Companies and individuals in the aviation industry are bound by the same antitrust laws and principles which govern commercial relationships in other areas of commerce. In prior times, the domestic aviation industry was highly regulated by both the now defunct Civil Aeronautics Board and the Department of Transportation ("DOT"). However, extensive regulation of airline economics has been replaced by deregulation and the role of market forces. Airline pricing is now primarily reviewed by the U.S. Department of Justice Antitrust Division ("Antitrust Division"), which analyzes airline pricing activities, mergers, acquisitions and interlocking relationships using the same standards as applied to other industries. In addition, the antitrust laws are increasingly being resorted to by private parties to challenge the allegedly anticompetitive conduct of airlines.
Price fixing is established by a showing of an agreement or mutual understanding between two or more competitors to fix, control, raise, lower, maintain, or stabilize the prices charged or to be charged for products or services. See United States v. Trenton Potteries Co., 273 U.S. 392 (1927).
Example of Alleged Price-Fixing in Aviation: In 1982, Robert Crandall, President of American Airlines, telephoned Howard Putnam, President of Braniff Airlines, and proposed that they raise prices by 20%.
Crandall: "I think it's dumb as hell for Christ's sake, all right, to sit here and pound the **** out of each other and neither one of us making a **** dime. . . . I have a suggestion for you. Raise your goddam fares twenty percent. I'll raise mine the next morning.
Putnam: "Robert . . .we can't talk about pricing."
Crandall: "Oh bull****, Howard. We can talk about any goddam thing we want to talk about."
Unfortunately for Crandall, Putnam was taping the conversation, and turned the recording over to the Government. Much to the chagrin of the Antitrust Division, it could not charge Crandall with violating section 1 because an attempt to fix prices is not a Sherman Act violation. United States v. American Airlines., 743 F.2d 1114 (5th Cir. 1984).
The Division did, however, file a civil case under section 2 of the Sherman Act, charging American and Crandall with attempting to monopolize the airline market in Dallas/Fort Worth. The case was eventually settled in a consent decree. In the wake of the Crandall case, the Division has sought to prosecute such attempts to violate section 1 by charging parties with mail fraud or wire fraud. (18 U.S.C. 1341 and 1343).
A form of price-fixing. The mere exchange of price information, without agreement on prices, is legal. See Maple Flooring Manufacturers Ass'n v. United States, 268 U.S. 563 (1925). However, where the effect of such agreed-upon changes is the stabilization of prices, the conduct may amount to unlawful price fixing. See United States v. Container Corp. of America, 393 U.S. 333 (1969). Such exchanges among competitors have often been pursued by the Division as "signaling" for the purpose of achieving coordinated price increases or policing discounts.
Example of Alleged Price Signaling in Aviation: In In re Domestic Air Transportation Antitrust Litigation, 148 F.R.D. 297 (N.D.Ga. 1993)a federal trial court approved the settlement of a class action against American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, United Airlines, TWA , USAir, and the Airline Tariff Publishing Co. ("ATPCO"), which alleged that the carriers had conspired to use ATPCO to eliminate price competition on routes to or from the carriers' hub airports. Plaintiffs contended that the airlines had used the computer system to publish "almost instantaneous fare information," and to transmit computerized "threats of fare wars" as a means of disciplining competitors who refused to comply with fares communicated to each other on the computer. The defendants paid $50 million in cash, and provided discount travel certificates in an amount of $ 408 million.
This litigation prompted the Antitrust Division to file a civil complaint against these defendants in United States v. Airline Tariff Publishing Co., 836 F. Supp. 9 (D.C. Dist. 1993), and various state antitrust agencies to pursue a similar investigation. The thrust of these proceedings was the government's allegation that the carriers were using the tariff information to signal proposed joint price increases or decreases to their competitors. For example, it was alleged that a carrier would announce a price increase to take effect at some future point in order to determine whether its competitors would likewise raise prices. If the other carriers opted not to raise prices, the first airline would rescind its proposed price increase. The consent orders entered by the airlines prohibit them from engaging in such price signaling or in even using the announced "first ticket dates," and, in some cases, "last ticket dates."
Involves agreement among independent competitors to allocate which competitors will compete for certain customers or in certain markets or territories. Such arrangements, whether part of a price-fixing arrangement or not, have been held per se unlawful.
Since the Airline Deregulation Act of 1978, all hub airports but three (Chicago, Dallas/Ft. Worth, and Denver) have come to be dominated by a single airline, and Denver is practically dominated by United now. Today, almost all city-pair markets are monopolies or duopolies.
Example of Alleged Market Allocation: In the Antitrust Division price signaling case, the Division also contended that first ticket dates were used by airlines to warn competitors to stay out of their hub markets. For example, if a carrier felt that its city-pair monopoly was being encroached upon by a competitor, it would move into that rival's city-pair monopoly with slashed prices in order to convey the message that the rival needed to back off from the carrier's domain. If these actions result in a tacit agreement to allocate markets, an antitrust violation has occurred.
A class of travel agents and the American Society of Travel Agents sued seven major domestic airlines in federal court in Minnesota, alleging they violated 1 by conspiring to reduce commissions on ticket sales by travel agents from 10% to a maximum of $50 for round-trip domestic flights and $25 for a one-way ticket. TWA agreed to settle the charges in 1995. The settlement required the airline to pay the 10% commission rate retroactively for a 10-week period. In September 1996, the six other airlines in the case -- Continental, USAir, American, Delta, Northwest and United -- agreed to pay a total of $86 million to settle the claims against them.
Section 2 claims arise when the government or a rival carrier alleges that an airline dominates or is trying to dominate the market for air passenger services between two city-pairs. For example, in the American Airlines case discussed supra, the Government alleged that American tried to monopolize the market for air passenger services by seeking to enter into an agreement with Braniff to raise prices.
Predatory Pricing. Section 2 claims in the aviation industry sometimes involve allegations of predatory pricing. Predatory pricing is the practice of driving out or excluding rivals by selling at prices below some level of cost to the seller. The concern is that once the rivals have left the market, the predator will be free to charge anticompetitively high prices. A major problem in identifying predatory pricing practices is distinguishing such practices from "vigorous price competition," and inadvertently condemning competition. Another problem is determining how to figure the seller's cost. Options include the use of "average total cost," "average variable cost," and "average marginal cost."
International Travel Arrangers, Inc. v. NWA, Inc., 991 F.2d 1389 (8th Cir.), cert. denied, 114 S. Ct. 345 (1993). Following a trial, the jury concluded that Northwest and other defendants had monopolized and attempted to monopolize air transportation between Minneapolis and seven U.S. cities by selling airline seats below cost. In reversing, the 8th Circuit held that the plaintiff's evidence failed to demonstrate that the defendants had engaged in predatory pricing. The court also held that plaintiff could not prevail on its claim that Northwest had violated the antitrust laws with its acquisition of a travel agency or Republic Airlines.
In 1993, Continental and Northwest sued American Airlines, alleging that American had engaged in unlawful predatory pricing with the adoption of its Value Pricing Plan in 1992. Under this Plan, American cut full coach fares by 38 percent and eliminated most discounts. American subsequently decreased advance-purchase ticket prices by 50 percent. U.S. Airlines felt compelled to match this price-cutting and collectively lost over a billion dollars as a result. In their suit, Continental and Northwest alleged that American was trying to drive its competitors out of the airline industry so that American could later reap anticompetitive profits from its strategic position following the collapse of other airlines. American countered that it was merely trying to simplify prices for consumers. Prior to its deliberations the jury was instructed that they could not find against American unless they were certain that American had tried to control the domestic airline industry through predatory pricing. After less than two hours of deliberation, the jury found for American. The jury concluded that the predatory pricing scheme attributed to American by Continental and Northwest would be "extraordinarily expensive and have no realistic chance of success."
On July 30, 1996, USAir filed suit against British Airways and American Airlines alleging that the announced alliance between British Airways and American constituted a breach of contract by British Air of its prior agreements with USAir and violated U.S. antitrust law.
U.S. antitrust laws could be violated if the alliance were to result in a lessening of competition in the air transportation routes which currently are, or which could be, served by British Airways and American Airlines. USAir's lawsuit seeks treble damages against British Air and American Airlines for its antitrust claims. The complaint also demands that British Air sell its 24.6% stake in USAir and withdraw its three representatives on USAir's board. In moving to dismiss the complaint, American alleged, among other things, that USAir's antitrust claim was moot since the Brit Air-American alliance will require antitrust immunity from the U.S. government. (The deal is currently being examined by the U.S. Transportation and Justice Departments, along with the European Union.) On October 28, 1996, a federal judge dismissed part of USAir's lawsuit, but left intact the allegation that the British Airways-American Airlines alliance violated antitrust laws.
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