back to top
Business

Can The Government Prove Airlines Conspired To Keep Ticket Prices High?

The government is looking into allegations of collusion among big airlines. But where does loose talk end and conspiracies begin?

Posted on

When news broke Wednesday that the Department of Justice is investigating whether America's biggest airlines conspired to keep ticket prices high, few questioned whether the alleged scheme, if it really happened, has succeeded.

Despite fuel prices plummeting — and fuel is the largest single cost for airlines — domestic flight prices have hardly budged. Meanwhile, the U.S. airline industry is enjoying record profits, and analysts expect this to be its busiest summer ever.

So yes, ticket prices have stayed high even though fuel costs are down dramatically. And it happened amid less competition, thanks to airline mergers — it was just two years ago that federal government stated its opposition to the merger of American Airlines and US Airways on the grounds that it feared the consequences of less competition in the industry.

But with the DOJ looking into things, it needs to answer a couple of basic questions: Was there a real conspiracy? And how do you prove it?

The standard to determine whether collusion happened is based on the lengths the airlines may have gone to in making an agreement that would not have been in their best interest if they were each acting alone, said George Hay, a professor at Cornell University Law School.

"Agreeing on the fares would be very difficult because there are a zillion different fares, but an agreement not to expand capacity would be a much easier agreement to implement," Hay told BuzzFeed News.

"Let's assume over the past year they achieved this, how did they do that? Did they shake hands? Or did they just chitchat at a conference and in a public forum they said, 'Yeah, that's a good idea'? The question is if they had some sort of commitment. What the DOJ needs to find is a fairly specific commitment or a more elaborate mechanism for telling people what to do, exactly what routes on which to limit capacity, or some implementation mechanism that shares information that would not otherwise be public."

At a recent industry conference in Miami hosted by the industry trade group International Air Transport Association (IATA), multiple airline executives spoke publicly about their plans to be "disciplined" in their approach to pricing and adding extra flights on popular routes. Many saw such talk as a barely coded form of public collusion — "classic oligopoly-speak for limiting flights and seats, higher prices and fatter profit margins," wrote New York Times columnist James Stewart.

"It was very, very stupid for them to make comments like they did at IATA because that was certain to attract the interest of the DOJ," said Christopher Sagers, a law professor at Cleveland State University who testified before Congress about the antitrust issues related to the American Airlines–US Airways merger.

The government's eventual approval of that merger "left the industry feeling very, very cocky," he told BuzzFeed News. "They pulled off a merger that everyone thought they would lose, and I just think they're feeling a little immune."

But public statements complaining about widespread discounting and excess capacity — a common refrain at industry conferences and on corporate earnings calls — probably wouldn't be enough. There would likely need to be an actual meeting of executives, what multiple antitrust specialists contacted by BuzzFeed News cited as the "smoke-filled room" standard.

"To convict someone of price fixing, you need to show there was a so-called meeting of minds among the different airlines," said Scott Hemphill, a professor at Columbia Law School. "Sometimes a conspiracy is easy to show. Other times the line is hard to draw. And you can have high prices without there being any price fixing. Sometimes we say that mere 'parallel pricing' doesn't count. But there is disagreement about what exactly that means."

There's plenty of precedent for the DOJ proving these kind of pricing conspiracies really happened. Throughout the second half of the last decade, 21 airlines have been fined by the Justice Department for price fixing.

Airline executives have long been well trained on the particulars of price fixing rules and how to avoid exposing their company to the risk of prosecution, according to Bob Offutt, a senior technology analyst focused on aviation at PhocusWright, a travel industry consultancy. In the early '90s, Offutt work with airline technology company Sabre on the American Airlines account, where antitrust rules were drilled into staff.

"When I joined Sabre for American Airlines, I had to go to training classes to learn how to behave to avoid antitrust issues, which included a little card you had to carry that said, if you hear any kind of conversations where collusion happens, leave the room immediately and call this number," Offutt told BuzzFeed News.

The number was usually that of American Airlines' general counsel. "Things are not as strict as back then, but they are very aware of [antitrust issues]. The reality is the fare structures are so complicated, and they each use their own revenue management software to determine them, so it would be too hard to get an arbitrary formula for each route. I don't think there is active collusion, but they are certainly watching the fares on their screens and that's informing their decisions."

It isn't the fares themselves that the airlines are being investigated for conspiring to fix, but the number of seats available on certain routes. The Justice Department is trying to determine whether airlines have colluded to manage overall capacity on routes, keeping flights full, prices high, and profits maximized.

The DOJ has not yet brought a formal case against any airline, but Spencer Weber Waller, a former staffer in its antitrust division, told BuzzFeed News that if a case is brought and won against the airlines, it will lead to headaches that go well beyond the government's own punishments — flyers themselves may be able to join lawsuits seeking compensation for high ticket prices.

"The fact that this has been publicized means it's a very, very likely that these companies will be facing class actions in the future," said Weber, who is now a law professor at Loyola University in Chicago. If a DOJ action is successful, these lawsuits would likely be easily winnable for the people who bring them, he said. "If the government wins, people will have prima facie, where the violation is presumed in any follow-on case. It's a very powerful weapon."

Mariah Summers is a business reporter for BuzzFeed News and is based in New York. Summers reports on hospitality, travel and real estate.

Contact Mariah Summers at mariah.summers@buzzfeed.com.

Got a confidential tip? Submit it here.