Lawsuit against airline may affect customers

The Outlook

May 23, 1999

THE JUSTICE Department has charged American Airlines, the nation's second-largest carrier, with cutting fares and adding flights temporarily to drive low-cost competitors out of its giant hub at Dallas-Fort Worth International Airport. The department said it is investigating whether other airlines used the same tactics at other hub airports across the nation.

If the Justice Department is successful in its civil suit, will it encourage new low-cost airlines to take on the big boys? And, if it is not successful, what will it mean for the flying public?

Glenn Engel

Analyst, Goldman Sachs, New York

I think the lawsuit is ridiculous. What American did is no different from what any other airline does. I'm not sure why American should let someone step in and take its passengers away. It seems that the Justice Department is not happy with the way the free market is working in allowing the big boys to use their edge over small carriers to win business. The department is trying to change the playing field to favor the small guys. It all seems so arbitrary. I don't understand why it's unfair for the big airlines to use their size advantage when it's not unfair for the small airlines to use their low labor cost advantage.

I'm also puzzled over why the Justice Department decided to go after American in particular. I think if the department wins its suit against American, it will pursue suits against other big airlines, or other big airlines will change their behavior.

If the suit is successful, it will also initially hurt customers. Not only will there be less fares available at cheap prices in the near term, but most customers want to fly a big airline if it offers a price that is competitive. If the big guys aren't allowed to match the low-fare guys, the public isn't going to fly the airlines they want. In the long run, what the Justice Department is hoping is by protecting the low-fare carriers, a bigger, healthy new entrant sector will keep fares down. But I think the odds are very low that the suit will be successful.

David S. Stempler

President of the Air Travelers Association, a passenger-advocacy group based in Washington

I think it will [encourage smaller airlines]. People feel they don't have alternatives. If people thought they had more alternatives, there would be less passenger tension.

On first blush, [the Justice Department suit] looked like a lot of posturing to us. It seems like it was more to make a statement than anything else. They're really firing a shot across the bow of all the airlines to say that all these actions are unacceptable. I think other airlines engage in behavior that's as egregious or more egregious. I don't know why they picked on American Airlines, but I think everybody's gotten the message.

It can't be made predatory for a large airline to match another airline's fares when they come into the market. It's sort of an American thing -- `we will not be undersold, we will match any price.' Often in this debate, discount carriers are depicted as the victims, but looking in a broader view, these carriers are going in with the express interest of taking markets away from the big carrier, and you can't expect big carriers to just roll over and die.

What we object to is the flooding of seats into the market, which basically overwhelms the discount carrier. A large carrier should be able to match the flights of another carrier, but not exceed it by a great amount.

I'm not sure [the failure of the Justice Department suit] would have a big effect. There seems to be a groundswell in Congress on some of these issues. I think the airlines have gotten the message that they have to be a little careful on how they respond to start-ups.

Jay Hierholzer

Independent aviation and marketing consultant based in Maryland

I can kind of see both sides of the story in the suit. If the Justice Department fails, it will be a strong signal for increased concentration in the industry, I think, with more mergers and consolidation.

The trend in the industry now is for the American public to expect lower fares. Aviation has sort of become the mass transit of the new millennium. We all expect to be able to travel on fairly low fares to lots of places. To the extent that there is less competition from smaller airlines, the American public will see fares start to creep up again, and there will be less ability to travel for both business and leisure if the fares go a lot higher.

If the Justice Department succeeds, it would probably trigger some additional lawsuits by some of the other low-fare airlines that have had similar circumstances, at least in their opinions. American Airlines is not the only large airline ever to have lowered fares in the face of competition, then raise them when the little guy leaves the market.

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