Lawsuits Against US Airlines Prompted By DOJ’s Probe

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In the wake of the investigation launched by the US Department of Justice (DOJ) last week, to detect any unlawful price collusion among the top four US airlines, several flyers have filed lawsuits against these airlines on similar charges. The plaintiffs have filed suits against American Airlines, United, Delta, and Southwest alleging violation of antitrust laws and artificial inflation of air fares by limiting capacity. Though the news of the DOJ probe and the following lawsuits has caused volatility in the airline stocks, we believe that the courts will have a tough time proving the allegations. As discussed in one of our recent articles “DOJ’s Investigation Will Not Have Long-Term Impact On The US Airlines,” the news will not have any material impact on the capacity plans or pricing policy of these airlines, except that it may alter the way these airlines communicate their capacity expansion plans in public. In this article, we provide a quick look at reasons driving our stance on the issue.

See our complete analysis for Southwest Airlines here

  • Firstly, the DOJ, which has launched a probe against the airlines, was responsible for approving four of the high-profile mergers in the last decade which led to the consolidation of the airline industry. The consolidation enabled these large airlines to control over 80% of the market, giving them a strong pricing power. Thus, the DOJ is responsible for this situation in the first place, if we assume that the charges against these airlines to be true.
  • Secondly, the nature of the industry is seasonal and the airlines have to constantly regulate their capacities to match the demand for air travel. Consequently, the efforts of these airlines to keep a check on their capacities to match the demand and supply of seats in the market are justified.
  • Thirdly, consolidated capacity of airlines in the first quarter of 2015 has been the highest since 2010, as the airlines have been rapidly adding capacity in markets such as Dallas, San Francisco, and New York which have a strong travel demand. However, it is surprising to note that most of the lawsuits have been filed in these three markets that have witnessed a rise in capacity due to competition among the airlines. Given the capacity expansion plans of airlines, it may be hard to convince a court of the main points in the lawsuits filed in these markets.
  • Lastly, while the airlines have been vocal about adopting capacity discipline to reassure the investors about the fundamentals of the industry, it will be extremely difficult for the courts to obtain written evidence to prove the charges against these airlines. We expect the airline executives to be more vigilant while publicly announcing their capacity expansion plans to avoid such a situation in the future.

In a nutshell, we believe that the airline industry has been highly competitive and the DOJ probe or lawsuits by flyers will not have a significant impact on the airlines in the long term.

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