Tacit coordination among competitors is the No. 1 concern among most antitrust experts and economists when an industry consolidates too far. American Airlines recently effectively admitted to one of the worst-kept secrets in the aviation world — it engages in such coordination with competitors Delta Air Lines and United Airlines aimed at harming consumers.
American recently agreed to pay $45 million — hardly a token amount — to settle an airfare collusion lawsuit brought against American, Delta, United and Southwest Airlines. Previously, Southwest settled that suit for $15 million. As part of their settlements, both American and Southwest have pledged to cooperate as the lawsuit against Delta and United continues. That should be interesting, and fray nerves in Atlanta and Chicago. A judge must approve both settlements.
The $45 million American admission of guilt stems from a 3-year-old consumer antitrust lawsuit in which, according to Bloomberg, “executives for those companies are accused of assuring one another that they’d adhere to ‘capacity discipline’ and of carrying out their scheme by limiting consumer ability to compare prices and deter market entry by foreign rivals.”
Predictably, American’s public relations team shifted into overdrive denying the $45 million settlement is an admission of guilt. Instead, in spin worthy of an Olympic gymnastics gold medal, American claims it would have cost more to continue litigating so the $45 million of shareholder money it agreed to pay to end the lawsuit was nothing more than a prudent business decision.
Sure! Is Southwest that much better at negotiating than American that it agreed to pay $30 million less — just one-third of American’s settlement? Or, perhaps, does it reflect recognition by American that its rebuttal case is that much less persuasive? Then there is the question did Delta and United’s litigation cost calculus yield a different conclusion because they think they have stronger and more compelling defenses than American, or at least less expensive legal representation?
Whatever the explanation, the fact that American, Delta and United (Big Three) engage in joint anti-competitive action has been on full and unmistakable display for at least the last three years. One need look no further than the Big Three’s $50 million lobbying campaign against Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers). The Big Three’s richly funded, scorched-earth lobbying campaign was targeted at the competitive choice the Gulf Carriers offer consumers at a time passengers, more than ever, need more service options due to consolidation run amok and the competition strangling emergence of mega-alliances and joint ventures wielding market power that are exempt from antitrust oversight.
American’s CEO, Doug Parker, was very candid about his objective in the political campaign against Gulf Carrier-provided competitive choice. Parker expressed no interest in financial transparency, which was a battle cry of the Big Three’s lavishly paid lobbying surrogate, the Partnership for Open and Fair Skies. Parker and his generously paid lobbying team, which includes former Transportation Secretary Jim Burnley whose law firm — paid more than $1 million in reported lobbying fees alone for the three-year battle — had their sights set squarely on one thing and one thing only, Fifth Freedom U.S.-Europe flights.
As Parker bluntly said in a September 15, 2016, interview in the The Street, “Our biggest concern is flights outside the Gulf, flights from outside the Gulf region to U.S.”
The title of that interview says it all — “American CEO Says Mideast Carriers Should End Europe-U.S. Flights: For American, Delta and United, the bottom line in the dispute with the big three Gulf carriers is an end to ‘fifth freedom’ Europe-U.S. flying.”
So what’s the Big Three’s beef with Gulf Carrier Fifth Freedom flying in the U.S.-Europe market anyways and why did they waste $50 million of shareholder money unsuccessfully trying to block it?
The Big Three have worked diligently forming trans-Atlantic partnerships, and winning grants of antitrust immunity for them, ensuring they can jointly fix prices, constrain capacity and coordinate schedules with abandon. The last thing the Big Three want is a new entrant competitor like Emirates, which is not a member of their alliance and JV club, independently entering “their” trans-Atlantic market where the Big Three gang controls more than 80 percent of the available passenger seats. So, under the guise of a legitimate public policy campaign, the Big Three unsuccessfully colluded to try to persuade the U.S. government to be their anticompetitive sword slaying future Fifth Freedom-related consumer choice.
This is but one high profile example over the last three years. In addition to their $50 million failed lobbying campaign against Gulf Carrier choice, the Big Three also stood shoulder-to-shoulder attempting to block competitive entry by Norwegian Air International and Norwegian UK Limited in “their” U.S.-Europe market. In coordination with their employee unions, the Big Three fought a pitched regulatory and legislative battle against Norwegian’s innovative product and the competitive choice it will provide to cost-conscious trans-Atlantic passengers, as well as the huge benefit to secondary U.S. cities seeking non-stop Europe flights.
Like its campaign against Gulf Carrier choice, the Big Three’s battle against Norwegian’s competitive entry failed. The Department of Transportation approved Norwegian’s foreign air carrier permit applications after a protracted and expensive battle.
If rumors are true, Parker’s eye now is focused on a new front in American’s battle against trans-Atlantic competition. In an ironic twist showing that protectionist instincts are stronger than alliance bonds, American is said to be targeting Air Italy, formerly Meridiana Airlines, which is 49 percent owned by American’s Oneworld partner Qatar Airways. American apparently is irked that Air Italy has the “audacity” to enter the U.S.-Europe market offering two daily flights this summer from Milan to New York JFK and Miami.
As you can see, over the last three years, American has a very clear and undeniable pattern of anti-consumer joint conduct. No wonder the public relations spin by American that its $45 million admission of guilt is not that at all melts away like butter.
When American’s conduct is appropriately viewed through this anti-competitive lens, its true intent comes into disturbingly sharp focus. As a result, its words and actions understandably become suspicious. For instance, when Parker recently told media at the International Air Transport Association’s Annual General Meeting in Sydney that rising fuel prices necessarily mean fare increases, was he signaling to his assembled CEO brethren? How about Parker’s comment that American would not restore its severed commercial relationships with Qatar and Etihad because “we haven’t had enough time to make sure those resolutions (U.S.-UAE and U.S.-Qatar understandings) actually have the affect we hope for.”
Was Parker in fact signaling to those carriers American will not restart commercial relationships with them unless and until Etihad and Qatar agree to collude with American to restrict commercial activities, to the detriment of consumers and competitive choice?
Let’s hope American’s $45 million admission of anti-competitive guilt is a watershed moment. The proverbial turning over of a new leaf. A recognition that, as the largest and one of the most profitable airlines in the world, American can succeed competitively in the right way. But, the jury remains out.
Whether American abandons its expensive lobbying campaign against Gulf Carrier competition, and how it behaves regarding Air Italy, Etihad and Qatar, will be very telling — is it a $45 million head fake or a meaningful and welcome course correction.