Airlines' seat talks draw U.S. scrutiny

In this Feb. 14, 2013 file photo, Travelers pass through a corridor at Philadelphia International Airport in Philadelphia. The U.S. government is investigating possible collusion between major airlines to limit available seats, which keeps airfares high, according to a document obtained by The Associated Press.
In this Feb. 14, 2013 file photo, Travelers pass through a corridor at Philadelphia International Airport in Philadelphia. The U.S. government is investigating possible collusion between major airlines to limit available seats, which keeps airfares high, according to a document obtained by The Associated Press.

WASHINGTON -- The U.S. government is investigating possible collusion among major airlines to limit available seats, according to a document obtained by The Associated Press.

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, routes and extra seats, in an attempt to keep airfares high.

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-carrying capacity, or "the undesirability of your company or any other airline increasing capacity."

The Justice Department asked each airline for its passenger-carrying capacity both by region, and overall, since January 2010.

Justice Department spokesman Emily Pierce confirmed that the department is looking into potential "unlawful coordination" among some airlines. She declined to comment further or say which airlines are being investigated.

Airfare decisions normally are among the most closely guarded secrets before they're announced, and upon announcement they trigger intense scrutiny by competitors and bargain-hunting travelers.

"I certainly haven't seen any outward signs of collusion," said Joe Denardi, an analyst with Stifel Financial Corp. in Baltimore. He questioned the Justice Department's timing in beginning an inquiry when in fact airlines have been adding more capacity than many investors would like to see.

On a day when the overall stock market was up, stocks of the major U.S. airlines ended the day down 1 percent to 3 percent on news of the investigation.

"We received the letter and are complying," United spokesman Luke Punzenberger said Wednesday. American Airlines also said it would cooperate with the Justice Department. Delta Air Lines and Southwest Airlines had no immediate comment.

The airlines publicly discussed capacity early last month in Miami at the International Air Transport Association's annual meeting. After hearing about that meeting, U.S. Sen. Richard Blumenthal, D-Conn., requested a Justice Department investigation.

The department had tried to block the most recent merger, the 2013 joining of Fort Worth-based American Airlines and US Airways, but ultimately agreed to let it proceed after the airlines made minor concessions.

Some Wall Street analysts argue that to remain financially strong, airlines should not expand capacity faster than the U.S. economy. And from January 2010 to January 2014, they didn't.

In that four-year period, capacity on domestic flights was virtually flat while the U.S. economy grew about 2.2 percent per year. From January 2014 to January 2015, however, the airlines expanded by 5.5 percent, topping the economy's 2.4 percent growth for 2014.

A series of mergers starting in 2008 put America, Delta, Southwest and United in control of more than 80 percent of the seats in the domestic travel market. They've eliminated unprofitable flights, filled more seats on planes and made a very public effort to slow growth to command higher airfares.

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

That has led to record profits. In the past two years, U.S. airlines earned a combined $19.7 billion.

This year could bring even higher profits because of a drop in the price of jet fuel, the airlines' biggest expense. In April, U.S. airlines paid $1.94 a gallon, down 34 percent from the year before.

That worries Wall Street analysts and investors. Cheap fuel has led airlines to make money-losing decisions in the past, rapidly expanding, introducing new routes and setting unrealistically low fares to lure passengers. Airlines already flying those routes would match the fare, and all carriers would lose money.

Such price wars are long gone, but 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 Dallas-based Southwest said at an industry event that the carrier would increase passenger-carrying capacity by 7 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 much faster. He urged the major airlines to "step up" and cut routes for the good of the industry.

On June 1, Southwest Chief Executive Officer Gary Kelly said his airline would cap its 2015 growth at 7 percent. That sparked a rally in airline stocks, as investors were more assured 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.

Information for this article was contributed by Mary Schlangenstein, David McLaughlin and Michael Sasso of Bloomberg News.

A Section on 07/02/2015

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