Unfair Fares? US Probes Airlines' Pricing Practices
Start-ups allege that big competitors use 'predatory pricing' to force them off routes.
The Department of Justice and the Department of Transportation are both investigating allegations that some of the country's major airlines have been trying to drive start-up, low-cost carriers out of business in violation of antitrust laws.
If the allegations prove true, it would mean consumers are paying higher ticket prices and have fewer choices at several top airports that are dominated by a single airline.
Calling one of the detailed investigations "particularly fruitful," a senior Transportation official says the DOT is poised to issue a new enforcement policy and guidelines on what constitutes illegal business practices in the highly competitive industry.
Justice Department officials would not comment, except to confirm the investigations are under way. But industry analysts say at least two major airlines could face penalties for behavior deemed to be anticompetitive.
"Until recently, we found that informal contacts with carriers served to resolve most of the problems," says Patrick Murphy, a deputy assistant secretary of transportation. "However, ... we are no longer convinced that informal actions are sufficient."
The major carriers deny they've engaged in predatory-pricing practices and contend the allegations were prompted by competitors too weak and inefficient to survive in the competitive airline marketplace. They also claim the probes are a first step in the Clinton administration's efforts re-regulate the airline industry.
"There's no more direct attack on the heart of the free market than telling a competitor that you can't compete on price," says Jon Austin, director of corporate communications for Minneapolis-based Northwest Airlines.
The investigations have been under way for more than a year. They were prompted by consumer complaints about high prices, congressional inquiries, and an increasing number of charges from smaller, low-cost airlines that their bigger competitors were engaging in more aggressive predatory behavior.
Within the past year, Denver-based Frontier Air and Vanguard Airlines in Kansas City, Mo., filed complaints against United Airlines and American Airlines, respectively. Those are the two airlines believed to be the targets of the probe. Neither Justice nor DOT would confirm which airlines are under investigation.
American Airlines twice refused comment. United says it is cooperating fully with the government. "We believe ultimately there will be no finding of wrongdoing by United, because we do not engage in predatory pricing," says Joe Hopkins, United's manager of media relations.
The heart of the two complaints is similar. When the upstart competitor began flying a route, the larger carrier would match its low prices. At the same time, the larger airline would flood the market with extra low-fare seats on the route, a practice known as "dumping capacity."
"In United's case, we found they were pricing their product 30 percent below costs for an extended period," says Paul Dempsey, vice chairman of Frontier Air's board of directors. He contends that after Frontier withdrew from two markets, United raised its ticket prices as much as 80 percent.
United Airlines officials call Frontier's charges "misleading and inaccurate."
'Several dozen' occasions
A senior Transportation official, without naming any airlines, says the department has collected "several dozen" instances of behavior that may be considered anticompetitive throughout the industry during the past 18 months.
"What you see when a start-up carrier comes in is a big increase in low-cost fares and added capacity by the major airlines, so much so that it appears to be out of proportion with what's appropriate in the market," says the official. "When the smaller carrier is forced out, the major carrier raises prices, sometimes higher than ... before the competitor came in."
In addition to using price and capacity, the major airlines can employ a whole array of tools to drive out smaller competitors, critics charge. These include increases in frequent-flyer bonuses, computer reservations systems biased against smaller carriers, and travel-agent overrides (commission bonuses paid to travel agents for steering customers toward a particular airline).
Officials from the major airlines say they're simply competing aggressively, as does any good business. "Does the government really want to sue an airline for charging the public less and providing more service?" asks Ed Merlis, a senior vice president of Air Transport Association, the major airlines' trade organization.
DOT officials say that while consumers might win in the short term, they suffer in the long run when the prices rise after the start-ups fail.
A fine line
The fine line between hard-nosed competition and illegal conduct can be hard to distinguish. Predatory pricing - selling seats for less than cost - is particularly difficult to prove, experts say, because "cost" is hard to define in the complex airline industry.
But the smaller airlines want the government and the courts to go beyond the traditional definition of predatory pricing and look at the airlines' overall competitive behavior.
"If they take the old, historic definition, it's going to be very difficult to prove," says an analyst who has been consulting with a smaller carrier on its complaint. "It will be interesting to see if the courts recognize the need to take into consideration all the tools that they use."
Some government officials believe that some kinds of alleged predatory behavior present a threat to the competitive free market envisioned when the airlines were deregulated in 1978. If smaller airlines can't survive to offer a competitive check against the larger carriers, those major airlines will simply dominate the market and set prices at will.