WASHINGTON:
A decade of mergers has led to four major US airlines and a problem for the government that blessed those deals: how to rein in behaviour that may amount to collusion.
Bill Baer, the head of the Justice Department’s antitrust division, tried to fix the last of those mergers two years ago by requiring terms aimed at fuelling competition by low-fare carriers.
Not one to shrink from a fight, and having collected victories against Apple and American Express, Baer is concerned a bigger fix may be needed. His antitrust unit is now examining the entire industry for signs of improper cooperation, taking on the cosy behaviour between airlines that he once warned about.
Troubling signs have been mounting: e-mails between airline chief executives uncovered in the last merger review, an industry conference where airline officials promised “discipline” on seating capacity, and questions about communications with industry analysts, all on top of past allegations of coordinated behaviour.
“In my experience looking at markets with just a few players, sometimes there is a temptation to coordinate behaviour,” Baer said Tuesday. “It’s a pretty good idea to resist that temptation.”
The Justice Department is investigating whether airlines are discussing how to control the supply of seats, a crucial factor in determining fares. Investigators are seeking information about conversations, meetings and conferences where industry capacity was discussed. Baer declined to comment about the investigation.
The four largest US carriers — American Airlines Group, Delta Air Lines, United Continental Holdings and Southwest Airlines — each pledged to cooperate with the Justice Department’s review.
The airlines probe begins as the Obama administration is about to enter its final year in office after promising renewed antitrust enforcement and Baer approaches his third anniversary running the division.
As outsiders post the administration is turning tough on business in its final years, Baer is tasked with determining which conduct threatens competition and hurts consumers. It’s a job he often says is non-partisan and requires enforcers to be ready to show their muscle in court to stop anticompetitive deals.
Industries that are consolidating with multiple deals at a time should be examined holistically in his view, an approach that could force health insurers now weighing takeovers to address how bigger players will affect consumers.
Baer’s priority as an antitrust enforcer is protecting consumers, said Molly Boast, a friend of Baer’s at law firm WilmerHale. While at the Federal Trade Commission in the late 1990s, Baer led the agency’s scrutiny of so-called pay-for-delay agreements that keep generic drugs off the market, a practice he saw as costly for consumers, Boast said.
“He’s willing to go to court if he doesn’t believe consumers will be fully protected,” she said.
Weeks after being sworn in as the antitrust chief in January 2013, Baer challenged Anheuser-Busch InBev NV’s proposed $20.1 billion (Dh73.83 billion) purchase of the half of Grupo Modelo SAB it didn’t already own. ABInbev subsequently agreed to completely divest all Modelo brands in the US.
The US airline industry was Baer’s next target when American and US Airways agreed to combine in 2013 to form the world’s largest airline. The government had already cleared a string of airline mergers — Delta and Northwest, United and Continental, and Southwest and AirTran — and antitrust lawyers broadly expected Baer to clear the American deal.
Instead, he surprised the market by suing to block it. The government was worried in part about coordination between carriers, saying in its complaint that airlines “increasingly prefer tacit coordination over full-throated competition.”
Baer settled that lawsuit by requiring the carriers to give up take-off and landing rights at Washington’s Reagan National and New York’s LaGuardia airports, among others. He defended the agreement at the time, saying it would “disrupt the cosy relationships among the incumbent legacy carriers” and generate competition from airlines like Southwest.
The settlement has lowered fares and increased service for passengers, according to Baer.
Capacity plans and changes are a frequent topic of discussion among airlines, investors, analysts and reporters, along with cost and revenue trends. Airlines try to match seating and flight capacity with travel demand to help support fares and avoid filling seats by cutting ticket prices.
Executives have talked about capacity discipline as far back as 2010, when airlines made the largest cut in available seats since World War II to counter slumping business travel in the recession and an end-of-year fall-off in leisure flyers.
Justice Department officials took renewed interest in such talk, according to a person familiar with the matter, after an industry conference in June. In response to reporters’ questions there, American Chief Executive Officer Doug Parker, Delta CEO Richard Anderson and Air Canada CEO Calin Rovinescu made remarks about capacity and maintaining discipline. An Air Canada spokesman couldn’t be reached for comment.
The Justice Department will look to those comments for signs of improper coordination, according to Spencer Waller, a law professor at Loyola University. But bringing a case will be challenging. The government has to show airline executives came to some kind of an agreement, possibly by signalling to one another through public remarks, Waller said.
Truly independent actions aren’t a problem even if they’re industrywide. One of the key questions for investigators will be whether any moves to cut capacity make economic sense if done independently, according to Waller.
“If it turns out that no, it doesn’t, that this is a booming market where passenger traffic is increasing and they each take steps to cut capacity, that’s at least an inference that there is more than independent corporate strategy going on,” he said.
The Justice Department has already shown it has evidence of communication between rival airline executives, and some of that is relevant to the new probe, according to a person familiar with the matter.
According to the antitrust complaint against American, Parker, then the CEO of US Airways, criticised an unnamed airline that was extending a triple miles campaign in 2010 and was expanding into new markets. US Airways senior management debated how to get the rival airline’s attention and “bring it back in line with the rest of the industry,” according to the complaint.
Parker, now the chief of American, urged his airline’s senior executives to portray “these guys as idiots to Wall Street and anyone else who’ll listen,” according to the complaint. Parker then forwarded that internal email chain, with its comments about how aggressive competition would be bad for the industry, to the rival airline’s CEO, the complaint said. The rival CEO responded it was an “inappropriate communication,” according to the complaint.
“The Justice Department reviewed this five-year-old email and millions others when it agreed to our merger,” said American spokesman Josh Freed. “The benefits we have delivered to customers, not someone’s speculation about an email mistakenly forwarded five years ago, should be the basis for evaluating American’s conduct.”
— Washington Post
