‘Discipline’ for Airlines, Pain for Fliers


Photo

The American Airlines chief, Doug Parker, said the carriers had learned from past price wars.

Credit
Ralph Lauer/European Pressphoto Agency

At this week’s meeting in Miami of the International Air Transport Association, the annual meeting of the world’s top airline executives, the buzzword was “discipline.”

Here is Delta Air Lines’ president, Ed Bastian: Delta is “continuing with the discipline that the marketplace is expecting.”

Air Canada’s chief executive, Calin Rovinescu: “People were undisciplined in the past, but they will be more disciplined this time.”

And American Airlines’ chief, Doug Parker, said the airlines had learned their lessons from past price wars. “I think everybody in the industry understands that,” he told Reuters.

Got the message? “Discipline” is classic oligopoly-speak for limiting flights and seats, higher prices and fatter profit margins. This year, that discipline seems to be working: the I.A.T.A. projected this week that airline industry profits would more than double this year to nearly $30 billion, a record.

Having recently paid nearly $1,500 to fly round trip on United from Newark to Indianapolis, on a cramped plane on which I had to hunch over to reach my back-row coach seat and complimentary cup of water, this came as no surprise. What’s good for airlines isn’t necessarily good for consumers, as years of mergers and consolidation are now making clear.

While it’s not illegal on its face to discuss capacity issues at industry conferences, it wouldn’t be much of a stretch to interpret this week’s comments as thinly veiled invitations to restrict capacity increases to keep ticket prices high. The industry is already highly concentrated, with only four major carriers accounting for 80 percent of all domestic air travel.

“When airline industry leaders say they’re going to be ‘disciplined,’ they mean they don’t want anyone to expand capacity,” said Fiona Scott Morton, professor of economics at Yale and a former deputy attorney general in the antitrust division of the Justice Department. “And when there aren’t enough seats, airlines raise prices. That’s what we’ve been seeing.”

Christopher L. Sagers, an antitrust professor at Cleveland-Marshall College of Law and an airline industry specialist who opposed the American-US Airways merger in testimony before Congress, said that sort of talk at a conference of direct competitors in a concentrated oligopoly is a huge legal risk.

“I don’t see a smoking gun,” Mr. Sagers said. “But they’re all but saying you need to limit output to keep up prices.”

Still, despite the airlines’ strong financial performance, investors grew nervous this week that an industry maverick — Southwest Airlines — was breaking ranks and unleashing another profit-sapping fare and capacity war. The more the airlines’ chief executives talked about discipline, the more their stocks fell, with Southwest dropping 9 percent this week and 20 percent in the last month.

Professor Scott Morton recently co-wrote a study of airline industry competition that concluded the major airlines were stifling competition by restricting the ability of consumers to use the Internet to compare airfares. The study, which was sponsored by the Travel Technology Association, a trade group representing air travel websites, also found minimal price and capacity competition among the major legacy carriers. And she noted that despite a decline in jet fuel prices of 24 percent and a drop in nonfuel operating costs of just under 3 percent in 2014, the average fare per mile increased 0.5 percent during that period.

As anyone who has flown recently on a packed plane should realize, as long as capacity is limited, there’s no incentive for airlines to reduce fares, no matter how low fuel prices or other costs go. The airlines respond that they set prices based on demand, as is the case in almost every other industry.

“That’s fine in an industry where you have competition and consumers have a choice,” Professor Scott Morton said. “But on most airline routes, consumers have very little choice.” She noted that only since the recent wave of consolidation among airlines have they been able to set prices significantly above marginal cost. “That’s great for the industry but not for consumers,” she said.

That has been reflected in the price of airline stocks: over the last five years, American’s stock has nearly tripled, compared with an 88 percent gain in the Standard & Poor’s 500-stock index.

But this week’s sell-off was prompted by fears that these good times for investors may not endure. Last month Southwest’s chief executive, Gary C. Kelly, said the airline, whose image is closely tied to discount fares, was going to expand capacity this year by as much as 8 percent, with the expansion spilling over into 2016. Southwest had already raised capacity this year to 12.1 million available seat miles, from 11.2 billion in 2014, as the airline reported in a filing with the Securities and Exchange Commission this week.

But after coming under fire at this week’s conference, Southwest quickly moved to reassure investors it isn’t going rogue. “We have taken steps this week to begin pulling down our second half 2015 to manage our 2015 capacity growth, year-over-year, to approximately 7 percent,” Mr. Kelly said.

Still, comments about capacity growth from Southwest prompt memories, both unwelcome (among investors) and fond (among passengers) about what is still known as the “Southwest Effect”— the phenomenon of sharply lower airfares whenever the maverick upstart Southwest entered a market.

But that era seems long over, and today Southwest is an established industry giant, the largest airline based on domestic passengers boarded. “Today it’s not that much different from the legacy carriers,” Professor Scott Morton said. “I wouldn’t say they have as much of a differential effect as they used to.”

Southwest and Delta did not respond to requests for comment.

Peter Fitzpatrick, a spokesman for Air Canada, said, “We are taking a disciplined approach to our business, not adding capacity in an attempt to simply expand market share but instead focusing on profitable growth.”

This state of affairs makes it all the more baffling that the Justice Department reversed course and dropped its opposition to the merger of American Airlines and US Airways in November 2013, reducing the number of major domestic airlines to four from five. Professor Scott Morton concluded that the merger had resulted in substantial fare increases on routes previously served by the two carriers (as high as 17 percent from Philadelphia to St. Thomas, Virgin Islands).

“I’d have to say, based on my research to date, that it was a mistake to approve the merger,” she said. “It’s possible there are other efficiencies I haven’t studied. But I’m concerned when I see higher prices and capacity discipline. That’s not what you want to see.”

Professor Sagers said, “There hasn’t been an airlines merger in decades in which the promised benefits materialized.”

As for the American-US Airways merger, “Prices have gone up even as costs have gone down. If there’s a consumer benefit, it’s very subjective, and it would have to be very large to outweigh the harm to consumers from higher airfares.”

American marked the anniversary of the merger last year by saying it would spend $2 billion to upgrade its aircraft and other services, which is a clear consumer benefit. The improvements include lie-flat beds, international Wi-Fi and refurbished Admirals Club lounges.

An American spokesman said consumers had benefited with better schedules and connections (like nonstop service on the Philadelphia-St. Thomas route), better planes and service (in part because cabin attendants and pilots got raises). He said price and capacity competition remained vigorous. American said this week that capacity rose 2.1 percent over May 2014, to 23.3 billion available seat miles, and that it expected revenue per available seat mile in the second quarter to drop in a range from 6 to 8 percent, suggesting increasing price competition in the coming months.

Airlines for America, a trade association, said that domestic fares were actually down slightly in 2015.

So are airfare bargains about to arrive just in time for the summer travel season?

Not if all that talk about “discipline” has an effect.

“I don’t know if we know the answer to that yet,” Mr. Parker of American said in Miami. But unlike previous price wars, this time “feels different.”



Source link

About admin

Check Also

Surf and Safari: Packages Offer Two Hotels, Two Experiences

Photo Barton Creek Cave in Belize. Credit Chaa Creek City or country, jungle or beach, ...

Leave a Reply

Your email address will not be published. Required fields are marked *