Politics/Policy
Capacity Increases
Up, Up, and Away
May 2013 to May 2015
First-quarter operating profits of U.S. domestic carriers
United Continental Delta Air Lines
r air
Upstarts seem less worried about “capacity discipline”
Southwest Airlines
$2b
lines
Major airlines
American Airlines
Oth
All airlines
ers
JetBlue
$1b
$0
Alaska Airlines Allegiant Air -$1b
Spirit Airlines 0%
55%
2007
2015
DATA: COMPILED BY BLOOMBERG, U.S. DEPARTMENT OF TRANSPORTATION
have soared. In any case, the Justice Department doesn’t need to demonstrate fantastic profitability to prove collusion. It needs to show only that key people are opening their mouths and saying the wrong things to each other. —Peter Coy and David McLaughlin The bottom line Discussions about capacity discipline may have kicked off a federal antitrust investigation of major airlines.
Wages
Memo to Lawmakers: Read the Fine Print
Portland, Maine, passes a minimum wage law with a surprise inside “Everyone makes mistakes, and I think you just deal with those”
On July 6, the City Council of Portland, Maine, voted 6 to 3 to establish a local minimum wage of $10.10, a $2.60 increase over the statewide minimum. The next day, the mayor and several council members said they’d made a mistake. The law, which they thought would let restaurants and other businesses keep paying tipped employees $3.75 an hour, actually gave such workers a giant raise—to $6.35 an hour. Fearful of hurting the city’s restaurant industry, Mayor Michael Brennan and his colleagues on the City Council are working on a new ordinance that would undo the increase for tipped workers before it takes effect on Jan. 1. “I don’t know what else to tell you, other than that when we voted on it, we felt we were voting on what the intent of the council was,” says Brennan, a Democrat. “It was clear afterwards that what we had voted on and the intent of the council were not the same thing.” Maine’s minimum wage, like the federal one, comes with a “tip credit,” the amount employers can subtract from the minimum wage when paying workers who earn tips. In Maine, where
ILLUSTRATION BY GRAHAM ROUMIEU; ALAMY
after both carriers agreed to sell some airport assets to rivals, decreasing the market power of the enlarged American Airlines. “This settlement will disrupt the cozy relationships among the incumbent legacy carriers,” Justice’s Baer said in a statement at the time. But it did nothing to reduce the potential for collusion, which is easier when there are fewer players in an industry. Justice may also look into communications with investors. Academic research suggests big firms that own stock in multiple airlines discourage competition to keep industry profits high. “We find that product prices are 3 percent to 11 percent higher because of common ownership,” Martin Schmalz of the University of Michigan’s Ross School of Business and José Azar and Isabel Tecu of consulting firm Charles River Associates argue in a working paper. One of the asset managers it names is BlackRock, a large shareholder in the four major airlines. “We expect fair and ethical competition between the companies we invest in on behalf of our clients,” BlackRock says. Capacity discipline, which accompanied the merger frenzy following the 2008 financial crisis, is giving the industry a rare chance to make a buck, analysts say. “Despite being as consolidated as it is, it’s still intensively competitive,” says Andrew Davis, an analyst at T. Rowe Price Group, whose funds own airline shares. “This is an industry that from a profitability standpoint, if it doesn’t rank dead last in the United States, it’s got to be near the bottom,” says Edmund Greenslet, a former Wall Street airline analyst who publishes the newsletter Airline Monitor. Lately fares have fallen, in part because of the drop in oil prices. But the major airlines haven’t passed along all the savings from cheaper fuel, and profits
Majo
26
conversations are more likely to get you into trouble than public statements. Anything that can be construed as a veiled offer to restrain trade, followed by a veiled acceptance of that offer, is almost certain to land you in hot water. “Communication is extremely important. You can’t just watch the other guy,” says William Kovacic, a former chairman of the Federal Trade Commission, which enforces competition law along with the Justice Department. What violates the law, says Kovacic, now a George Washington University Law School professor, is “communication that indicates intentions and elicits a response.” The antitrust bar is buzzing with questions about what prompted the feds to look at the airlines. One trigger may have been the June meeting of the International Air Transport Association in Miami, at which airline executives talked openly about “capacity discipline,” not-so-subtle code for limiting the number of seats available. At a press conference, Delta President Ed Bastian said his company is “continuing with the discipline that the marketplace is expecting.” American Airlines CEO Doug Parker told Reuters it was important to avoid overcapacity: “I think everybody in the industry understands that.” Another red flag arose during the 2013 merger of American and US Airways, which Justice sued to block. According to documents filed in the antitrust suit, Parker, then chief of US Airways, forwarded e-mails complaining about aggressive competition to the CEO of a rival airline. That CEO, who wasn’t identified, responded that it was an “inappropriate communication,” according to the complaint. On July 15, American said it should be judged on “the benefits we have delivered to customers.” The Justice Department settled
