Given the importance of cheap traveloptions, such as cheapairplane tickets, discount hotel rooms, discounttravel deals, and cheap vacation packages, somewould-be travelers are questioning how airfares can be basically flat when fuelprices are dramatically lower than a year ago at this time.
Now the Justice Department has acknowledged that it isinvestigating possible cooperation between major airlines to illegally limitavailable seat availability in order to keep airline ticket prices high.
The Justice investigation appears to be focusing on whetherairlines have been illegally signaling one another regarding the timing ofadding new flights, routes, and extra seats with the aim to limit seatcapacity, which in turn keep prices up.
The Justice Department is seeking to determine if airlineofficials are coordinating their capacity strategies by communicating with oneanother through public statements or private statements to market analysts.
While the Justice Department has declined to specify whichairlines received demand letters which act like subpoenas, United Airlines andDelta Air Lines have acknowledged that they received letters as part of theinvestigation.
The demand letters received by major U.S. Airlines demandcopies of all communications the airlines have had with one another, WallStreet analysts, and major shareholders concerning future passenger capacitystrategies.
Airlines for America, an airline industry trade organization,said that its members are competitive. This group claims that our members compete vigorously every day, andthe traveling public has been the beneficiary.
As a result of a series of mergers starting in 2008, AmericanAirlines, Delta Air Lines, Southwest Airlines, and United Airlines todaycontrol over 80 percent of the seats in the countrys domestic travelmarket. Since 2008 these airlines haveeliminated unprofitable flights, filled an increasingly greater percentage ofseats on their planes, and made it clear that their strategy is to slow seatcapacity in order to command higher ticket prices.
These initiatives have paid off handsomely, with the averagedomestic ticket price increasing 13 percent from 2009 to 2014, after beingadjusted for inflation. Airline revenuesbenefited even more from the new fees it increasingly collects, including $25each way for a checked bag and $200 to change a domestic reservation. Over the last 12 months, airlines havegenerated $3.6 billion in baggage fees and an additional $3 billion chargingfor reservation change fees.
Higher ticket prices, dramatically higher revenues generatedby increased fees, and lower fuel costs have resulted in record profits for theairline industry. Over the last two yearsU.S. airlines earned a profit of $19.7 billion.
Airline profits in 2015 are expected to rise even more due toa massive drop in jet fuel prices, which is the airlines most expensive costfactor. In April the cost of airlinefuel was 34 percent less than a year ago.
In the past cheap fuel has often resulted in airlines makingexpensive money losing decisions. Typically they reacted by expanding rapidly, launching new routes andoffering cheap ticket prices to attract new passengers. Airlines already flying those routes thenmatched the lower prices, with all airlines flying those routes losing money.
Airlines today appear intent on avoiding the knee jerkreactions to cheaper fuel prices that historically have resulted in actionsthat hurt their bottom profit lines.
The real question is whether they are illegally coordinatingtheir capacity decisions in such a manner as to artificially maintain highairfares.
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