Opinion: Justice Department dropped the ball during consolidation

Rotation

Earlier this week the four largest airlines in the USA confirmed that the Department of Justice is seeking information from them related to possible collusion in controlling capacity growth. With recent consolidation in the industry, four carriers – American, Delta, United and Southwest – control 80% of the traffic in the domestic market, and elected officials and consumer-rights groups have been voicing concerns about increasing fares and cuts on some routes. But is it really collusion?

In the initial reports it has been suggested that conversations in public conferences, such as the IATA Annual General Meeting held in early June or an investor conference later in the month were examples of such collusion. This seems a strange assertion given that the discussions at these events are not unique and have been happening for years. Unless the DOJ wishes to admit that it has been ignoring the problem for a decade or more this seems a challenging position from which to base the investigation.

Rotation
Of course, it would not be unreasonable to assert that the DOJ has perhaps been shirking its antitrust duty of late. Consolidation is good for legacy airlines but a challenge for the newer, smaller players. And very much a mixed bag for consumers.

The DOJ had minimal objections to any of the recent major mergers; arguably the department facilitated the situation it is currently investigating. The lawsuit filed to block American’s merger with US Airways was settled with a minor divestiture of slots at Washington’s National Airport. Politicians were protected but the public good as a whole was mostly ignored. Moreover, it seems unlikely there will be a smoking gun such as the infamous Bob Crandall/Howard Putnam call in 1982 which triggered a DOJ suit at that time.

At the same time, however, it is hard to expect that airlines would continue to operate as public charities rather than as businesses. They must have profits in order to grow their fleets, to modernize service and to upgrade passenger-facing systems like inflight entertainment and connectivity. And, for better or worse, Wall Street analysts have a different set of expectations from the companies than consumers do. It is not hard to understand what pushes decisions forward.

Should the DOJ have been more aggressive during the most recent round of mergers? Probably. Provisions to ensure that smaller carriers would gain better access to the congested and contested airports would have been good for competition and consumers and likely not derailed the mergers. But the DOJ dropped the ball there. Its next chance to behave otherwise comes with the proposed Delta/United slot swap in New York City. Perhaps that will tell us if the DOJ has truly changed its tune or if this is just paying lip service to the politicians.