Airlines

Are the Airlines Colluding—or Just Careful?

An industry that has struggled in the past may have good reasons for its decisions.

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Credit: kevin dooley / photo on flickr

In recent decades, there have been many ways to make money and one virtually infallible formula for losing it: running an airline. At times, it might have made more sense for the major carriers to set up bonfires of cash on tarmacs rather than actually transport people. 

Lately, though, they have figured out how to avoid squandering huge sums. Hint: It involves charging more for their services than it costs to provide them. This strange development has set off alarms among people in Congress who think aviation should be a charitable activity. 

Sen. Richard Blumenthal, D-Conn., recently charged, "Consumers are paying sky-high fares and are trapped in an uncompetitive market with a history of collusive behavior." He called on the Justice Department to launch an anti-trust investigation, and last week, it said it was doing just that. 

The suspicion is that the big airlines have been using winks and nods to limit the number of planes in the sky. When too many seats are available, fares get slashed, profits vanish and, time after time, carriers go bankrupt. When fewer seats are offered, the opposite happens. 

The department suspects that when company executives tell Wall Street analysts they have learned their lesson about overexpansion, they are sending a clear nonaggression message to other airlines. A Justice spokesperson said their talk about "discipline" on capacity suggests "potential unlawful coordination." 

Yes, it could. And if New Orleans shop owners who got flooded after Katrina respond to a hurricane warning by closing, it could mean they are colluding with each other to maximize price-gouging opportunities after the storm is over. Or it could mean they have enough sense not to repeat ruinous mistakes of the past. 

Investors sometimes insist on verifying the sound judgment of those who want their money. "There have been about two years of conference calls in which Wall Street analysts have browbeat airline executives to either have discipline, or they will bust their recommendations on their stock," aviation analyst Robert W. Mann Jr. told The New York Times

Who can blame them? Those analysts weren't born yesterday, which is about when the domestic industry got flush. Between 2000 and 2009, it lost $54 billion. No wonder investing guru Warren Buffett once groused that when the Wright brothers got their flying machine into the air at Kitty Hawk, someone should have shot it down. 

Year after year, American travelers took full advantage of the industry's habit of cutting fares and expanding capacity. But if something is too good to last, it won't. At some point, the airlines' need to make money to stay in business had to prevail, at least temporarily, over passengers' desire for bargains. 

Lately, the airlines have managed to make money, mainly by making sure they don't fly so many planes that they can't fill them up. When seats are empty, these carriers know, loss-inducing fare wars ensue. When planes are packed, they can be assured of covering their costs. 

The strategy has worked reasonably well. Since 2007, reports The Wall Street Journal, inflation-adjusted fares are up 5 percent—but they are 16.3 percent lower than in 2000. This year, fares are actually shrinking. Profits have reached record levels, thanks in part to higher baggage fees and other irksome charges. 

But there is no guarantee the good times will keep rolling. A recession—a surge of growth—could upset the carriers' plans. 

Airlines, like other businesses, have to worry about two dangers: having too much capacity, which requires costly discounting, and having too little, which drives customers away. Either mistake can be devastating. 

Right now, many big airlines are erring on the side of caution, but they are not cutting back capacity. Total capacity in the third quarter is expected to be up by more than 5 percent, well above the rate of growth in the economy. 

The Justice Department seems to be confusing collusion with prudent caution induced by repetitive trauma. Anyone who wants to bet that the airlines will stay profitable the next time there's a terrorism scare or a slump in the economy will have no trouble finding takers. 

When airlines were on the verge of drowning a few years ago, our leaders didn't offer a life preserver. Now that the industry has its head above water, Washington shouldn't toss it an anchor.

© Copyright 2015 by Creators Syndicate Inc.

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  1. There are only four major airlines in the US now. Prices tend to be higher when there is less competition.

    1. This. And we have so few because the cost of getting into the business is absurdly high. If there is collusion, it’s the result of the government creating massive barriers to entry so there is no actual market.

      Cartels and collusion can only exist in markets artificially restricted by government. The progs and ‘reasonable’ people obstruct barriers and then whine irrationally about capitalism.

    2. There are at least 2 dozen regional and national passenger airlines (not counting charter and cargo lines) in the US alone. This is an *explosion* of passenger air transport that came about after deregulation of the airlines in 1978.

      The difference, *now* is that the airlines have managed to adjust to living under the new sky and have made their legacy unions finally understand that if the airline goes under, *no one gets paid*.

      There was less competition, higher prices, but better service – since the prices were government set, airline competed on service. But at the price of allowing incumbents to lock new-comers out of the market.

      Since deregulation, several of the legacy carriers went out of business and pretty much every other major airline went bankrupt at least once while trying to adjust to a new competitive market where people, when given the choice, showed they didn’t care as much about leggy stewardesses as they did about getting from A to B quickly and inexpensively.

      1. I think your counting is a little off. I count 6 airlines from Detroit to New York (although Spirit hardly counts as an airline). But to Los Angeles there are two–again Spirit, and Delta (at three times Spirit’s price–$1400 r/t). And most of the regional airlines are actually subsidiaries of the BIG FOUR. So it’s at best an oligopoly. But it’s not deregulation that has caused this (and the escalation in prices that goes along with it–has anybody bought a ticket to Europe in the past two months, for example? It used to be you could fly to England or France for under a thousand, and now it’s minimum 2K for a round-trip in the summer.)

        The point that many of the commenters (and the author) missed is that there is no free market in *destinations*–landing slots are monopolized by (normally government-run) airport authorities, at least in the US. Internationally they are monopolized by IATA and national governments with political axes to grind.

        1. https://en.wikipedia.org/wiki/ List_of_airlines_of_the_United_States

          Not two dozen *everywhere*, but two dozen large and regional airlines that serve different parts of the US.

          Its absolutely deregulation that has caused this – now, *if* you can scrape up the starting capital, you can start an airline. Before, your competitors could block that (there was, effectively, ‘certificates of need’ for airlines).

          And prices go up, and they go down. The costs of transporting people is not constant. Fluctuations in fuel prices alone will have a significant impact on ticket prices.

          As or the rise in ticket prices – well, increasing wealth means that more people are wanting those European vacations. That means each seat is more valuable, meaning the airlines can charge more and still keep them filled.

          Sure, the right to control landing slots is ‘monopolized’ by the airport – as it should be. Landing and take-off are the *business* of the airport. But those slots are auctioned off to those who consider them the most valuable.

      2. they didn’t care as much about leggy stewardesses as they did about getting from A to B quickly and inexpensively.

        Speak for yourself. I only fly Scandinavian Airlines for precisely this reason.

    3. Jet Blue and Alaska do a pretty good job playing 5th fiddle on their respective coasts. I don’t think lack of competition is a serious problem but maybe.

      1. True, but aside from Hawaiian, there are no other airlines besides the Big Four (soon to be three) that fly over the Atlantic or Pacific oceans

        1. There are, however, a multitude of foreign airlines that fly into and out of the US.

          Oh, wait – there’s a government sponsored lock-out of foreign competitors.

          1. Which is really too bad. If you want a return to leggy stewardesses, Volaris is the way to go in and out of Mexico. They already fly as far north as Chicago, but heaven forbid they fly from Phoenix to Miami.

        2. What about Virgin?

          1. American subsidiary.

      2. Here in Atlanta we had a major problem with lack of competition. Delta is KING here in ATL, and subsequently controlled the vast majority of terminals. Southwest tried for years to get terminal rights at Hartsfield-Jackson, but Delta always blocked them. Delta allowed regional discount airlines access (like AirTran), but none national like Southwest. Eventually Southwest was able to buy up AirTran (and their terminal rights), and now we actually have options and competition.

    4. How many “major” airlines were in the US before now?

      1. I am guessing that TWA, Continental, Northwest, Eastern, and such might have qualified at one time – check this out:

        http://historyshots.com/products/airlines

    5. Consolidation has created an environment that allows for more technological advances, more stability, and more efficiency. I would doubt you could find a cheaper/faster way to move your rear end around this country even with consolidation. There are a host of carriers offering domestic service including Frontier, Spirit,and Jet Blue. Before when there dozens of carriers there was instability and it wasn’t all that great.

  2. The ABC’s of Anti-Trust laws

    A. If your prices are higher, you’re gouging.
    B. If your prices are lower, you’re “dumping”.
    C. If your prices are the same, you’re colluding.

    1. Nailed it OM –

      This is nothing more than the opening salvo in the protection racket game. It’s funny – when I was in Sicily there were all sorts of huge construction projects going on and it was well known that the mafia was involved. Seems like they’re at least a bit more honest there.

    2. A monopoly really can charge a premium over a competitive business. This is micro-economics. If I’m the only one selling Confederate flags my price-point is higher than it would be in a competitive market. I can’t charge $1 million for one, I’d have no customers. I can’t charge less than the cost of making one either. My price-point is the profit from the zenith of whatever the number of buyers is times the money I charge.

      1. Re: Muhammad Finkelstein (widget),

        A monopoly really can charge a premium over a competitive business.

        Even being the first to market (the only instance of a natural monopoly) does not confer you with the power to set the price by yourself. First, as a businessperson you know customers face opportunity costs and competing choices ?besides the fact that, the price of something being a process of discovery, the business has to find that spot where the market clears? and second, because a high-enough price would attract competitors like bees to honey. A monopolist cannot then act like a monopolist, at least in a free market.

        1. Evidence:
          When ALCOA was ‘broken up’, the price of aluminum went up.

        2. I agree.

    3. D. If you are a labor union it doesn’t matter because colluding is just fine and dandy for you.

  3. Charles Paine says airlines have been loosing money since the Wright Brothers took off. Owning an airline seems to be vanity project for the well-heeled. I remember,back in the ’80s, flying between Los Angeles and Miami for $99 round trip. Before the security overhead. Thanks for the ride, xoxo, but no fucking way did my $99 pay the cost.

    1. Something I’ve never really understood – why this is the case. Is it truly the vanity concept?

      It seems odd – while the industry is highly regulated, there’s really quite a bit of competition and it’s seems relatively straightforward to run the financials (figure out fuel and labor costs and then set your routes).

      1. Its really that airline run on razor thin margins and a sudden downturn can suck the operating capital right out of the business.

        Fuel is *the* major expense, unions jack up labor costs, and the heavy competition with regional carriers means no one has the freedom to jack up prices to a comfortable (for the owners) margin.

        And, in the end, its the consumers who win by getting the cheap, fast, transport they desire.

        1. Pretty sure the way to make money in the airline bizz is to be damned good at hedging fuel costs.
          IOWs, the good ones are hedge fund with wings.

          1. All you can do is buy enough in futures to lock in your costs. But how can you know how much you’ll be using in any given interval? You could lose your shirt on futures; every bit you wind up speculating in beyond what you wind up using is add’l risk.

        2. I hear grocery stores are kind of like that–very thin margins, requiring very good management of inventory, expenses, etc.

          1. Grinding ice in with the ground beef, changing expiration dates, under-weighting packages, lowering advertised and shelf prices while maintaining or increasing scan prices…

            1. Dim lighting and cheap fabric. That’s how you move merchandise.–

            2. SIV|7.9.15 @ 1:06PM|#

              Grinding ice in with the ground beef, changing expiration dates, under-weighting packages, lowering advertised and shelf prices while maintaining or increasing scan prices…

              Anybody caught doing that kind of thing in the larger chains gets an escort to the door by Loss Prevention. Second best way to get fired I know; the first being theft.

          2. The little ones are – that’s why they keep closing down from the competitive pressure of the big chains.

  4. A Justice spokesperson said their talk about “discipline” on capacity suggests “potential unlawful coordination.”

    That statement suggests the spokesperson is a “potential sheepfucker”.

  5. This showed up on FB last week, steeped in a spicy Millennial soup of how high plane ticket prices are. It’s unfair!

    It saddens me how much of an history-ignorant clusterfuck this has become.

    1. Gah! do these people even look at their ticket price? A maddenly huge chunk is for my forced TSA massage – I assume it was all about greedy CEOs and no mention of wasteful security state right?

      1. Of course they don’t – they just look at the final price and scream at the airline.

        Governments like that so much that when the airline *forces* consumers to see what they’re paying to who, they make it illegal to break down the prices (see RyanAir and their ‘one Euro’ promotion).

    2. Facebook – there’s the problem. The worst noise to signal ratio on the internet. The INTERNET.

      1. Its even worse than Youtube – on Youtube, nobody expects comments to *make sense*, but on Facebook, you *know* these people and are always getting blindsided by their stupidity.

    3. It saddens me how much of an history-ignorant clusterfuck this has become.

      No kidding. I’m pretty much paying the same for various flights around the country as I was… Way back in college around 1990, which inflation calculators tell me means flying has gotten 45% *cheaper*. Even if my comparison is anecdotal, even if im off by 10-20%,*it’s still fucking cheaper*

      1. I initially read that last clause as “Fucking is still cheaper.”

  6. I hope Reason is just getting all the nut-punchiness out of the way before Friday. It’s been a string of stingers this morning.

    1. Speaking of collusion and nutpunches: Gowdy reveals subpoena Clinton claims she ‘never had’

      How long can this go on? 8-(

      1. FOUR MORE YEARS! FOUR MORE YEARS!

        1. A Clinton campaign spokesman has said she turned over 55,000 pages of materials to the State Department

          “*Including*, I might add, over one thousand fliers touting the virtues of The Original ‘Slick Willie’ Condom.”

      2. Covered yesterday. Subpoenas were sent to her lawyer, not served on her directly.

        The Clintons are the masters of making technically factual statements that obfuscate the truth.

  7. FAA
    DOT
    TSA
    DHS
    Unions
    High energy costs

    I wonder why the airline industry is a mess?

    1. I blame it on high-speed rail.

      1. I blame it on the lack of high-speed rail. If more travelers went by rail airlines would have fewer customers and wouldn’t need to compete so fiercely, so prices would… um.

        1. Exactly. Bring back dirigibles.

              1. NO STAIRWAY!

              2. Oh the humanity!

            1. “Rigid airship”!
              So, blimps with huge Viagra habits?

              1. Zeppelins with stripper poles.

      2. No one wants to invest in high-speed rail due to the potential competitive threat posed by high-speed bus.

        1. Seriously though – self-driving buses.

          By the time you got an HSR track running for more than 10 miles Greyhound will be undercutting you and providing better service to more places and travel times that are only 1.25 to 1.5 times as long.

          Rich people will fly, poor people will still take the bus, and the rest of us will make the trips in our self-driving cars.

          1. Actually Megabus has Greyhound beat, at least here in the Midwest. Took it to Chicago a month or so ago. Decent WiFi, comfortable seats, pleasant passengers. Takes the same time as flying, (given how early you have to get to the airport to be groped, and how far the airports are from the Loop), driving yourself or taking Amtrak.

          2. Some day somebody’s going to leapfrog all that w teleport’n. It may be an extremely long shot to invest in the research now, but when you consider the enormous potential payoff…wow.

  8. Someone should call Greenpeas and tell them Congress wants more half-empty planes in the air.

    Global Warming! Global Warming!

  9. Grocery stores have it set up so that Coke goes on sale (but other brands can’t go on sale) 26 weeks out of the year and Pepsi has the same deal with them… this kinda screws over RC Cola.

    No collusion necessary.

    That said: the airlines are totally colluding.

    1. Why would grocery stores care what brands of pop they put on sale as long as they make money? Are they the ones creating the coke and pepsi?

  10. Bush’s new campain slogan

    http://hotair.com/archives/201…..ger-hours/

  11. “Lately, though, they have figured out how to avoid squandering huge sums. Hint: It involves charging more for their services than it costs to provide them.”

    They’re charging more than it costs!

    Has Obama heard about this?

  12. Why is it just fine and dandy for labor unions to collude with each other but it’s big no-no for corporations to do it?

    1. If you have to ask, then you’re part of the problem, you racist.

  13. This is insanity.

    Really, the big brains of the Airline Industry need to collude to come to the conclusion that “I shouldn’t operate more seats than I can sell”? Really? If this standard business practice is colluding, then we should send every business school to jail as conspirators.

    I can almost guarantee that the real cause of this is the advent of machine learning and other more sophisticated ways of planning routes.

    This is anecdotal, but I have been flying Southwest roughly twice a month between the same locations for roughly 4 years now. When I started, I knew which days would have the flights I wanted and I had a good 50/50 chance of a flight being empty enough that I would have at least the seat next to me empty if not my own row.

    Today, Southwest changes their flights weekly. One week there will be a 3 daily flights to San Jose, the next week it will be 1 flight a day. And the flights are ALWAYS full. In my past 6 months of flying, I had 1 empty flight and I am almost sure that it was just a last-flight-of-the-day leg meant to get the plane back to my city for the next day.

    Technology in flight planning has made it possible for airlines to use fewer airplanes to hit demand at the best prices. This isn’t collusion, it is remarkably smart, sophisticated business practices.

    1. This isn’t collusion, it is remarkably smart, sophisticated business practices.

      Bingo.

      The difference in willingness to pay of passengers is vast. The airlines are doing a much better job of capturing more of that consumer surplus while collaterally filling every seat of every flight. That means (a) they don’t need to fly as many planes to transport the more people and (b) the bargain ticket price can be lower since the premium ticket and service prices can be higher.

  14. It’s called ‘yield management’ and it is indeed very sophisticated machine learning, Bayesian analysis and minute-by-minute price changes. That’s why Kayak has graphs of prices by date. It’s annoying, but only for those of us who remember when flying was for the elite. And, although I think prices really have gone up, it’s still pretty damn cheap.

    Flying is now mass transit. At least we still get seats, and don’t have to hang onto straps or get pushed into the planes by white-gloved flight-attendants.

  15. If the government thinks there’s a problem, the obvious fix is to allow foreign airlines to operate in the US, providing nearly infinite potential competition.

    I’m not holding my breath.

    1. In both the airlines and maritime and similar industries, there’s something called cabotage – for good reason. You could look it up.

      1. I looked it up. Didn’t see good reason for it. Maybe I didn’t look in the right place?

  16. See? Mr. Chapman can write solid, sensible stuff.

  17. DOJ should and must investigate whether there is or has been coordination of and communication about limitation of capacity, prices or any similar competitive aspects of airline policy. If individual airlines effect their own policies independently, fine. Vive la difference!
    Industry-wide discipline arouses suspicion, naturally.
    And, by the way, the airlines have gotten plenty of lifelines from the Feds.

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