Airlines' undisciplined talk may have led to antitrust probe: experts

The U.S. Justice Department disclosed Wednesday that it has demanded details from the airlines about their communications on capacity with analysts, investors, the public and each other.

The probe revives an issue from reviews of recent industry mergers: Can four airlines that control 80 percent of domestic air travel coordinate pricing by following each other's public statements and fare moves?

Concern about coordination among the big air carriers was one reason the Justice Department sued in 2013 to stop U.S. Airways from merging with American Airlines. That lawsuit was eventually dropped and the companies completed the deal.

"Here it is - the very coordination that they had speculated about. It was something of a problem before and it certainly has gotten worse," said John Kwoka, who teaches antitrust economics at Northeastern University.

Clandestine efforts by competitors to set prices or divide up markets are clearly illegal. Less clear is what executives of American Airlines Group Inc, Delta Air Lines Inc, United Continental Holdings Inc and Southwest Airlines Co can say in public about pricing or capacity.

At a meeting last month in Miami of the International Air Transport Association, at least three senior airline executives stressed the need for "discipline."

American Airlines CEO Doug Parker, for example, said airlines and their financial backers had learned painful lessons about the costs of adding capacity.

Such remarks are catnip for regulators.

"This (probe) should not be a surprise to the airlines," said one antitrust expert who asked not to be identified to protect business relationships. "The word 'discipline' is a no no. It's one of the words you don't use. It's like 101 in compliance."

Still, some analysts said the investigation came as a surprise, because airlines regularly talk about capacity at industry conferences.

"To give us guidance, they have to give us that information," said Helane Becker, airline analyst at Cowen and Co in New York. "It's not nefarious. It's not hidden. It is just what it is."

Some U.S. courts have upheld the ability of companies to give guidance to the market even when sending those signals could affect the actions of competitors. An antitrust lawsuit filed in 2000 against cigarette makers by tobacco wholesalers and distributors was thrown out by a judge who said that talking to financial analysts about pricing strategies did not amount to illegal “signaling” or price-fixing.

Wall Street expects airlines to restrict capacity this year, because U.S. GDP growth at 1.5 percent to 2 percent was well below forecasts of 3 percent to 4 percent, she said. "Traffic always grows in line with GDP," Becker said.

The Justice Department, in its probe, will be asking for emails and other communications that would show the extent of any coordination between airlines, if any, on critical issues of ticket prices, fees or capacity.

In the absence of exchanges explicitly outlining capacity restraints to prop up prices, the Justice Department would have to rely on circumstantial evidence, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa.

Cutting output unilaterally is legal while making an agreement to do so is not, but proving the latter can be extremely difficult.

"In part the Justice Department wants to test the boundaries in this," he said.

It is often difficult for regulators to prove allegations of improper market signaling.

Scott Wagner, an antitrust expert with the law firm Bilzin Sumberg in Miami, said the investigation's goal could be to nudge the airline industry to reduce prices and give travelers more of the benefit of the recent sharp fall in fuel prices.

"I think this is a shot across the bow by the Department of Justice," he said.

(Reporting by Diane Bartz, Alwyn Scott and David Ingram. Editing by Joseph White and Christian Plumb)