TOPICS: Antitrust, Collusion,Competition
SUMMARY: The four largest airlines in the United States are being investigated by the Justice Department for possible unlawful coordination. The concern is that airlines are limiting growth to protect profit margins. Airlines’ goal is to avoid the rapid expansion that led to boom and bust cycles in the past. The industry consolidated since 2008. Mergers reduced the number of big airlines from 8 to 4. One concern with consolidation is how it affects prices. Fares are down 16.3% adjusted for inflation from their peak in 2000 which suggests a limited anticompetitive affect. The three largest carriers are the slowest growing airlines. Growth adds seats and capacity to the system but may limit financial performance. Regulators will need to prove whether airline business practices are anti-competitive.
CLASSROOM APPLICATION: Antitrust regulators have been more aggressive as they examine practices in many different businesses and industries. Regulators may view the airline industry’s plans to control capacity and keep airfares high as anti-competitive, but companies see it as good business practice. The perspective of regulators is consumer protection. It might be difficult to find the kind of evidence that represents a hard core agreement between the airlines. Both investors and companies understand the relationship between capacity and financial performance. The airlines respond that they compete vigorously. Lack of expansion isn’t necessarily the results of collusion.
QUESTIONS:
1. Do a web search for the terms “antitrust” and “collusion” and use information found to explain what these business term mean.
2. Explain why the airlines are being investigated by the Justice Department.
3. Airlines responded to regulators with explanations for slow expansion of capacity (number of flights). What were their reasons?
4. What are some of the risks airlines face if they significantly expand capacity and the number of flights to destinations? END
