Frequent fliers sue over high fares at hubs
The suits allege that airlines unfairly keep prices up and drive out small competitors.
Fed up with high prices and haughty service in the nation's deregulated aviation marketplace, some passengers are now taking to the courts.
In at least two class-action lawsuits, frequent fliers hope to break the competitive hold that major carriers have over their hub airports. They say those hubs give airlines the ability to drive out small competitors and keep ticket prices artificially high.
Depending on the outcome of the cases, more than the aviation industry could be affected. "This has far-reaching implications in terms of the competitive behavior not only of airlines, but of other major network industries, like telecommunications, as well," says Darryl Jenkins, director of the Aviation Institute at George Washington University.
This fall, a federal judge will decide whether to "certify" a lawsuit brought by two regular customers against Northwest Airlines in Minneapolis. A similar class-action suit is pending against American Airlines.
Northwest officials refused to comment on the litigation, but did deny they were engaged in anticompetitive behavior, saying they're simply competing aggressively.
The arguments in these cases are similar to a predatory-pricing case that the Department of Justice lost against American Airlines, which is now on appeal. (The class-action suit against American has been stayed, pending the outcome.)
At the heart of all the litigation is what constitutes fair competition in the complex airline networks - known as the hub-and-spoke system, which developed after Congress deregulated the industry in 1978. Critics contend their complexity allows the big airlines to engage in anticompetitive and predatory practices that don't fit the traditional definitions under the nation's antitrust laws. The airline supporters deny that.
The documents in the Northwest case remain under seal. But a study of predatory pricing in the airline industry done for the Department of Transportation in January provides an indication of the type of behavior being questioned in the lawsuit. The study raised specific concerns "about what might be termed predatory practices or unfair methods of competition" by major carriers.
When small, low-cost start-ups come into a market, major carriers tend to respond by matching the service, dropping prices, adding extra capacity on contested routes, and offering frequent-flier bonuses. When the small airlines can't compete and pull out, the majors jack their prices back up.
"For such predatory practices to be a rational business strategy, there must be some expectation that any losses or reduced profits incurred while driving a rival from the market can be recouped through higher prices once the rival has left the market," the report concludes.
A primary example cited in the report concerns Northwest's response to Reno Air. In 1991, Northwest abandoned the route between Reno, Nev., and Minneapolis. In 1993, the small, low-cost carrier Reno Air announced it was starting three round-trip flights daily between Reno and Minneapolis. The day after, Northwest announced that it would restart its Reno to Minneapolis service with three nonstop flights daily. Among other things, the big carrier matched Reno Air's prices and also offered frequent-flier bonuses.
Within a few months, Reno Air was forced to abandon its Minneapolis route. And Northwest's prices rose "quickly and steadily."
Northwest insists there is nothing inappropriate about such behavior. "Our policies and practices on competition are to compete aggressively but fairly in every market we serve," says Kathy Peach, spokeswoman for Northwest. "Every regulatory body that has examined Northwest's competition practices has concluded the same."
But critics note the Department of Transportation singled out Northwest as a carrier that "arguably runs afoul of the law."
"Northwest has a stranglehold on the Minneapolis market, and consumers have paid a tremendous price for that, to the tune of several hundred million dollars a year over what they would if Minneapolis were a competitive market," says Paul Dempsey, a professor of law at the University of Denver and board member of Frontier Airlines.
But Northwest supporters say there is plenty of competition in the airline industry. Professor Jenkins points out that a judge dismissed the Department of Justice case against American, saying there was no indication of "brass knuckled" predatory practices by the company.
"He called it bare-knuckled competition, and that's right - this is not a kinder, gentler industry," says Jenkins.
Still, legal experts contend that a new way of analyzing competition could help win the Justice Department case on appeal.