As Fares Drop, U.S. Surprises Airlines in Seat-Supply Probe

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Amid a drop in airfares and a surge in seating, U.S. antitrust officials surprised airline investors with an investigation into whether carriers are colluding to maintain pricing power.

The Justice Department seeks airline documents that would reveal the “need for, or the desirability of, capacity reductions or growth limitations by the company or any other airline,” according to the government’s request for the information.

Fares and capacity are closely linked, because having too many seats can dent carriers’ ability to charge more. While executives have mused publicly about wanting to rein in new flying to help prop up prices, the U.S. is jumping into the fray when the stock market is signaling that airlines have actually done too little to curb their seat supply.

“Carriers have been pretty outspoken about capacity, and certainly Wall Street has reinforced that to them,” said David Swierenga, president of aviation consultant Aeroecon. Seating is among the crucial drivers for airlines, and “if you don’t talk about those things with your investors, you’re just not doing your job.”

The Bloomberg U.S. Airlines Index was unchanged Thursday, leaving the gauge down 19 percent this year for the worst performance over the period since 2009.

Analysts Puzzled

The four largest U.S. carriers -- American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co. -- each pledged to cooperate with the review. Department spokeswoman Emily Pierce declined to discuss details of a probe that many analysts found puzzling.

“We do not believe this investigation into airline collusion has merit,” Helane Becker, who follows the industry for Cowen & Co., said in a note. “Airlines have recently been competing in Dallas, Seattle and Chicago to gain market share, often at the expense” of a decline in a benchmark gauge of industry revenue.

Delta’s experience has been typical among the major airlines. Revenue from each seat flown a mile fell 4.5 percent last quarter, the airline said Thursday. Domestic yields, or the average fare per mile, “softened” in June in some cities, Delta said.

Capacity Growth

After a 2 percent increase in domestic seating in 2014, carriers are adding capacity at a 5 percent clip, said Joe Denardi, an analyst with Stifel Financial Corp. in Baltimore. Prices are down, too. Average domestic coach fares fell 4.9 percent through May, based on data compiled by Bloomberg.

“I certainly haven’t seen any outward signs of collusion,” Denardi said in an interview.

U.S. law is clear on that point: Companies are prohibited from attempting to limit competition through agreements.

“Saying there’s too much capacity in our industry is not a defense to an antitrust violation,” said Allen Grunes, an antitrust lawyer at Konkurrenz Group in Washington.

The Justice Department’s antitrust division has been probing collusion and price-fixing across financial markets and industries. Bloomberg reported last month the division has begun scrutinizing U.S. Treasury trading, following the outlines of successful cases against banks for rigging currency fixes and benchmark interest rates. It also successfully sued Apple Inc. for conspiring with publishers to fix electronic-book prices.

Pleasing Investors

Investors typically welcome airlines’ efforts to hold the line on their seat growth. When Southwest Chief Executive Officer Gary Kelly said last month that he was backing off 2015 capacity plans by one percentage point, the airlines index staged its biggest rally in three weeks.

In turn, Wall Street also frowns on the bargain fares prized by travelers. American CEO Doug Parker helped trigger the industry’s deepest stock rout since 2011 after saying in May that he would fight discount carriers on price.

Critics say the major airlines have too much clout after five of the 10 largest carriers were gobbled up last decade via mergers or acquisitions. The quartet of American, United, Delta and Southwest accounted for 77 percent of 2014 U.S. airline traffic, according to the U.S. Transportation Department.

Justice Department officials heard the too-big argument last month from U.S. Senator Richard Blumenthal, a Connecticut Democrat, who called for an investigation of “anticompetitive, anti-consumer conduct and misuse of market power in the airline industry.”

That reasoning drew scorn Wednesday from analysts who say airlines’ record earnings stem from ending bad habits such as adding flights even when they lose money. At last, carriers have found a sustainable business model, said Bob Mann, a former American executive who now runs consultant R.W. Mann & Co.

“Should government be in the business of requiring commercial failure for continued licensure?” Mann said. “Are airlines now a public utility?”

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