Analysis: U.S. Airlines Reportedly Investigated for Alleged “Collusion” by Justice Dept.

UPDATE July 7, 2015: A group of passengers is now suing the airlines, allegeding carriers conspired to “fix” prices.

According to the Associated Press, the U.S. Department of Justice is investigating “whether airlines are colluding to grow at a slower pace as part of an effort to keep airfares high.”

The AP quotes a DOJ spokeswoman who called it an antitrust investigation into potential “unlawful coordination” among some airlines, but no airlines are named.

LISTEN: Rick Seaney’s insider view.

Airlines and Alleged Collusion

Let me begin my analysis by noting “collusion” is a loaded word. Are airlines calling each other up to set prices? No. But there may well be new systemic changes underway, set in motion by the unintended consequence of recent history, financial pressures, and technological advances. First, some background.

The recession of 2007-2009 and accompanying fuel crisis meant big changes for the airline industry. For the 20 or so years leading up to this crisis, airline executives followed the economic mantra of grow-or-die as they increased seats and routes.

This ended with the recession. Many airlines were forced out of business while others turned to mergers: Delta and Northwest, United and Continental, Southwest and AirTran, American and US Airways. Today, these four mega-carriers account for nearly 80% of all traffic in the U.S. and are a perfect example of the new, post-recession mantra: contract-and-survive.

Capacity Discipline and the Airlines

The contract-and-survive mentality fits perfectly with today’s Wall St. airline investors who urge like-minded airline executives to follow “capacity discipline”: This means cutting capacity (or seats) on unpopular routes, and little if any seat expansion in the post-recession recovery era – ensuring seats remain filled and fares stay high.

Add to the mix more sophisticated airline computer pricing systems that detect competitors’ airfare hikes and price-drops, which in turn enable airlines to match up-and-down fare changes. This matching is nothing more than part of doing business in today’s online world because no airline wants its prices to wind up on page 10 of an airfare search site which would effectively hide the fares from all but the most diligent shopper.

Solutions?

What are the possible solutions to the current way of doing business, what the Department of Justice reportedly fears smacks of collusion? Since DOJ tinkering has set the current playing field, here are some of the ways they could change the situation by changing rules. The question is, could these potential solutions make things worse?

  1. Break up the newly-merged airlines
  2. Have the government set prices as they did before airline deregulation of 1978
  3. Take routes from the carriers controlling 80% of traffic and give them to the airlines controlling just 20%
  4. Break up the virtual mergers between U.S. carriers and their transoceanic alliance partners which were granted antitrust immunity to consult on fares and routes
  5. Lower the barriers for foreign investment to spur more competition
  6. Continue to strengthen passenger rights as has been done in the European Union

Will any of these happen? Doubtful. More likely is some slight tweaking of current regulations.

There is a certain irony in the Justice Department’s concern over alleged collusion since it was the DOJ that gave U.S. airlines and foreign carriers the antitrust immunity to consult on routes and prices. And just a couple of years ago the Department of Justice initially balked at approving the American Airlines/US Airways merger because it “would substantially lessen competition” in various U.S. markets. That was ultimately resolved to the government’s satisfaction.

Can You Still Find Cheap Flights?

It remains to be seen what will happen with the current “collusion” allegations. I don’t expect much but we will follow the story carefully.

At the same time, you’d better believe the airlines continue to carefully follow the buying patterns of passengers because this may bring about an ultimate solution. You see, travelers have some power over prices: If fares get too high, people stay home, and if that happens prices will come down.

Yes, you can still find cheap flights, especially if you follow our practical, cost-cutting advice: Travel unpopular times and days (Tuesdays, Wednesdays and Saturdays are usually cheap), shop for tickets on Tuesdays (cheapest day to shop), and stay on top of unexpected deals by setting airfare alert.

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Updated: July 7, 2015