Feedback
News

DOJ Looking Into Possible Airline Collusion to Keep Fares High

Feds investigating airlines for possible price fixing 3:14

The Justice Department is investigating possible collusion among major airlines to limit available seats that keeps airfares high.

Officials familiar with the antitrust investigation say the question is whether the major airlines are illegally coordinating with one another to limit capacity, which would have the effect of keeping fares up, to the detriment of passengers. The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to one another how quickly they would add new flights and routes and extra seats.

The investigation became public after the Justice Department began sending what are known as "civil investigative demands" Tuesday to the airlines, which are like subpoenas. The Justice Department wants to know whether airline officials are coordinating their efforts, communicating with one another through public statements or private statement to market analysts.

FROM AUG. 13, 2013: US Air, American merger could hurt customers, Feds say 3:28

Justice Department officials declined to specify which airlines received the demand letters.

United Airlines confirmed to NBC News that it received a letter as part of the investigation.

Southwest Airlines, which has not said whether it had received a letter, issued a statement saying, "We'll cooperate fully in answering any questions the DOJ has of us."

Delta also told NBC News that it has received a civil investigative demand and is fully cooperating.

The investigation was first reported by the Associated Press.

Related: Airline Profits Soar as Fuel Prices Drop, but Fliers Face Bumpy Ride

Investigative sources say they're looking at how often airline executives have publicly used the word "discipline."

Veteran fare watcher Rick Seaney says he often hears airline chief executives and Wall Street analysts talking about "capacity discipline," which he says "is basically saying don't grow your airline, don't add seats, get rid of routes where you don't have flights completely full."

In a statement, the airline industry trade group Airlines for America said their members are competitive.

"We are confident that the Justice Department will find what we know to be true: our members compete vigorously every day, and the traveling public has been the beneficiary," the group's statement read.

A letter received Tuesday by major U.S. carriers demands copies of all communications the airlines had with one another, Wall Street analysts and major shareholders about their plans for passenger capacity.

Justice Department spokeswoman Emily Pierce confirmed Wednesday that the department was investigating potential "unlawful coordination" among some airlines. She declined to comment further, including about which airlines are being investigated.

Thanks to a series of mergers starting in 2008, American Airlines, Delta Air Lines, Southwest Airlines and United now control more than 80 percent of the seats in the domestic travel market. During that period, they have eliminated unprofitable flights, filled a higher percentage of seats on planes and made a very public effort to slow growth in order to command higher airfares.

Airlines second half: Will fares rise? 1:40

It worked. The average domestic airfare rose 13 percent from 2009 to 2014, when adjusted for inflation, according to the Bureau of Transportation Statistics. And that doesn't include the billions of dollars airlines collect from new fees: $25 each way to check a bag and $200 to change a domestic reservation. During the past 12 months, the airlines took in $3.6 billion in bag fees and $3 billion more in reservation change fees.

All of that has led to record profits for the industry. In the past two years, U.S. airlines earned a combined $19.7 billion.

This year could lead to even higher profits thanks to a massive drop in the price airlines pay for jet fuel, their single highest expense. In April, U.S. airlines paid $1.94 a gallon, down 34 percent from the year before.

And that's what worries Wall Street analysts and investors.

Historically, cheap fuel has led airlines to make money-losing decisions. They would rapidly expand, launching new routes and setting unrealistically low airfares to lure passengers. Airlines that already flew those routes would match the fares, and all carriers would lose money.

Such price wars are long gone, but today's low fuel costs, along with recent comments from airline executives, have given the market jitters.

Airline stocks plunged in May after the chief financial officer of Southwest said at an industry event that the carrier would increase passenger capacity by 7 percent to 8 percent, an increase over an earlier target.

Wolfe Research analyst Hunter Keay, who hosted that May 19 conference, told investors in a note afterward that the big airlines are unhappy to be restraining growth while low-cost airlines like Spirit grow at a much faster pace. He urged the major airlines in a note to investors to "step up" and cut routes for the good of the industry.

FROM JUNE 15: Airlines want to shrink carry-on luggage size 0:37

"This is a Mexican Standoff. Four airlines with guns pointed at each other. Each is afraid to cut suddenly profitable routes because they fear another will backfill that route," he wrote. "Airlines keep those routes under the rationale that it's good for the long term. This is literally the exact opposite of capacity discipline."

On June 1, Southwest CEO Gary Kelly said his airline would cap its 2015 growth at 7 percent. That sparked a rally in airline stocks, as investors were more reassured that capacity growth would be limited.

Keay said Wednesday that he had not been contacted by the government and doesn't think the airlines have been acting inappropriately.

"The analyst community is bringing up the subject. You certainly can't fault an airline executive for responding to the question," Keay said. "The capacity continues to grow at the airports people want to fly to, and air travel remains a particular good value for the consumer, especially for the utility that it provides."