, the U.S. government launched a probe into several of the country’s most popular airlines on suspicion of collusion. The claims are that these major airlines are purposefully keeping customer’s airfare high by limiting the number of seats available on their flights, creating an increase in demand.
As if that weren’t skeezy enough, the Justice Department’s civil antitrust investigation claims that the major airlines were illegally signalling to each other about how quickly they were adding new flights and seats. This is a much worse crime than simply forcing demand to remain high. They violated the competition policies that the government set forth in order to keep competitive pricing healthy in our state of capitalism.
The major airlines in question received letters demanding that they turn over all records of communication between each other, Wall Street analysts, and shareholders. The government has also requested their information about passenger-carrying capacity from 2010 to the present.
They suspect that these airliners have avoided upgrading their planes or adding new flights when they could’ve in an effort to limit available seats, keep demand unreasonably high, and increase fare for passengers. The investigation claims that these airlines could have added more seats many times, but conspired with other major airlines to intentionally limit their passenger-carrying capacities together.
Although the Justice Department spokesperson, Emily Pierce declined to confirm which airlines were under investigation, she did confirm that they were looking into “unlawful coordination” between some of the U.S.’ most popular airlines.
Major airlines such as Southwest, Delta, American, and United Airlines have all said that they received the government-issued letters and are complying by providing the requested information.
Massive Profit Growth for Post-Merger Airlines Sparked Suspicion
Suspicions grew when from January 2010 to January 2014 the economy 2.2% per year, but the passenger-carrying capacity remained static. Compare that to the airline’s growth of a whopping 5.5% in just one year; from January 2014 to January 2015. It simply doesn’t follow unless there was a little extra help between the competing airlines.
Through a series of very well executed business moves, United, Delta, Southwest, and American Airlines now control over 80% of seats on commercial flights. Since 2008, there have been a series of careful mergers, eliminations of less-profitable flights, and controlled airfares. Their strategy worked: the average domestic airfare has risen 13% from 2009 to 2014.
That percentage is adjusted for inflation, and doesn’t even cover the fees collected from passengers. In the last year alone, these airlines raked in $13 billion in reservation changing fees, and $3.6 billion in baggage fees. The profits were record-breaking at a combined $19.7 billion earned for the U.S. airlines in just the past two years.
Decrease in Jet Fuel Prices Could Spoil the Airline Industry for Investors
Investigation aside, will we see a decrease in prices this year? Unlikely. In fact, the airlines will probably see more profit since the 34% drop in jet fuel prices (their highest expense).
In the defense of airliners, expanding too rapidly has been the kiss of death for many flights in the past. When fuel is cheap, airlines often reduce their prices too much in an effort to outprice the competition, but instead offer too-low fare and add too many new flights… all too fast, effectively emptying their pockets.
It’s a capitalistic highwire act, to be sure. But as this current investigation shows; stacking the odds too heavily in your own favor can just as easily hurt you. Analysts are nervous that the control over the market will soon be lost, and the health of the airline industry will decline as new, cheaper airlines like Jet Blue and Spirit continue to grow more popular. Investors want to know that airlines will cap their growth and keep their passenger-carrying capacity limited for the health of the industry, or else they’ll retreat.
Effects of the Conspiracy Investigation Felt in the Stock Market
When the news of the investigation went out, stocks plummeted 3-5% within minutes on a day where the overall stock market was previously up. Investors would be most affected if the investigation were to reveal that the airlines in question were indeed colluding. Many are already pulling out in an effort to protect their finances.
Spokespeople from many of the airlines under investigation have reiterated that they’ve done nothing but benefit their passengers, and that the airline industry is competitive and healthier than ever.
Even if the collusion allegations are proven to be false, this investigation could change the financial course for the airline industry over the next few months; for investors, the stock market, airlines, and even passengers.
07 Jul 2015