U.S. to investigate airlines over seat-supply concerns

Probe centres on whether carriers are colluding to limit competition, control pricing

WASHINGTON— Amid a drop in airfares and a surge in seating, U.S. antitrust officials have surprised airline investors with an investigation into whether carriers are colluding to maintain pricing power.

The Justice Department seeks airline documents that would reveal the “need for, or the desirability of, capacity reductions or growth limitations by the company or any other airline,” according to the government’s request for the information.

Fares and capacity are closely linked because having too many seats can dent carriers’ ability to charge more. While executives have mused publicly about wanting to rein in new flying to help prop up prices, the U.S. is jumping into the fray when the stock market is signalling that airlines have actually done too little to curb their seat supply.

“Carriers have been pretty outspoken about capacity, and certainly Wall Street has reinforced that to them,” said David Swierenga, president of aviation consultant Aeroecon. Seating is a crucial driver for airlines, and “if you don’t talk about those things with your investors, you’re just not doing your job.”

The four largest U.S. carriers — American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co.— each pledged to co-oper- ate with the review. A departmental spokeswoman, Emily Pierce, declined to discuss details of a probe that many analysts found puzzling.

“We do not believe this investigation into airline collusion has merit,” Helane Becker, who follows the industry for Cowen & Co., said in a note. “Airlines have recently been competing in Dallas, Seattle and Chicago to gain market share, often at the expense” of a decline in a benchmark gauge of industry revenue.

Delta’s experience has been typical among the major airlines. Revenue from each seat flown a mile fell 4.5 per cent last quarter, the airline said Thursday. Domestic yields, or the average fare per mile, “softened” in June in some cities, Delta said.

After a 2-per-cent increase in domestic seating in 2014, carriers are adding capacity at a 5-per-cent clip, said Joe Denardi, an analyst with Stifel Financial Corp. in Baltimore. Prices are down too. Average domestic coach fares fell 4.9 per cent through May, based on data compiled by Bloomberg.

“I certainly haven’t seen any outward signs of collusion,” Denardi said in an interview.

U.S. law is clear on that point: Companies are prohibited from attempting to limit competition through agreements.

The Justice Department’s Antitrust Division has been probing collusion and price-fixing across financial markets and industries. Bloomberg reported last month the division has begun scrutinizing U.S. Treasury trading, following the outlines of successful cases against banks for rigging currency fixes and benchmark interest rates.