Air cargo on edge of seat

   With the U.S. Justice Department now querying the domestic airlines about passenger pricing, what’s that saying about history repeating itself? 
   Well, this isn’t exactly replication, but the seemingly ongoing collusion/price-fixing/antitrust pattern of investigations by the department against the airline industry. 
   Not even a decade ago, the Justice Department brought price-fixing cases against a handful of all-cargo carriers and cargo-carrying divisions of major passenger airlines. European and American regulators raided offices around the world in February 2006. The U.S. portion of the investigation has generated close to $2 billion in fines and guilty pleas by more than 40 airlines and individual airline executives.
   It seems like regulators are now playing a familiar tune with allegations that United, Delta, Southwest and American coordinated capacity in order to fix passenger fares, but the case might not be as cut-and-dry as the cargo-collusion investigation. The Justice Department sent subpoenas to airline officials on July 1 in the first move of the inquiry.
   Sen. Richard Blumenthal, D-Conn., spurred the investigation by writing the department about a recent International Air Transport Association meeting during which officials from the four domestic carriers allegedly indirectly encouraged each other to keep passenger capacity low. In the letter, he wrote that “airlines have traditionally viewed capacity reductions as a highly valuable way to artificially raise fares and boost profit margins.” Blumenthal continued on to state that airline mergers are at the heart of this problem, and that the Justice Department may have exacerbated the issue by approving the merger between American and US Airways. The coupling was approved on the second go-around after concessions were made because the Justice Department had been concerned about the significant market power it would be granting to a post-merger American.    
   Blumenthal’s proof that the topic is at least worth examining comes from tidbits in the public conference conversations of top executives at Delta, Air Canada and American. “At best,” he wrote, “these remarks reflect participants in an overly consolidated market aligning supra-competitive fares. At worst, they may be a strategic attempt to coordinate behavior.” 
   In an interview on NPR as news of the investigation broke, Blumenthal added airline officials talked about freezing out Southwest, “which had the nerve to talk about increasing the number of flights, thereby going against the industry rule.” In his Justice Department letter, he noted the executives’ comments at the conference could be seen as a signal to Wall Street — airlines that don’t follow prescribed capacity restraint should be “punished.”
   Blumenthal conceded these talks occurred out in the open at an industry conference, but said the quasi-directives mean there might have been more direct talks behind closed doors. 
   Air cargo isn’t a part of the new government claims, but any inquiry centering on capacity could have a great impact on air cargo. As new generations of passenger planes with larger bellies have come onto the market, the availability of cargo space has increased drastically. An edict from the Justice Department to increase passenger capacity could lead a further increase in air cargo capacity and a reduction in the price to transport air cargo. If regulators go so far as to take another look at merged airlines, the impact on cargo could be even more significant.  
    In July, IATA found that worldwide air cargo capacity grew 4.3 percent in March, compared to volume growth of 2.1 percent. Focusing on just the North American market, capacity fell 4.2 percent in March, compared to the same period in 2014. 
   The cargo exploration by global regulators lasted years, with reverberations and civil suits keeping the ugly words “price-fixing” top of mind for quite a while. It’s too early to tell how long the examination into potential passenger wrongdoing will take, but the passenger side of the business is more visible — and will likely garner more public and media interest — than the cargo arena.
   In separate statements, airline officials said they will work with the Justice Department and fully comply with the probe. An American official said it is sharing information related to passenger capacity going back two years and welcomed the probe. The industry group Airlines 4 America pointed out that seat capacity is actually rather high, and prices have been lower so far this year. 
   In December, Sen. Chuck Schumer, D-N.Y., asked the Justice Department to investigate why airline prices remained high despite a precipitous drop in the price of jet fuel. He also asked regulators to look into what impact, if any, airline mergers have had on ticket prices. 
   Schumer trumpeted the Justice Department’s recent decision to look into domestic airlines. In a statement, he said, “it’s hard to understand, with jet fuel prices dropping by 40 percent since last year, why ticket prices haven’t followed. We know that when airlines merge, there’s less price competition. What we need now is a top-to-bottom review to ensure consumers aren’t being hurt by industry changes.”
   U.S. Travel Association President and Chief Executive Officer Roger Dow noted that looking for collusion in a market in which only four major carriers operate isn’t exactly going out on a limb. 
   “If not for the radical consolidation we have seen in the airline industry in the last few years, we probably would not even be having this conversation,” he said in a statement. “Now that four carriers control 85 percent of domestic routes, ‘collusion’ is a thought that’s constantly going to be in the back of the minds of federal regulators.”
    Dow posed a solution, pressing Congress to make a change. He said lawmakers could “make adjustments to airport financing so that individual airports can raise funds to expand terminal space and allow new carriers into their markets. More competitors significantly lessens the possibility that collusion can occur, and the pressures upon prices and service would be tremendously favorable to travelers, and therefore the broader economy.”
   Ross, a former American Shipper editor, writes about air transport and freight issues. He can be reached by email.

This column was published in the August 2015 issue of American Shipper.