The Justice Department is now investigating the airline industry for potentially colluding to keep airfares high. Officials reportedly suspect that airlines are working together to maintain “capacity discipline,” whereby the companies refrain from adding seats or routes in order to restrict the number of seats for sale. Coordinating to keep supply tight would hand airlines more power to extract greater profits from the public — and violate antitrust laws.
Airlines rank high on the list of America’s most hated industries, so it’s tempting to celebrate DOJ’s move both as just deserts for the companies and as the mark of a dedicated government looking out for the public. That gets the story backwards, though. The investigation is a sign not of DOJ’s diligence but of its earlier failings. The Justice Department shouldn’t be lauded for the investigation — but rebuked for creating the problem in the first place.
Since 2005, what were once nine major airlines have merged their way down to four. Today, these remaining carriers — American, Delta, United and Southwest — control around 80 percent of air travel in the United States. The high level of concentration has handed the four companies enormous market power, equipping them to keep fares high even as oil prices have plummeted. The quality of their service, meanwhile, continues to deteriorate, with less seat space, fewer flight options and a litany of fees for basics that used to be free, such as checked bags and in-flight snacks. The situation, in other words, bears classic signs of oligopoly.
At every juncture, this was predicted. When Delta and Northwest sought to merge in 2008, consumer groups noted the tie-up would be the “canary in the coal mine” that, if allowed, would lead to “radical consolidation” across the industry and hand carriers significant market power. Regardless, DOJ let them merge. When United and Continental followed suit in 2010, public interest advocates pointed out that the merger would lead the companies to raise fares, slash routes and abandon hubs, hurting Midwestern cities in particular. Again, DOJ let them merge. Finally, after the airlines had exhausted nearly all possible mergers, it seemed that DOJ had learned its lesson. In August 2013, the government sued to block the proposed tie-up between American Airlines and US Airways.
The government’s complaint — the product of a careful and lengthy investigation — was damning. It observed that rising consolidation had already hurt passengers, and quoted airline executives cheering that consolidation had empowered them to hike fares, cut back flights and pile on extra charges like baggage fees. In one instance, DOJ found an e-mail from an executive urging a rival to compete less aggressively. Importantly, the core of the government’s argument was about market structure. Recent experience had shown that allowing airlines to merge made it easier for them to collude to suppress competition and harm the public. Allowing more mergers would only make the problem worse. “If not stopped, the merger would likely substantially enhance the ability of the industry to coordinate on fares, ancillary fees, and service reductions,” DOJ wrote.
It was a forceful case for why the industry — already highly concentrated and highly conducive to collusion — should not be allowed to consolidate further. On a call with reporters, DOJ antitrust chief Bill Baer said he believed “the right solution here is a full-stop injunction” to block the proposed merger. A settlement wouldn’t cut it.
Three months later, DOJ backed down and blessed the merger anyway. Its settlement required US Airways and American to divest slots and gates at a few airports, including Washington Reagan National, where the duo would’ve amassed control over 70 percent of slots. This concession, the government declared, would “enhance meaningful competition.” On the structural argument it had made in its complaint — that fewer airlines would be bad, period — it said nothing.
Granted, it’s not unusual for an antitrust agency to settle a merger even after it sues to block one. Often, filing a complaint serves as a prelude to further negotiations and strengthens the government’s hand by showing that officials are willing to go to court. In this case, however, the settlement left untouched virtually all of the harms that DOJ had outlined. Nothing changed the fact that airlines nationally would wield tremendous market power and, as DOJ detailed, would likely use it to collude. As the American Antitrust Institute wrote in a letter opposing the settlement, “[A] yawning gap exists between the complaint and the remedy.”
DOJ now seems to be confronting the consequences of its decision. Public disclosure of the investigation came a month after the New York Times reported that top airline executives discussed strategies to keep capacity tight at a recent industry conference. Following the report, Sen. Richard Blumenthal (D-Conn.) called on DOJ to investigate this potential “misuse of market power” and “excessive consolidation” in the industry. According to the Wall Street Journal, the investigation began around two months ago.
Three lessons follow from how things have unfolded.
First, a competitive market structure is the best guardian of competition. Seeking to police companies after they’ve bulked up in size and whittled down the number of rivals to three or four is no substitute for real competition. Thanks to Supreme Court decisions over the past 40 years, schemes like collusion have become far more difficult to prove, and firms in concentrated markets can coordinate in all sorts of non-overt ways. Moreover, antitrust laws don’t prohibit the full range of ways that companies in concentrated industries can suppress competition. Given our laws today, extreme consolidation itself is bound to be anti-competitive.
Second, the sequence of events vindicates one of the oldest arguments in favor of antitrust laws: that competitive markets ultimately require less government involvement than do consolidated ones. At its extreme, the argument goes, concentration of private economic power eventually leads to government controlling the economy through price regulation or even state ownership of monopolies. The resurgence of antitrust under Franklin Roosevelt in the 1930s, for example, was in part animated by the fear that monopoly was a path to fascism. As Roosevelt said in a 1938 address to Congress, “The enforcement of free competition is the least regulation business can expect.”
Third, the antitrust agencies remain some of the least publicly accountable parts of government. We have no idea what prodded DOJ to abruptly switch course and endorse a deal it had only months earlier declared would hurt the public. Neither the department nor the Federal Trade Commission is required to conduct retrospective reviews or hearings to assess how their predictions about the effects of mergers actually played out. The lack of reckoning means officials can ignore past experience and clear evidence of failure.
When the Carter administration deregulated the airlines in the 1970s, a key assumption was that government would continue to enforce antitrust laws. Alfred Kahn, the chief architect of airline deregulation, later wrote that the government’s abandonment of vigorous antitrust was one of the main threats to the success of deregulation. Today the consequences of DOJ’s failure are in full view. Its collusion investigation, whatever it turns up, is no reparation.